1 INTRODUCTION
This analysis focuses on some emerging and related markets as they correspond to microfinance. The first portion deals with the intriguing activity of remittances worldwide. Remittances have some direct applicability to microfinance in general and particularly for operations in India. The second portion examines the mechanisms and execution of the relationship between banks and microfinance activities in the United States. This includes a detailed description of Community Development Financial Institutions (CDFIs) which effectively act as MFIs in the US. The system in place in the US relies heavily on favorable US Government regulations and involvement. The lessons learned from the evolution of CDFIs in the US over the last ten years offer a success story based on a particular approach. Finally, the last portion is a brief description of the US secondary mortgage market and how it uses securitization to ensure large, steady flows of capital into a system.
2 GLOBAL MICROFINANCE: AN OVERVIEW
Microfinance is the supply of loans, savings, and other basic financial services to the poor. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services required by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services or remittances.
Providers of financial services to the poor include donor-supported, non-profit non-government organizations (NGOs), cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; wire services; post offices; and other points of sale. NGOs and other non-bank and micro financial institutions (MFIs) have led the way in developing workable credit methodologies for the poor and reaching out to large numbers of the poor.
Historical context can help explain how these specialized MFIs developed over the last few decades. Between the 1950s and 1970s, governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes. During the 1980s, microenterprise credit concentrated on providing loans to poor women to invest in tiny businesses, enabling them to accumulate assets and raise household income and welfare. These experiments resulted in the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor. In the 1990s, many of these institutions transformed themselves into formal financial institutions in order to access and on-lend client savings, thus enhancing their outreach.
According to the Global Development Research Center’s Virtual Library on Microcredit, there are an estimated 13 million microcredit borrowers worldwide, with US$7 billion in outstanding loans, and generating repayment rates of 97 percent. This market has been growing at a rate of 30 percent annually.
Also, they found that fewer than 10 million of the 500 million people who run micro and small enterprises have access to financial support for their businesses. Furthermore, Unitus, a global microfinance think tank, found that at least 90% of eligible self-employed lack access to microcredit programs. Unmet demand, they state, is around 270 million people.
The World Bank Statistics for 2001 show a number of 10,000 MFIs worldwide, reaching only 4% of potential market. This number has increased substantially, since microfinance has attracted attention through World Bank, United Nations and several think tank and governmental programs.
A July 2004 study, by the Consultative Group to Assist the Poor (CGAP), did a global outreach for Alternative Financial Institutions (AFI), which includes MFIs, but extends to institutions that focus to some degree on extending financial services downward from the economic level of the traditional clients of commercial banks. This study found more than 50,000 MFIs worldwide, divided in different regions as shown in the next table. MFIs here include NGOs, banks, and non-bank financial institutions that specialize in microfinance, as well as microfinance programs in full-service commercial banks.
Region MFIs
Africa (sub-Saharan) 3,956
East Asia and Pacific (including China) 18,292
China only 153
Europe and Central Asia 430
Latin America and the Caribbean 4,464
Middle East and North Africa 909
South Asia (including India) 22,366
India only 3,961
TOTAL 50,415
According to the Microbanking Bulletin, published in November 2002, by Isabelle Barres, MFIs reach self-sufficiency through cost and income structures that vary by region.
The following is a table that summarizes cost numbers for MFIs in all regions, based on data collected by the MicroBanking Bulleting.
The financially self-sufficient MFIs in Asia are the most profitable, with an average AROA of 6.1%. They achieve this high level of profitability through lower cost structures, rather than by charging higher interest rates to their clients. Because they operate in a lower labor cost environment, FSS MFIs in Asia have lower salary costs that compensate for the lower staff productivity and lower average loan sizes when compared to all financially self-sufficient MFIs in the Bulletin. These external and internal cost structures allow them to have the lowest portfolio yield (37%) and operating revenue ratio when compared to the other regions. Their high margin suggests that they could in fact even further reduce their revenue without compromising their level of self-sufficiency. The cost per borrower for these MFIs is on average US$ 44, the lowest of all regions.
In Eastern Europe, financially self-sufficient MFIs are the least profitable, with an AROA of 2.0%. Indeed, like financially self-sufficient MFIs in Latin America, they show the highest cost ratios when compared to other regions. Their overall results are explained, in part, by a lower operating revenue ratio than their Latin American counterparts, thereby reducing their margin. These MFIs display the highest cost per borrower, at US$ 193. Their higher loan sizes are not sufficient to compensate for relatively higher salary levels and lower productivity.
Financially self-sufficient MFIs in Latin America have the highest operating revenue ratio when compared to other regions. Their high productivity of staff enables these MFIs to serve a relatively poorer clientele (with loans that average about 60 percent of GNP per capita) and show the same level of efficiency as all financially self-sufficient MFIs.
In Africa, financially self-sufficient MFIs have an average AROA of 3.9%. They show a lower level of efficiency when looking at the total administrative expense relative to average loan portfolio. Their relatively high average loan sizes and productivity enable them to compensate for high relative salaries.