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The Centre for Micro Finance

A comprehensive approach of Microfinance

KarachiNovember 1st, 2006

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Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

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Microfinance: who are the targeted clients?

Poor and vulnerable households economically at the Bottom of the Pyramid

Low IncomeLow Income

Middle Class

HNI

Ultra poorHow can microfinance improve their lives?

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Microfinance: what is it?

…whereas objectives areOften perceived as…

• Suite of financial services– Thrift / savings– Credit– Insurance and Investments– Transfer Payments and

Remittances

• Group and individual lending

• Sustainable activity

• Micro-credit

• Group lending

• Social/charitable activity

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The challenge ahead: demand vs. supply gap to bridge

SupplyDemand

• 60% of MF services in South• Several un-served areas

• < 2M Households reached• 500M un-served poor

• Fast growing population and overall economy

• Range of risks to be covered

• Missing market linkages / employment opportunities

• Limited non-credit services

Improve access

Increase impact

• Largely urban • Mostly rural

• $1.5 Bn*• $50Bn

* Including loans against gold

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Information Asymmetry

• No collateral• No credit history• Difficult to evaluate

enterprises’ potential success

High Costs of Intermediation

• Low value transactions• Geographical isolation• High supervision costs (no financial literacy)• Informal activities: need flexible access• Illiteracy: traditional services inappropriate• High cash handling costs

Constraints overcome those challenges?

Difficult risk assessment

High transaction costs

How to release these constraints?

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Systems

Finance

Thus the need for institutions’ building

• Venture capital for start ups• Cheaper cost of funds for on lending

Capacities

• Product development• Technology platform• Clients’ authentication by unique ID

• Staff Skills strengthening / Training• Recruiting of professionals• MFI Entrepreneurs development

Research• Assess and Increase impact on poverty alleviation• Experiment and improve products

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Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

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CMF’s objectives and mission

• Established in 2005

• CMF’s objectives– To address knowledge gaps in micro finance sector– Experiment on ground solutions

• CMF’s mission– Systematically research links between access to financial

services and participation of poor in larger economy

– Participate in maximizing access to financial services

Research on micro finance and livelihood financing (RU)

Strategy building for MFIs (MSU)

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CMF’s Objectives

ResearchInfluence practice

Advocacy

Strategybuilding

Training

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MSU and RU re-enforcement loop

Strategy (MSU)

Research (RU)

Impact of microfinance• Impact Evaluation Studies• Economics of micro enterprise• Insights on HH "financial behavior"• Constraints on HH productivity• Experimentation on product design• Micro finance transaction costs

MFIs Strategy for growth•Definition and implementation of

innovative business models–Market research, creation of linkages

•MFIS best practices sharing•Design/test of new financial products •Capacity building

–capital structure, HR, MIS, processes, customer segmentation, governance…

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CMF collaborates with existing active players in the microfinance sector

Manufacturing Companies

Insurance Companies

Funding Organizations

MFIs/NGOs/Trust Banks/Financial

Institutions Universities/

Research Institutions

Regulators/ Policy Makers

Government (Central and State)

SMEs CDF

CIRMCAFS

CMF

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Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

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Understand better

• Why are recovery rates so high?• What is the financial behavior of clients? • What is the impact of microfinance?

Improve quality of services

• New and innovative products• Maximize the impact of credit through other

services

• Improve organizations– Information management– Role of HR policy and staff incentives– More cost-effective processes

Goals of Research is to maximize microfinance impact through 3 axes

• Alternative channels– SHGs– Revive RRBs– New channels (Kiosks, ATM, CF…)

• Policy– Regulation– Competition and information sharing

Expand access

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These objectives translate into 4 Research areas to maximize microfinance impact

Microfinance plus

Finance andOrganizational

issues

Policy

Impact and product design

1 2

4 3

Maximize impact On client

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Product design: credit

Selection Monitoring Enforcement

• Individual/group liability

• Self/MFI selection• Guarantors• Collaterals• Interest rate

• Repayment schedule• Communication

strategies• Loan size• Interest rate

Design the most cost-effective products by varying credit product components

• Within group monitoring

• Staff supervision

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What do low

income clients want?

Insurance•Weather •Life and Health•Livestock Flexible loans

•Small initial sizes•Larger subsequent loans

•Longer terms

Housing loans•Build new homes•Improve existing homes

Savings

•Group based•Individual loans

Remittances products

Product diversification and communication strategies

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Which delivery channels/communication strategies are effective?

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Microfinance Plus: address contextual constraints

? Impact

Health

infrastructure

entrepreneurship

Access toFinancial services

•Reduce risks of MFIs by combining microfinance with other development interventions (health, financial training…) •Provide products / services through credit

2

inpu

ts

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Organizational issues: cost and profitability

Bank Transaction? Micro-loan9% 25%

Return?

