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Reaching SME Rural Clients

Reaching SME Rural Clients. New Technologies for SME finance Jacob Yaron - Consultant December 2002. Why Are Rural SMEs Under Serviced?. Asymmetric information Bad policies (interest rate policy, legal enforcement) Variance risk Seasonality Collateral

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Reaching SME Rural Clients

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  1. Reaching SME Rural Clients New Technologies for SME finance Jacob Yaron - Consultant December 2002

  2. Why Are Rural SMEs Under Serviced? • Asymmetric information • Bad policies (interest rate policy, legal enforcement) • Variance risk • Seasonality • Collateral • Lack of knowledge regarding: • 1) Developments that make servicing this clientele profitable 2) The use of lending interest rates as a compensatory mechanism to overcome difficulties associated w/ rural lending

  3. The New RF Paradigm Must eliminate the viscous circle of: • Administrated, artificially low lending rates • Poor loan recovery • High subsidy dependence • Low outreach that result from budget constraints • Repressed supply of RF services

  4. A Success Story in Rural Micro Finance =A Lesson for Rural SMEs For the last 18 years in Indonesia small loans and saving accounts appropriately designed and priced have generated: • High outreach (servicing millions of people) • Subsidy independence • Return on assets of 5.5 to 7 percent PA

  5. How Was It Achieved? • Appropriate pricing of products • Incentives to staff • Incentives to clients • Adjusting costs and products to the actual demand of rural population • Creating long-term relationship between clients and the bank

  6. If This Could Be Achieved With: • Loans size averaging $500 to $700 • Frequent monthly repayments • Small savings accounts THEN… IT CAN, IF PROPERLY APPLIED, WORK FOR SMEs AS WELL.

  7. Innovations in RF • Loan loss is the more costly item in the history of RF more than the cost of capital & the admin cost • The issue is how to reduce the loan losses • information issues • Credit bureaus • Credit scoring • Loan risk issues • Combining three instruments could provide a triangular solution that would mitigate credit risk and create credit enhancement: 1. Warehouse receipts 2. Index based yield insurance 3. Commodity price risk insurance

  8. The Credit Insurance Triangle • The use of price risk management together with warehouse receipts, and yield insurance will enhance both credit and overall welfare. • Strengthening of one link makes the other links and the entire package stronger.

  9. The Benefits of the “Credit Insurance” Triangle • Improves rural welfare • Enhances certainty w/ respect to yield and price (income) • Reduces substantially or eliminates the unwilling repayment defaults • Improves loan portfolio quality • Enhances access to credit by making borrowers a better credit risk • Transforms some rural clients from non-credit worthy to credit worthy clients • Diversifies the financial products delivered by RFIs

  10. Yield Risk Insurance Price Risk Insurance Warehouse Receipts Enhancing Credit Enhancing Welfare Enhancing Credit Enhancing Credit Credit Enhancing Welfare Enhancing Welfare TARGET CLIENTELE: Small Scale Producers

  11. The Role of the RFI in the Triangle • Aggregate demand • Disseminate the benefits • Create a market for risk

  12. The Limitations of Using Price Risk Instruments (Put Options) These instruments can only be used when: • The government doesn’t guarantee the price of the commodity • The commodity is traded in a liquid exchange • The domestic price of the commodity highly correlates with the price on the exchange

  13. What Is the the Role of the State? • To support the introduction of new instruments that reduce credit risk and expand outreach • Initial support not a permanent subsidy. These instruments rely on the market forces rather then defying them, as was practiced by the traditional crop insurance and commodities price floors that were guaranteed by the state).

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