What kinds of banks?

1. What kinds of banks? • Government banks • Development banks • Foreign-owned banks • Cooperative/mutual banks • “Southern” banks

2. Bank ownership: Africa and ROW Note prominence of foreign-owned banks in Africa

3. Percent of total assets 2 0 -2 Net interest margin Non interest income Profit before tax Over-heads Provisions Estimated impact of foreign bank entry on domestic bank performance

4. Nigeria’s DFIs in 2000 Annual losses=9% total assets Cumulative losses=45% of total assets Negative net worth=35% of total assets 78% of portfolio non-performing

5. Nigeria’s DFIs in 2000 Started vigorous and promising But made poor loans Never built a strong credit appraisal capacity Charged insufficient spreads Incured excessive FX risks As NPLs started to spiral, cash dried-up Even those who could repay stopped given new lending prospects poor

6. Percent of total assets 40 30 20 10 Crisis countries 0 Noncrisis countries Foreign-owned banks State-owned banks Comparing the share of foreign and state ownership in crisis and noncrisis countries

7. Sources of banking crisis • Government interference • Especially in countries with poor governance • Market: Boom and bust • East Asia crisis 1997-8; Structured finance crisis, 2007-8 • Bad management and fraud • Venezuela, 1994, Dominican Republic 2003

9. Is microfinance different? • Scale • Subsidy • Style

10. Beck, Demirguc-Kunt and Honohan, 2008

11. MF likely helps poverty • But scarcity of reliable evidence is not widely recognized • Cf. Dichter and Harper: What’s wrong with microfinance?

13. Direct impact channels of MF on poverty • Insure against current income falling below poverty level • Reduction in cost of making small payments • Return to credit-financed investment • Insurance allowing high-yield high-risk ventures …channels can be slow and complex (cf. child labor channel)

14. Difficulty of impact meta-analysis • Multiple indicators allow cherry-picking by secondary sources… …But hinder aggregation across studies • Researchers don’t report rates of return (even though they may be very high) • Technical problem: selection bias

15. Example: Bolivia study Primary report cited 14 indicators; five significant, of which four unfavorable (only one favorable) But reputable secondary sources cherrypick the one favorable finding: “incomes of 2/3 of clients had increased after joining the program” http://www.cgap.org/docs/FocusNote_24.pdf

16. Selection biases Success of household in accessing credit is already an indicator of otherwise unmeasured abilities - leads to upward bias of credit impact (solved by Coleman) But on the other hand NGOs may target disadvantaged areas - leads to opposite bias (solved by Pitt & Khandker)

17. Scale and MFI viability MF remains fragmented with most individual MFIs operating well below efficient scale. Larger firms (# clients, or total assets) tend to be more profitable (99% significance). A doubling of scale implies between 6 and 10 percentage point improvement in the self-sufficiency index (income as % expenses) Small loan size (in absolute terms) reduces profitability

18. Subsidy/Interest rates • Is present in many if not most MFIs • Any MF subsidy should be evaluated on its effectiveness relative other grant finance • MF subsidies may constrain MF development • discouraging entry of the unsubsidized and • vulnerable to fluctuations in aid • Are government-imposed interest rate ceilings good for the poor?

19. Interest ceilings: the simplest story

20. There is no alchemy Enormous diversity in style but… …the essential features of microfinance technology are banal! Common sense, cost control & skilled attention to the demands & sensitivities of the local clientele the main requirements, along with the ambition to achieve scale.

21. The constraining factor • Even if viable, MF is typically not high-profit • It is intensive in managerial/entrepreneurial resources that are scarce in LDCs • And these resources are also highly rewarded in other sectors (Hence predominance of charitable sponsors)

22. Other measurement issues Displacement effects Decline in income variance could lower poverty rate even if mean (group) income does not increase Access to credit could worsen poverty (e.g. funds squandered or appropriated by menfolk leaving rest of family overindebted)

23. Is finance-intensive growth pro-poor (or does the rising tide just raise all boats)?Two views and some evidence

24. Not mainly for the rich The optimistic view (cf. Rajan and Zingales: Saving Capitalism…from the Capitalists): • Undeveloped financial system is “uncompetitive, clubby, conservative” • Developed financial system can • Undermine the power of incumbent firms • Help households and small producers escape the tyranny of middlemen

25. Not mainly for the rich (2) The pessimistic view: • Requires minimum scale/wealth in order to benefit from formal finance (Greenwood and Jovanovic, 1990) • More financial system might mean that those excluded fall back even further?

27. Pro-poor financial development? Honohan, 2004

29. Access to Finance Distribution of countries in each region

30. Supplementary reading: Topic 3 • Demirgüç-Kunt, Asli, Thorsten Beck and Patrick Honohan. 2008 Finance for All? Policies and Pitfalls in Expanding Access (Washington DC: The World Bank). http://www.worldbank.org/financeforall. Overview and Summary • Honohan, Patrick. 2004. “Financial Development, Growth and Poverty: How Close Are the Links?” World Bank Policy Research Working Paper WPS 3203. • Honohan, Patrick. 2008. “Money Matters for Poor Countries.” Trinity College, Dublin, Mimeo