Home 
Publications Catalog Online Publications Document
Annual Report 2004 : Special Theme: The Changing Face of the Microfinance Industry: Building Financial Systems for the Poor
CommercializationThe potential market for microfinance is large and the demand for the scarce resources of funding agencies is great. ADB and others cannot, therefore, individually or collectively supply all the resources needed for scaling up services. Based on this simple fact, ADB's microfinance development strategy emphasizes the need to commercialize the industry. In 2000, ADB initiated a regional study on commercialization to improve its understanding of the process as well as its challenges, implications, and prospects.19 The study indicated a significant increase in the commercialization of the microfinance industry in a variety of ways in most countries. The policy environment has improved in general in many countries since the 1990s. The legal framework has also improved. The supervision and regulation of microfinance institutions that accept deposits have attracted greater attention, and more countries are making efforts to reform and improve the performance, regulation, and supervision of cooperatives. In addition, various support institutions have expanded in the region. The establishment and expansion of microfinance-focused credit rating institutions is a major change in the support structure. Micro-Credit Ratings International, Ltd. made 170 ratings of 123 microfinance institutions in South Asia between September 1998 and June 2003. Of those, 86 were rated once, 28 twice, 8 three times, and 1 four times. This clearly shows that the industry is commercializing. The PRC is the only large country in the region where the microfinance industry has not yet shown signs of development, but some significant policy changes have recently been introduced. A pilot project aimed at consolidating RCC management is proceeding in eight provinces, and interest rate caps—a major policy barrier for the growth of microfinance— have been relaxed. In August 2004 based on the results of the pilot, the People's Bank of China and the China Banking Regulatory Commission announced full-scale implementation of the reform package for RCCs in 21 provinces. ADB is supporting sustainable development of RCCs in underdeveloped areas of Guizhou Province and the Inner Mongolia Autonomous Region through technical assistance. These measures are likely to gradually change the landscape of the industry in the PRC. A small group of microfinance institutions in the region has already achieved financial sustainability and has shown that financial services can be provided to poor and low-income households profitably. This group includes large NGOs like BRAC and the Association for Social Advancement (ASA) in Bangladesh, regulated banks like ACLEDA in Cambodia, nonbank financial institutions like Share Microfin Ltd. in India, and AMRET in Cambodia. These institutions are making a difference and giving a new face to the industry. A growing number of microfinance institutions are
Empirical evidence from a range of countries in the region indicates that commercialization helps the poor in a variety of ways. Microfinance institutions see commercialization and their social mission as compatible rather than as mutually exclusive. The demands from the larger funding community, especially CGAP, to improve governance and transparency and efficiency have also contributed to this process in no small measure. Growing competition in some markets is driving commercialization. The increasing polarization of NGOs, their consolidation, and their desire to increase individual institutional market share have a bearing on the way they provide services. These institutions are also driven by a persistent desire to improve their brand names and, in some cases, their global reputations. They are adopting professional approaches to their operations and expanding their services in the manner of established private sector companies. They are improving their governance, risk management, transparency, and disclosure policies. Above all, they have developed and conveyed to their investors, clients, and potential clients that they have clear growth strategies. This together with the better organizational capability that they have built through experience and investment in human resource development is helping them to grow rapidly. Some have placed independent directors on their boards while others have included directors with banking and accounting experience. Thus, governing boards now have a better balance between social development and financial management and banking skills. They are also adopting improved accounting practices such as loan classification and making adequate provisions for loan losses and are introducing loan write-offs and income recognition policies. More importantly, they have opened their books to external audits by reputable firms. Many also have websites that provide detailed information on their operations to the public.21 Microfinance institutions are also paying more attention to the expense side of their income statements than before. In the 1990s, the widely held assumption was that access was more important than cost to the clients, hence cost-recovery interest rates could be charged. However, the increased empowerment and improved financial literacy of clients, growing competition in some markets, and concerns that many microfinance institutions are passing on their inefficiencies to clients in terms of higher interest rates on credit are driving these microfinance institutions to contain operating costs. Recent improvements in operating efficiency have been driven mainly by these factors and less by improvements in the scale of operations. The small group of flagship institutions that are financially sustainable is moving to commercial sources of funding, paying more attention to the liabilities in their balance sheets, and changing the structure of their liabilities. Transformed NGOs have attracted equity investments from multilateral agencies and public development banks. Flagship NGOs have also increased their retained earnings and other reserves in recent years enabling them to reduce their reliance on grants and subsidized funds. A new breed of debt and equity suppliers that operates on a commercial or semicommercial basis is now in business in the market actively seeking clients. These suppliers provide unsecured loans based on the finances of microfinance institutions. A few microfinance institutions have already started borrowing short- and medium-term funds from these sources.22 To support the development of this trend, ADB made an equity investment in 2004 in ShoreCap International, an investment fund targeting financially viable and growthoriented microfinance institutions. Microfinance institutions are also increasingly borrowing from commercial banks which include a range of institutions from state-owned to domestic medium-sized private to large private sector. ICICI Bank and Samruddhi, a rapidly growing but still small-scale microfinance institution in Andra Pradesh, India finalized the first microfinance securitization deal in November 2003. In January 2004, Share Microfin Ltd. sold a portfolio of 42,500 loans from its books to ICICI Bank for $4.2 million. ICICI Bank, ABN-AMRO, and Citibank in India; Planters Bank in the Philippines; and Mongolia's Khan Bank, for example, are not in the microfinance market for altruistic reasons. They have recognized the business opportunities there and have sought to take advantage of them.23 Although their involvement is motivated by profit, the operations of these banks in effect lead to the improvement of services for poor and low-income households. More importantly, they have the infrastructure, resources, and capability to scale up services relatively quickly and to manage growth more efficiently and effectively than most of the specialized microfinance institutions.
|
© 2009 Asian Development Bank Privacy | Terms of Use |
 Top of page |
Back