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Eight Business Model Breakthroughs for Microfinance Presentation of Work in Progress, October 24, 2006

Eight Business Model Breakthroughs for Microfinance Presentation of Work in Progress, October 24, 2006. Task Force on Microfinance. The Challenge of Scale in Microfinance. Microfinance is a recognized tool for addressing poverty and empowering the poor.

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Eight Business Model Breakthroughs for Microfinance Presentation of Work in Progress, October 24, 2006

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  1. Eight Business Model Breakthroughs for MicrofinancePresentation of Work in Progress, October 24, 2006 Task Force on Microfinance

  2. The Challenge of Scale in Microfinance Microfinance is a recognized tool for addressing poverty and empowering the poor. Despite the important accomplishments of microfinance institutions, most of the potential clients of microfinance still lack access to quality financial services. Why? Needed: Business models that can bring microfinance to scale

  3. The Forum of Young Global Leaders (YGL) A unique, multi-stakeholder community of the world’s most extraordinary leaders who are 40 years old or younger and who are ready to dedicate a part of their time and energy to jointly work towards a better future. The 2020 Initiative – defining a vision for a world where sustainable economic development replaces the plague of poverty around the globe. In association with the World Economic Forum

  4. YGL Microfinance Task Force Objectives Public Awareness Private Sector Engagement Specific Microfinance Projects Conducive Regulatory Environment

  5. The Breakthroughs Project of the YGL Task Force • Search for business model breakthroughs, especially related to scale and efficiency. • Leaders from microfinance join counterparts from business and other sectors to exchange experience. • ACCION International facilitates. • Eight key breakthroughs identified and presented here. • Work will continue on: Potential impact Obstacles to expansion Pathways to widespread adoption Final paper to be presented at the World Economic Forum in early 07.

  6. Conventional Wisdom in Microfinance Microfinance is about lending for “productive” purposes. Loan officers are the cornerstone of good microfinance. Widely held “truths” may block a breakthrough. Microfinance clients won’t use new technologies. Every MFI needs a custom-tailored IT system.

  7. Prepare MFIs to apply the innovation Adapt technology to fit Microfinance clients Innovate for MF Clients Upgrade MFI capabilities Examples: credit bureaus, software companies Attract new players, support structures Foster policy or regulatory change Innovations bring need to revise regulations Four Dimensions of Breakthroughs

  8. Client convenience and security Benefits to Clients and MFIs Increased MFI efficiency; lower cost Penetrate difficult locations Mechanisms Card products: debit, credit, prepaid, etc. Devices: ATMs, POS, cell phones Challenges Few MFIs are members in payment networks Products designed for middle class market Clients are used to cash, as are vendors they use Exercise Breakthrough 1. Payment Systems Make automated payment systems available to microfinance clients

  9. The ultimate in client convenience Benefits Low income clients already love cell phones Cooperation between Telcoms and Banks Mechanisms Sim card becomes payment vehicle Text messaging to transfer money Infrastructure preconditions Challenges Per-transaction fees high Security vulnerabilities make regulators skeptical Exercise Breakthrough 2. Mobile Phones Turn cell phones into payments devices

  10. Financial Management and Reporting Connect to Payment Systems ATMs, Cards, International Money Transfer Streamline Customer Interface Teller transactions Loan Approvals Data Mining Credit Scoring Understanding Customers Social Performance Monitoring Breakthrough 4. Improve MFI Information Technology IT System Basic Ops. Connected Networked Recoverable MFI systems must perform all these functions well.

  11. Retailer as Delivery Channel MFI Branch -- ? Retail Agent (Pago Facil) Customer Retailer Becomes MFI Retailer (Elektra) Retail Store Cashier/Clerk Customer Breakthrough 5. New Channels to Reach Customers: Retail Networks MFI Branch Loan Officer/ Branch cashier Customer Traditional Model . Use of Retail Agent . Many models are possible.

  12. From Mono to Multi-product • Credit: • Group • Individual • Housing • Consumer • Small business • Vehicle • Fixed asset • Pawn loans • Credit: • Group • Individual • Savings: • current accounts • Programmed savings • Fixed deposits • Payments: • Utility bills • Savings: • Current accounts • Programmed savings • Fixed deposits • Insurance: • Life insurance • Property insurance • Health insurance • Money Transfers and Payments: • National • International • Utility bill payments • Credit: • Group • Individual • Housing • Consumer • Small business • Credit: • Individual • Group • Housing • Consumer • Vehicle • Small business • Pawn loans Monoproduct Credit Variety Credit & Savings Full Service Breakthrough 6. Offer Clients a Full Suite of Products

  13. Breakthrough 7. Leverage the Mainstream Financial System Bank Alliances With MFIs • Concept: MFIs Reach Clients More Effectively • Conventional bank loan to MFI (many examples worldwide) • Investment banking services (Citibank and Compartamos bonds) • Bank purchases MFI portfolio (ICICI partnership model) • Bank uses MFI as deposit collection agent (Brazil model of banking correspondents) Banks as Retailers • Concept: Banks Have Advantages MFIs Cannot Duplicate • NGO-MFIs become banks (BancoSol, Mibanco, Compartamos, etc.) • Bank establishes microfinance subsidiary (Pichincha, Sogebank) • Bank adapts consumer lending to microfinance market (Banco de Trabajo, Peru) • Bank provides savings and payments services but not loans (Post Office Savings Banks) Mainstream banks offer: low cost of funds, known brand, branch infrastructure, technology, connection to payment systems.

  14. Breakthrough 8. Create a Supportive Policy Environment Basic • Minimum Conditions for Microfinance to Operate • Stable macroeconomic and political situation • Liberalized financial sector with quality supervisors Microfinance Friendly • Microfinance-Specific Concerns • No interest rate caps – market-determined • Government respects its role as rule-setter, not service provider • May have special categories for microfinance Forward Looking • Policies & Regulations Keep Pace with New Developments • Policymakers pursue access to financial services for all as goal • Regulators work with industry to ensure security for new technologies such as cell phones • Regulators and industry cooperate to ensure consumer protection A country’s policy environment may determine whether or not microfinance takes off.

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