Links between Banks & Non-Banks

to promote Access to Financial Services for the Poor

Douglas Pearce, CGAP

ABA Annual Meeting 2003San Francisco, August 10, 2003

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Banks and Microfinance

Banks have significant strengths as vs. specialist non-bank microfinance institutions

Wider range of financial services Existing infrastructure & systems Access to funds

3

Banks and Microfinance

But: May not view poorer clients as

attractive Lack market knowledge Inappropriate methodologies/services Inflexible procedures Attitudinal and career factors Bank branches may not be viable

Non-bank financial institutions (NBFIs): can be more flexible, innovative, closer

to microfinance clients, more motivated

4

Links between Banks and NBFIs offer a way forward

5

Links between Banks & NBFIs can take the form of:

Merger or

takeover

Loan/Credit

Facility

Sharing/renting

facilities

NBFI clients accessing

bank services

Bank contracting NBFI to

conduct operations

Banks providing front or

back office functions

Bank buying NBFI

portfolio

Bank creates

Service Company

Strategic Alliances

Finance

Ownership-based

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Links between Banks & NBFIs can take the form of:

Merger or

takeover

Loan/Credit

Facility

Sharing/renting

facilities

NBFI clients accessing

bank services

Bank contracting NBFI to

conduct operations

Banks providing front or

back office functions

Bank buying NBFI

portfolio

Bank creates

Service Company

Strategic Alliances Ownership-based

Finance

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Bank providing Loan or Credit Facility

NBFIs = good SME clients Bank financing quicker to access &

in local currency

Bosnia: direct Bank-NBFI lending Microfinance NBFIs have lending

arrangements with >4 banks

Moldova: Bank lending to NBFIs, with ‘guarantee’ from NBFI network

MAIB lends to savings & credit associations (SCAs)

Moldova Microfinance Alliance creates & supports/monitors SCAs

8

Constraints to Banks financing NBFIs

Short-term and high cost NBFI Collateral Banks may lack skills to assess risk

presented by MF portfolio Reporting & financial management

by NBFIs may not be acceptable Legal and tax constraints to

linkages Lack of trust/poor communication

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Constraints to Banks financing NBFIs: Responses

Complementary sources of funds Technical assistance & tools for banks

in assessing NBFI risk Technical assistance, CGAP tools, to

assist NBFIs in reporting, negotiating etc

More conducive legal environment Promote bank-NBFI communication

and links [www.mixmarket.org]

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(Microloan) Service Company

Provides loan origination & administration services to a bank Uses specialized microfinance methodologies and staff Selects clients & monitors loans, but loans on bank’s books Can take advantage of bank’s capacity and services Is not a financial entity, therefore easier to set-up Allows for transparent relationship Most appropriate for:

Banks with large branch networks Banks that wish to expand into microfinance market Banking sectors where strong competition for SME clients

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Sogesol, Haiti

Loan service company to Sogebank Sogesol originates & manages loans Mini-branches in or near Sogebank

branches Sogebank books loans, providing

teller function and support services Sogebank owns 35% of Sogesol Portfolio $3.2 million, 6,500 active

clients, av. loan balance $500

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Conclusions

Bank-NBFI links offer way forward to scale, & financial services ‘for all’

In order to promote Bank-NBFI links: Require NBFI reporting in line with

good practice & IAS Wean NBFIs off dependence on donor

funds and don’t ‘crowd-out’ banks Address any legal and tax constraints Help ‘broker’ and facilitate linkages –

and not just with guarantees…

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Further CGAP Resources include:

Consensus Principles on Regulation & Supervision of Microfinanceadopted by CGAP’s 29 member agencies in September 2002

Glossary of standard (micro)financial terms, ratios & adjustmentsagreed by leading donors and microfinance assessment/rating agencies

Microfinance orientation for Central Bankers and Supervisors

www.cgap.org

www.microfinancegateway.org

www.mixmarket.org