• How to reduce transaction costs?• Show investors risk return performance of

micro-loans

3

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Policy issues

• What are regulatory obstacles to MFIs?

• What are the consequences of competition and how to manage it?

• Why is there no information sharing? How can a credit bureau be set up?

• How to make MFIs more transparent?

• How to improve microfinance reputation?

4

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Research: other initiatives

• Construction of a panel database in Tamil Nadu for on-going research• With Yale Center for Economic growth (Mark Rosenzweig, Dean Karlan, Chris

Udry, Paul Schultz, Rohini Pande)• 10,000 households in Tamil Nadu, rural and urban, every 4 years• Study vulnerability, consumption patterns over time• Document migration patterns, access to financial services over time

• Economics of micro finance, by Adel Varghese, Texas University• Evaluating social programs, by Poverty Action Lab• MBA course elective on microfinance, by Rock Rock Magleby-Lambert, Boston University• Total immersion program in Finance and development

Panel database

Seminar series

• Academics and practitioners• Foregone seminars

– Prof Ashok Jhunjhunwala, IIT Chennai – Prof Vaidyanathan, Madras Institute of Development studies– Prof Sendhil Mullainathan, Harvard– GN Bajpai, ex chairman of SEBI– Shekhar Shah, World Bank

Courses

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Agenda

• Microfinance in India: an overview

• The Centre for Micro Finance

– Research Unit

– MFI Strategy Unit

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MSU: Objectives and areas of work

• Advice MFIs to define and execute a growth strategy by addressing their main challenges– Horizontal growth (Same Products & Same Customers Profile)– Vertical growth (New Products &/or New Customers Profile)

Refine Business strategy and model

Improve internal Organizational structure

Support MFIs growth (vertical & horizontal)

Recommend Implement Diagnose Scale up

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MSU: Areas of work with MFIs

Business strategyOrganizational structure

• 3y strategic plan definition– Competitive position assessment

(SWOT analysis)

• Marketing strategy – Customer segments to target– Products to develop to serve these

segments (IL, insurance…)– Portfolio management

• Market linkages creation– Leverage of ICICI MFIs and

corporations clients– Thematic consultations

• Capital structure (equity/debt) and access to financial markets (VC, securitization…)

• HR recruiting, training, incentives

• Organizational design– MIS– Processes of operations– Governance

2

4

1

3

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Reduction of MFIs cost of funds: Supply-demand match assessment

Supply Demand

Identify potential assets to securitize/buy out

Evaluate investors risk/return appetite for

MFIs’ paper

Check demand / supply requirements match

Facilitate / structure the deal

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4 options to explore and 4 types of players to interview to reduce MFIs costs of funds

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Portfolio Securitization

Bond issuePortfolio Buyout

Direct medium/long

term loan

Foreign banks

Domestic banks

Funds

Facilitator

• Minimum volume of investment?• Investment currency and hedging mechanism?• Tenure / maturity of investment?• Pooled vs single MFI portfolio investment?• Investor risk/return profile?

– Portfolio / MFI rating requirement?– Guaranty requirement (FLDG/SLDG)?

• Investment seasonality (PSL requirement)?• Investor reporting / monitoring requirements?• Willingness / capacity of the MFIs to receive funds and

comply with investors requirements?

Impact on MFIs CoF?

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HR training, recruiting, incentives

Potential partnersOrganizational structure

• MFIs careers, Hunt – Third sector• Awareness program

• Recruitment: facilitate recruitment for the entire sector in the next 3-5 y => 20K FTEs to hire (TBD)

• Financial training for top mngt

• Training for middle mngt & field staff

• Incentive schemes

• IFMR centers (CAFS, insurance…)• ICICI trainings• HBS, Duke, IIM

• Coordinate existing providers– MicroSave, Care India, Basix school

of livelihood, EDA

• Set up new facilities (if required)

• Cocoon?

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MIS: partnership with FINO3

• To develop a common end to end delivery platform shared across Indian MFIs

• Created as sectoral resource to serve 700M customers

Objective

• To access reliable data on MFIs operations performance• Easier portfolio rating through creation of historical data

Benefits for MFIs

Benefits for investors

• To reduce initial CAPEX required per MFI• To improve product depth and capability • To improve business management and reduce transaction costs

– data reliability and timeliness (product, clients) – To better service liabilities and investments– To allow single-window monitoring of customer relationships

Current status

• Currently sized for 12-50M customers• Proof of concepts completed, final contract negotiations (IBM/iflex)• Entire infrastructure, hosting, operations outsourced• First phase launch with 5 partners by May 2006

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Market linkage creation: approach

Corporates

MFI

• Local presence in identified region?• Willingness/Capacity of MFI to

−Provide customized financial products?−Identify entrepreneurs (if necessary)?−Provide/coordinate technical training at

the field level?

