Summary of the Last Lecture

1. Summary of the Last Lecture • Financing vs. Delivery • In house vs. partnerships

2. MODELS ANDCORPORATE CHOICES

3. Social Responsibility Positioning • When thinking about inclusive finance, companies are advised to be clear about where they place themselves on the spectrum of corporate social responsibility (CSR). Will they approach financial inclusion on purely commercial terms, or at the other extreme—as a philanthropic activity?

4. Social Responsibility Positioning • Will they pursue a double bottom line, and, if so, how? Can attention to social value enhance financial value?

5. Social Responsibility Positioning • Some players see their involvement in inclusive finance strictly as corporate social responsibility. An international bank’s head of microfinance, quoted in Euromoney, commented, “Anyone who tells you that they’re in this for business reasons alone is lying to you … We have a trillion-dollar balance sheet.

6. Social Responsibility Positioning • Do you think this really matters for our bottom line? You couldn’t do three big deals with all the money in microfinance.” Zach Fuchs, the Euromoneyreporter who interviewed this person, found him to be an outlier.

7. Social Responsibility Positioning • He observed that the corporate leaders he spoke with were shifting their outlook from charity toward investment.

8. Social Responsibility Positioning • ACCION believes that for-profit businesses can and should incorporate social goals. Moreover, the transfer of social objectives from CSR to mainstream strategy is one of the harbingers of success for inclusive finance.

9. Social Responsibility Positioning • Projects viewed through the CSR lens and handled by CSR departments tend to stay limited because they lack the full weight of the company behind them. • Scale becomes possible when these projects move into the mainstream arena.

10. Social Responsibility Positioning • Corporate champions like NachiketMor and Bob Annibale may be motivated by their own desire to make a difference to the poor. They may operate from passion and conviction, concepts strongly on the social side of the spectrum.

11. Social Responsibility Positioning • However, they have succeeded by crafting strategies that leverage the core business strengths of their institutions.

12. Social Responsibility Positioning • The companies cited in this course have motivations ranging from the highly commercial (Banco Azteca) to the highly social (ANZ Bank).

13. Social Responsibility Positioning • Yet all the examples we selected approach inclusive finance in a businesslike manner, using sound business principles. All expect to earn profits.

14. Social Responsibility Positioning • Companies can find many opportunities to address important social and economic challenges if they seek them creatively. An excellent example comes from the education services of Equity Bank in Kenya, which contribute to the education of hundreds of thousands of students, address one of Kenya’s highest social values, and earn Equity Bank both profits and enormous goodwill.

15. Social Responsibility Positioning • Social goals must also include a strong commitment to consumer protection. When financial institutions do not protect consumers, as in the case of the subprime mortgage debacle in the United States, the damage can spread far beyond a single offending bank. It tarnishes the reputation—and the returns—of the entire sector.

16. Social Responsibility Positioning • Consumer protection is only a minimum standard, however. There is much to gain when companies pursue inclusive finance in a positive way, with client needs at the top of their minds.

17. Social Responsibility Positioning • When they ask, “How can we improve lives through financial services?” this question may help them discover the answer to “How can we build a profitable line of business?”

18. COMMERCIAL BANKS ASMICROLENDERS • Banks can participate in inclusive finance in many ways. In this lecture we focus on one mode, often called bank “downscaling.” In downscaling, banks provide working capital credit directly to microentrepreneursusing techniques derived from microfinance institutions.

19. COMMERCIAL BANKS ASMICROLENDERS • For a few brave banks that have launched their own microenterprise finance operations, downscaling has already provided rewards in the form of growth, profits, and social value added. ACCION has assisted seven banks to start microlending, first in Latin America and more recently in Africa and Asia.

20. COMMERCIAL BANKS ASMICROLENDERS • All of the operations more than two years old are consistently profitable, and together they reach more than 450,000 active borrowers. There are numerous other examples carried out by a variety of actors, notably several newly rising banks in Eastern Europe and Central Asia.

