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Annual Report 2004 : Special Theme: The Changing Face of the Microfinance Industry: Building Financial Systems for the Poor
Increased Diversity of Service ProvidersThe poor are a highly heterogeneous group with diverse livelihoods, needs, and potential, and their requirements for financial services change in response to life cycle events, new opportunities, and external shocks. For example, the demand for financial services has completely changed for poor households that survived the tsunami disaster. The industry must, therefore, be dynamic and must comprise a range of institutions. A few years ago, there was little institutional diversity in the microfinance industry in most Asian countries. Formal financial institutions were only minor service providers in the microcredit market with the exception of Bangladesh and Indonesia. In Bangladesh, Grameen Bank operated side by side with NGOs, while in Indonesia, Unit Desas of Bank Rakyat Indonesia (BRI) was the major supplier of microfinance services along with many People's Credit Banks (Bank Perkreditan Rakyat). Perum Pegadaian, a state-owned pawn company, also provided microcredit to many low-income households. NGOs were the dominant suppliers of microcredit in Cambodia, Nepal, Pakistan, Philippines, and a number of Central Asian republics though there even NGOs were reaching only a very small number of low-income households. Many believed that provision of financial services to the poor could only be done by entrepreneurs with a social mission. The idea of commercial microfinance had not taken root. This picture of microfinance is changing for a variety of reasons. Among them are the following: (i) the transformation of NGOs into regulated financial institutions in some countries and their subsequent rapid growth; (ii) the entry of small existing banks into the industry and the expansion of their microfinance operations; (iii) the entry of new microfinance banks; (iv) the increased role of cooperatives including credit unions; (v) the increasing role of established, conventional commercial banks; (vi) the rapid growth of selfhelp groups in microfinance especially in India; and (vii) the entry of nonfinancial institutions. In recent years, small banks have begun to penetrate the microfinance industry in several countries. In the 1990s, only a few rural banks were involved in microfinance in the Philippines, but by the end of 2004 with assistance from ADB and other funding agencies over 175 had entered the industry and were reaching over 500,000 poor households. Their share was over 40% of the total market served by microfinance institutions in the country. In Indonesia, people's credit banks have been making a concerted effort to expand their operations to cover poor and low-income households.7 The cooperative rural banks in Sri Lanka have also evidently increased their role in microfinance services in recent years.8 In a few Asian countries, new microfinance banks and nonbanking financial institutions have appeared. In Azerbaijan, a specialized microfinance bank was established recently. In the Philippines, the Micro Enterprise Bank was established in October 2001 to serve poor and low-income households in Mindanao. Khushhali Bank in Pakistan is another newcomer to the industry and an interesting public-private partnership. It was established in August 2000 with a paid-up capital of $30 million subscribed by 12 domestic private sector commercial banks, 2 foreign commercial banks, and 2 stateowned commercial banks.9 Timor-Leste established the Instituiçäo de Microfinanças de Timor-Leste as a regulated nonbank financial institution with assistance provided by ADB's Microfinance Development Project. The institution has filled a vacuum in the microfinance industry in this new nation. Papua New Guinea also established a new microfinance bank in 2004 with ADB support. The First Microfinance Bank of Tajikistan began operations in July 2004 as the country's first full-service microfinance bank. Afghanistan also established a new microfinance bank in 2003. In most Asian countries, cooperatives were originally established to serve poor and low-income households, but they gradually dropped the poor and focused on the nonpoor. With support from ADB and other funding agencies, many cooperatives have recently begun to make headway in the sustainable provision of microfinance services. A case in point is the growing involvement of credit unions in the microfinance industry in the Philippines. In the Kyrgyz Republic and Viet Nam, ADB assisted in the development of credit unions and expanded their outreach to the low-income population, and in Sri Lanka, the Rural Finance Sector Development Project focuses on improving the microfinance operations of the cooperative rural banks. The rapid growth of self-help groups and their operations since early 2000 has also contributed to the changing landscape of the microfinance industry. Although this development is primarily confined to India where they are now the dominant microfinance model, because of their vast numbers they have made a difference in the regional industry in a broader sense. At the end of March 2004, they numbered 942,000. A typical self-help group has 15–25 members and operates on the principle of revolving members' savings. External finance is also provided to expand their credit operations.10 