• Volume generated (absorbed)?• Quality?• Cost of production?• Capacity to contract & payback loan?• Existing capabilities/training need?

• Product to be sourced (retailed)?−Region? Volume? Price? Quality?

• Required investments (capital or capabilities) for tie up?−Expected return (in value)?−Timeframe of return?

• Risk undertaken by company (quality…)?• Previous pilot already undertaken?

Customers

Dem

and

Supply

ICICI Commercial teams

ICICI Sectoral team Sectoral experts / NGOsMarket dynamics

4

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Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (1/2)

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Objective• To increase farmers revenues from milk production through improved

yield and quality of milk produced by cattle feed utilization• To reduce the risk on Spandana’s loans that go toward buffalo purchase

Expected Impact

• Expected net revenue increase in Guntur – 300-600Rs/month/household with a single buffalo fed with cattle feed– up to 2400Rs/month, ie. by 34%*, once households scale up to 4 buffalo after

demonstration effect on one buffalo

• Marketing the feed product to traditional / low income farmers and educating them to utilization of such product

• Designing a credit product that caters to the clients’ needsChallenges

*: average monthly household income of 60 families surveyed was 7000Rs

• Dairy activity is a low revenue activity for farmers in spite of a growing milk demand and therefore remains a marginal source income

– Milk yields from buffaloes is low because these are not fed good quality feed– Farmers perceive dairying as a subsidiary activity because it only offers marginal

income: they have no incentive to own more that 1 or 2 buffaloes– Farmers however willing to invest in dairy (cattle feed, high quality breeds, artificial

insemination…) often lack the funds to do so

• Godrej Agrovet, a concentrate cattle feed producer, is not presence in the areas where Spandana (MFI with 700,000 clients) operates.

Initial Situation

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Market linkage example: cattle feed distribution through Godrej Agrovet-Spandana (2/2)

Godrej Agrovet

Spandana

• Provide credit at 0% int. rate for the purchase of feed

• Delivers the product to weekly center meeting

• Has assigned 1 project leader• Does not make any profit out of

this initiative

• Increase yields and fat %• Increase income by 10-20 Rs/day• Are offered doorstep delivery• Are able to purchase the feed on

credit at 0%

• Delivers concentrate feed in 50 kg bags to central locations from where Spandana receives the product

• Region: Guntur• Price: 325Rs/50 Kg• Has assigned 2 officers to coordinate project

Customers

Dem

and

Supply

4

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Godrej Agrovet-Spandana: productivity improvement

Initial situation

Dealer

Godrej

Distributor

Farmer

Dealer

Dairy

After Spandana-Godrej partnership

To be piloted

Spandana

Farmer

Godrej

Spandana

Chiller Entrp.

Dairy

Milk

Cattle feed

Cattle feedPiloted

Loan

Sales

Sales

Loan

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• Handicraft

• Fisheries / Seaweed

• Trees plantation

• Food processing

• Vegetables / Mint cropping

Market linkage creation: other projects4

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Thank youFor any question…

annie@ifmr.ac.in or sdjari@ifmr.ac.in

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Information Asymmetry• No collateral• No credit history• Difficult to evaluate

enterprises’ potential success

High Costs of Intermediation • Low value transactions• Geographical isolation• High supervision costs (no financial literacy)• Informal activities: need flexible access• Illiteracy: traditional services inappropriate• High cash handling costs

Constraints to scaling access for the poor

Provision of microfinance is

constrained by…Regulatory Issues

Staff Incentives not aligned to maximise access to financial services for poor

High transaction costs

Poor Technology

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How to release these constraints?

• To improve impact of microfinance on the poor• To increase access to the relevant suite of financial services

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CMF: Who are we?

• Permanent staff: 23 Research associates and 8 MSU Associates from Kennedy School, Yale, IFMR, XIMB, IRMA…

• Short-term Interns: Masters and Phd students from Kennedy School, Harvard, Yale, MIT, DSE etc.

• Research Committee to give advice on submitted proposals :– Jonathan Morduch (NYU), Abhijit Banerjee (MIT), Byomkesh (SKS),

Mr. Thiagarajan (MCFI), Chandrasekar (IFMR), Bindu Ananth (CMFR founder)

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CMF’s Objectives

ResearchInfluence practice

Advocacy

Strategybuilding

Training