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Financial Intermediary Lending and Microfinance

Financial Intermediary Lending and Microfinance. Carlos E. Cuevas, FSD. Microfinance as a practice. Defined by the size, terms and conditions of the transactions Small, unsecured loans or secured with non-conventional guarantees Small deposits (opening balances and average balances)

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Financial Intermediary Lending and Microfinance

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  1. Financial Intermediary Lending and Microfinance Carlos E. Cuevas, FSD

  2. Microfinance as a practice • Defined by the size, terms and conditions of the transactions • Small, unsecured loans or secured with non-conventional guarantees • Small deposits (opening balances and average balances) • Small, regular transfers (remittances) “small”: relative to GDP or to financial sector averages Finance Forum 2002

  3. Outreach and Sustainability in Microfinance • More likely when institution has: • Large scale, • Diversified clientele (income levels and economic activities), and/or • highly specialized, technologically advanced • Commercially oriented • Which usually means: regulated and supervised Finance Forum 2002

  4. MF outside formal (regulated) finance • Unregulated financial cooperatives • NGOs **************** • Investment funds, Social funds (usually with NGOs as retailers) **************** • To be avoided, if possible Finance Forum 2002

  5. MF outside formal (regulated) finance (cont.) • Many problems • Heterogeneity: Std. Deviations of key indicators much larger than the mean • Instability: ownership, governance, internal controls, external oversight, donor dependence issues • New, inexperienced • Unreliable data (several thousands in the world, about 110 report to the Microbanking Bulletin) Finance Forum 2002

  6. MF outside formal (regulated) finance (cont.) • Resources exist • Do it yourself: • CGAP Appraisal Report • Selected indicators for outreach and sustainability • Rating agencies for MFIs • CGAP, IADB supporting expansion of ratings services • Quality of ratings still untested, not yet standardized • Data quality problems Finance Forum 2002

  7. MF outside formal (regulated) finance (cont.) • Fairly common in investment operations with credit components • In social funds, rural investment funds, community development funds Finance Forum 2002

  8. FIL versus Investment Operation with a Credit Component • <<When an investment operation that is not a FIL includes a credit component, Regional Staff consult with the Financial Sector Board; on the basis of that consultation, the Project Concept Review meeting decides to what extent OP and BP8.30 apply to the component>> (BP8.30, July 1998, emphasis added) Finance Forum 2002

  9. What is wrong with this picture? • Bank procedure not specific enough • How many such operations are brought to the FS Board? • Do QATs look at PCDs that include credit components with OP8.30 in mind? • Do QATs know what to look for? Finance Forum 2002

  10. Improving the quality of MF operations • Regular review of OP8.30 applicability at entry level - Regional QA mechanism to apply the policy • Minimum standards, good practice lessons and advice – GP8.30 (how to) • Engage staff with the necessary skills to do due diligence and apply good practice to operations design. Finance Forum 2002

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