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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 OperationsUntil the late 1990s, the microfinance industry in many Asian countries was unimodal: microfinance institutions were largely supply driven providing mainly short-term working capital loans for income-generating activities as this was considered to be the primary mechanism for helping the poor. Most firms in the industry also used the group-liability and group-lending methodology and other approaches13 tested, adopted, and popularized by the Grameen Bank. In most cases, initial loan amounts and subsequent increases for group members were fixed and were applied uniformly to all borrowers (one-size-fits-all approach). Clients were required to save fixed amounts on a weekly basis and could not access the funds until they had repaid their loans and formally discontinued their membership. Many microfinance institutions have since changed their product and service menus. Some have adjusted repayment schedules and loan sizes to align them better with the requirements of their target markets. Others have expanded their product lines. The Grameen Bank itself fundamentally changed its 20-year-old model of financial services (which its pioneer, Professor Yunus, now calls the Grameen Classic System) in August 2002 and shifted to a new system known as Grameen II. Grameen discarded the group-liability system; now each member's loan is secured against her word. Grameen also did away with the staggered loan disbursement system (members of one group can now borrow at the same time) and drastically changed its standard products to better attract and retain clients. The new approach offers, among other things, flexible loan arrangements for terms of 3 months to 3 years and variable repayment schedules to avoid seasonal difficulties. Grameen has also introduced new savings products. Although some fixed savings deposits are still compulsory, the weekly savings facility has been opened up to enable members to deposit and withdraw at will. More significant is the new contractual savings account called the Grameen Pension Scheme with 5- or 10-year terms for members. According to Micro- Credit Ratings International, Ltd.,14 a specialized microfinance rating agency based in India, several leading microfinance institutions in that country have also started to move away from the Grameen Classic System. As a result, they are more innovative and are now providing individual loans in addition to group loans and plan to increase individual loans in the future. Many microfinance institutions have either changed repayment schedules or have introduced new products with relatively flexible schedules. Some microfinance institutions offer monthly or quarterly repayment schedules for agricultural loans based on requests from members. Many institutions have recently adjusted the terms of their loans and are deviating from the classic system's pre-fixed initial loan size and uniform subsequent loan increments. Subject to a specified ceiling, in many cases loan sizes are flexible partly in response to high client dropout rates. They are also increasingly expanding their product lines which has increased their value to poor and lowincome households. Housing finance in particular has started to figure prominently in the expanding product line. ADB has supported a number of microfinance institutions in Indonesia and the Philippines to extend housing loans to poor and lowincome households. Most NGOs that were transformed into regulated financial institutions have also introduced new saving products in recent years and are now mobilizing savings not just from their borrowers in the target market but from a much broader market that includes higher income households. Many have made impressive progress. The story of the Association of Cambodian Local Economic Development Agencies (ACLEDA) Bank's savings mobilization is perhaps the most interesting ( see graph at right). ACLEDA Bank had only 3,826 deposit accounts with a total outstanding deposit amount of $2.0 million at the end of 2001; however, at the end of December 2004, it had 57,091 deposit accounts with $31.6 million in outstanding deposits. Although some large companies and higher income households are among the depositors, most users of this service are small savers. BRI units increased their deposit accounts from $25.8 million at the end of 2000 to $29.9 million at the end of 2003, and their deposit volume increased from $1.98 billion to $3.24 billion during this period. Another aspect of the changing market is the increase since the late 1990s in other products and services such as money transfers, remittances, and micro-insurance. For example, the volume of domestic money transfers of ACLEDA Bank increased from $7.1 million in 2001 to $28.1 million in 2002 and $68.5 million in 2003. The number of transactions increased from about 6,000 in 2002 to nearly 18,000 in 2003. In January 2004 with a commercial banking license, ACLEDA Bank introduced a direct international fund transfer service.15 To enter the remittance market, some institutions have established partnerships with commercial banks and other established service providers while others are exploring ways to leverage remittances to provide medium-term loans for their clients. ADB and a number of other funding agencies are formulating programs to support these initiatives. ADB completed a study on remittances of overseas workers from the Philippines16 to identify how to improve the flow of remittances and to maximize their development impact. The study indicates that microfinance institutions can enhance the ability of recipients to leverage their funds. In December 2004, ADB approved a regional technical assistance project for Southeast Asia to identify factors in the policy, regulatory, and institutional frameworks that have an impact on remittance flows and to propose country and regional action plans to increase flows and to channel them through the formal banking system. Micro-insurance has also recently been added to the product lines of many Asian microfinance institutions.17 Until the 1990s, the main purpose of insurance was to protect the microfinance institutions themselves. Now some have established specialized institutions to provide micro-insurance. A number of other microfinance institutions have established partnerships or agency arrangements with established insurance companies. However, given the complexity of developing sustainable insurance services for the poor, funding agencies have to provide considerable assistance for capacity building. To assist these agencies, CGAP's Working Group on Micro-insurance has recently produced a set of preliminary donor guidelines.18
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