Inclusive financial sectors and market integration

1. Inclusive financial sectors and market integration Gerhard Coetzee (with support from Ronald Chua, Luis Noel Alfaro and partly based on the work of ECIAfrica)

2. Outline • Focus on southern Africa and introduction • Market integration defined • Market Integration and financial exclusion • Market development and integration • Indications of integration and some evidence • Enabling factors, challenges and strategy

3. Introduction • Conventional supply-led  market based approach (and both still alive) • Slow growth in poverty focused sector • MF and financial sector, still somewhat separate, still shallow • Decline in aid flows for microfinance, need alternatives, that are more sustainable • Integration – may lead to market development and larger outreach • Market development – leads to decrease in poverty • GDP per capita growth of 3.8% to reach MDGs • One standard deviation improvement in equality in Latin America and Africa • Why integration as terminology?

4. Working definition • Up-scaling and downscaling • Linkages, joint ventures • Breadth, depth and scope • Why? • Political push – charters in South Africa, accounts • Profit pull – increased competition due to globalization, liberalization • Perceptions of the poor changing – Prahalad • Technology – largely ICT with “mobile” banking and expectations of 1,4 billion on line

5. MI and FE “The inability to access necessary financial services in appropriate form” (Kempson and Whyley, 1999). • Causes may be (Financial Services Authority, 2000): • Access exclusion due to risk assessment • Conditional exclusion or eligibility • Price exclusion or affordability • Marketing exclusion • Self-exclusion • Market integration includes financial inclusion strategies • Market integration lead to inclusion improvements

6. Market integration and market development • Is integration always possible? • No, depending • On level of development of market • On availability of institutions and • on level of development of financial and other institutions • Different strategies

7. Strategies regarding integration and market development

8. Indicators of readiness for and of market integration • Supply Side • Diversity of players and methods • Convergence and consolidation • More and better products and services • Greater reach and greater depth • Better systems and following international standards • Conducive ICT systems and structures

9. Indicators of readiness for and of market integration • Demand • More informed and sophisticated clients • More choices • Broad range - from vulnerable non-poor to the poorest • Context • Rules, new and adjusted • Information flows improve, credit bureaus, consumer education

10. Evidence: South Africa (1) • Legislation • Three new laws • To address access, sector structure and conduct • Prudential side • Cooperative Banking Bill • Dedicated Banks Bill • Conduct Side • National Credit Act replaces Usury Act, Credit Agreements Act and MFRC • Started on June 1, 2006 • Phasing in over a year

11. Evidence: South Africa (2) • Main stream banks in microfinance “sector” • Mzansi Savings Account • MTN Banking • Consumer credit – mainstream banks now the biggest role • Niche Banks in microfinance • WIZZIT • Capitec Bank

12. 120,000 104,000 100,000 100,000 80,000 No of points (1000s) 60,000 40,000 20,000 8,600 8,000 6,300 2,700 2,800 0 Banks Post Office ATMs DSD Lottery Retail Spaza Payment merchants* Evidence: South Africa (3) • Access potential and real

13. Evidence: eastern and southern Africa • Legislation • Uganda, Kenya, Tanzania, Mozambique, Zambia, Angola • Main stream banks in microfinance • Stanbic, Barclays, ABSA, • Niche banks in microfinance • NMB, Equity Bank and more • Outreach • Insufficient data to confirm or deny

14. Enabling Factors for Market Integration* • Broad definition of microfinance • Functioning microfinance “sector” • Conducive policy environment and • Appropriate legal framework, regulation and supervision • Access to money and capital markets • Presence of support Institutions • Informed clients through information flow and consumer education • Incentives and motivation for continuing innovation • Convergence of stakeholder initiatives * Some adapted from “Commercialization of Microfinance: Perspectives from South and Southeast Asia” Charitonenko et al, ADB.

15. Challenges • Mission drift • Knowledge of market • Appropriate products • Business model • Scaling up and cost of integration (cost of transforming) • Organisational culture • Perceptions

16. Need change of perceptions • The poor – from beneficiary to clients and partners • Poverty and vulnerability – from risk to opportunity • From subsidy to sustainability • From microenterprise credit to household financial services • Reaching the poor & sustainability – from trade-off to win-win • From failures to opportunities for learning • From margin to mainstream

17. Policy and strategy • Advocacy and support by international bodies • Ensure integration aspects in national policy • Legislation and policy • take away obstacles, but keep • balance between prudential and innovation • For example, in South Africa strategy to integrate “first” and “second” economies – ASGISA

18. Supply led, state banks, small farmers, largely failure, but some successes Commercialisationtrying to find right institutions, systems, outreach improved More demand, NGOs, Urban MEs, outreach ceiling Integration, many institutional types, linked how to keep reaching the poor What next? 50s to 70s 70s to 90s 80s to 90s 90s to present Summary of progress and challenges

19. Acknowledgement • Ron Chua • Luis Noel Alfaro • David Porteous • Finmark Trust • CGAP • The Mix • ECIAfrica