About 70% are concentrated in three southern states: Andhra Pradesh, Tamil Nadu, and Karnataka. Andhra Pradesh alone accounts for 47% of the national total with 439,000 self-help groups, including 5.4 million women. The increasing involvement of conventional, private, commercial banks has reinforced the changes in the microfinance industry in the region and is gradually breaking down the walls between microfinance and the formal financial sector. With few exceptions, before 2000 in the banking sector only state-owned commercial banks were involved in microfinance through directed credit and other mainly subsidized programs. While some of these banks continue their operations, private sector commercial banks are becoming increasingly involved by extending their deposit services to tap the potential of low-income households, although commercial banks do not generate data to support this assertion. More importantly, private commercial banks have increased their direct involvement in financing microfinance institutions in a number of countries. ABN-AMRO started microfinance operations in India in September 2003. ICICI Bank, also in India, figures prominently in this new trend not only because of its increasing volume of transactions with microfinance institutions but also because of its innovative approaches to increasing its participation in this market. With the help of the Indian Institute of Technology in Chennai, ICICI Bank built India's first rural automatic teller machine to serve microsavers in remote areas with a view to reaching the poor for profit. This augurs well for expanding the outreach of microfinance services for the poor. Private banks in other countries have also increased their penetration in the microfinance market. Planters Bank in the Philippines played the lead role in establishing the Micro Enterprise Bank in Mindanao and was the major shareholder with 40% of the capital in October 2001. Hatton National Bank and Seylan Bank in Sri Lanka are gradually increasing their microfinance operations. In Mongolia, the formerly stateowned now privately owned agricultural bank (commonly known as Khan Bank) is the main player in the microfinance market with branches in more than 390 locations. In Nepal, a number of private commercial banks have invested in microfinance institutions that were formerly NGOs. These developments indicate the growing involvement of the private sector in microfinance. AFIs in Asia and the Pacific also reach poor clients. In the People's Republic of China (PRC), some 35,000 rural credit cooperatives (RCCs) are mobilizing deposits despite their high level of nonperforming loans and other operational problems. Their borrowers and depositors include some of the country's poorest people. The post office savings banks in a number of Asian countries—Bangladesh, PRC, India, and Sri Lanka—play a major role11 in providing much needed, safe deposit services while in others pawn companies provide microcredit services. This is certainly the case in Indonesia. Perum Pegadaian, a state-owned pawn company with a long history, provides services throughout the country to a wide range of clients through its 774 branches and 13 regional offices. In 2003, it provided over $1.0 billion in 21 million loans and was the major supplier of microcredit in terms of the number of clients served.12 The large infrastructure of these institutions, particularly the large number of service outlets in rural and remote areas, offers potential for scaling up services. Funding agencies and governments need to pay specific attention to harnessing this potential. With this in mind, ADB is focusing attention on AFIs. It is collaborating with the Government of the PRC to reform RCCs and is assisting the Lao People's Democratic Republic to reform the Agriculture Promotion Bank. ADB will pay increasing attention to AFIs in other countries in the future in its efforts to diversify service providers and to harness the potential of these institutions to scale up microfinance services. Nonfinancial institutions are also gradually making inroads into the microfinance industry in Asia. Although this is not yet a significant phenomenon, their entry is obviously adding more diversity and development potential. Events in the mobile phone industry in the Philippines illustrate this potential well and may just be the beginning of a trend that is likely to gather momentum in the near future. A new, text-based remittance service is now offered by one of the country's leading mobile telecommunications companies. The service, which started in August 2004, is reportedly the first of its kind in the world. It allows overseas Filipino workers to file their remittances with the company’s partners in 17 countries. Recipients can collect their money in the Philippines at any company office or partner, including some pawnshops and gas stations. The G-cash program of another major cell phone company in the Philippines also facilitates international remittances and the low-cost transfer of funds within the country. These programs illustrate innovative ways of applying information and communication technology to reach poor and low-income households with quality financial services. Such applications have the potential to fundamentally transform the region's microfinance industry and rapidly scale up services.
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