21. COMMERCIAL BANKS ASMICROLENDERS • And the original microfinance bank, Bank Rakyat Indonesia (BRI), although a public-sector bank, implemented what was in many ways the first successful downscaling effort in the mid–1980s, which is still going strong. BRI’s microfinance division, with 3.5 million borrowers and 21.2 million savers, has been consistently the most profitable part of BRI.

22. COMMERCIAL BANKS ASMICROLENDERS • External factors have often helped convince banks to downscale. Regulatory changes such as financial-sector liberalization and removal of interest-rate caps created conditions that allowed banks to operate profitably in the lower segment.

23. COMMERCIAL BANKS ASMICROLENDERS • They also created intense competition in the mainstream corporate sector, which pushed some banks toward underserved markets. In addition, banks seek to improve their images by providing services to the poor.

24. COMMERCIAL BANKS ASMICROLENDERS • Motives such as these have created interest in downscaling, but many banks needed an additional risk-reducing nudge. These banks have taken advantage of research and start-up subsidies from donors and multilateral institutions

25. COMMERCIAL BANKS ASMICROLENDERS • like the International Finance Corporation and United States Agency for International Development. Such up-front subsidies support initial trial-and-error experimentation and shorten the time to break even.

26. COMMERCIAL BANKS ASMICROLENDERS • If commercial banks decide to operate microlending operations, they have several major competitive advantages to draw upon in comparison to specialized microfinance providers:

27. Physical and human infrastructure. • An existing network of branches and service technologies, if located near microfinance clients, can cut the cost of microfinance outlets.

28. Physical and human infrastructure. • And commercial banks bring staff with skills in human resources, customer service, information technology, marketing, and law that can support microfinance operations.

29. Market presence and brand recognition. • Banks in the market for a long time are well-known and have a recognized brand even among lower-income people. Some large banks already have connections to the BOP population through savings accounts or payment services.

30. Access to plentiful and low-cost funds. • Banks can directly access local and international financial markets, and established banks have a broad deposit base. They can raise large amounts of funds that can be loaned quickly and at relatively low cost.

31. Low cost structure. • Banks generally have a much lower operating cost structure than specialized microfinance institutions.

32. Why is it, then, that banks have not moved faster into microenterprise lending? • Not all banks possess all these advantages to the same degree, but taken together, these make banks potentially successful competitors in the microfinance market. • Why is it, then, that banks have not moved faster into microenterprise lending?

33. Market knowledge. • Commercial banks lack an understanding of the microfinance market and its clientele, and often dismiss this segment as both too risky and too expensive.

34. Market knowledge. • Even if a bank recognizes that microfinance can be profitable, the resulting portfolio size may be viewed as too small relative to the management “bandwidth” required to manage a microfinance operation.

35. Credit methodology. • Banks often attempt to serve the market with inappropriate credit methodologies; for example, adaptations of traditional commercial or consumer lending approaches. When these methodologies fail, they reinforce the idea that microfinance is not promising.

36. Trend toward automation. • The banking sector is fast adopting technologies that reduce the number of costly face-to-face transactions. Bankers may see the labor-intensive and personal nature of microenterprise credit as the antithesis of their drive toward more automation and less infrastructure.

37. Conservative corporate culture. • The long tradition of banking is closely tied to specific ways of doing business. With a conservative outlook, banks may tend to burden microfinance with traditional policies and procedures that prevent its success.

38. Human resources. • Microenterprise credit requires a staff comfortable in the neighborhoods where clients live and work, and that must be highly productive.

39. Human resources. • Monetary incentive systems are often used to spark such productivity. These requirements are often incompatible with the human resources profile and policies of commercial banks.

40. Summary • As can be seen, the advantages commercial banks can capitalize on arise from their market position, while most of the obstacles involve the need to change internal ways of thinking and operating.

41. Summary • Successful strategies provide a structure that uses the positional advantages of banks while preventing the attitudes and processes of traditional banking from hobbling microfinance.