Written by Analysts Nicholas Kwan, Kelvin Lau, and Elizabeth Lee. Released on August 31, 2009 in “On the Ground” through the Standard Chartered Bank (Hong Kong) Limited. Ref: GR_20Jul09
http://www.microfinancegateway.org/gm/document-1.9.37784/Asia%20Commercialise%20Microfinance.pdf
This is a paper written by analysts from the Standard Chartered Bank that describes to the public the role of commercialization in the transformation of the microfinance industry. In this paper, the authors note that though microfinance has been growing in popularity throughout the world in the past few decades, Asia has not maximized its potential in this investment sector. The authors use the term “commercialization” of microfinance to refer to the idea of microfinance institutions (MFIs) becoming very much integrated into the for-profit, business and financial sector, rather than the non-profit, subsidized sector. According to them, especially considering Asia’s growing economy, Asian MFIs are currently well positioned to become more involved in commercialized microfinance and cross-border investment. Many Asian MFIs have begun to further integrate themselves with commercial banks and the financial sector.
This report first examines the increasing role of commercial banks in bridging the gap between demand and supply of microfinance loans, as well as the lack of funding sources for non-profit MFIs. The authors note that though the microfinance industry has grown at an unprecedented rate, there is still an excess demand for microfinance loans from a global market of 3 billion people. As the microfinance industry has gained popularity in recent years and has shown that it can be profitable, more commercial banks and other for-profit organizations have begun to enter the industry to fill this gap between demand and supply. Therefore, they argue that commercialization is a tool for banks and organizations to penetrate the market and tap into those that have not yet been reached by existing MFIs.
The authors state that commercialization also helps fill the funding gap that exists in the microfinance industry. Since financial sustainability continues to be a challenge for non-profit MFIs, preventing them from expanding their outreach, the authors believes that commercialization allows banks and organization to face fewer restrictions on funding sources. In addition, it provides MFIs with new opportunities to access local savings pools and capital markets, accept deposits from the public, or even go public, like Mexico’s Banco Compartamos did in 2007.
The report refers to data from the Consultative Group to Assist the Poor (CGAP), between 2004 and 2006, which illustrates that foreign capital investment in microfinance has tripled to USD 4 billion, to show that commercialized microfinance has tremendously increased in appeal to the socially responsible investment (SRI) market, due to the sector’s double bottom-line of both financial profit and positive social impact.
The paper then moves on to compare various countries’ outreach and successes in attracting cross-border microfinance investments. Out of the regions surveyed, Asia is the region with the greatest number of borrowers and savers, but is one of the worst, along with Africa, in terms of foreign capital investment. The authors note, however, that this data must not be interpreted too literally, as one must also taken into consideration intra-regional differences in socio-political and economic situations, as well as structural disparities between MFIs.
Finally, as the authors recommend commercialization is the best way for Asian MFIs to increase foreign investment and further develop the microfinance sector, they identify guidelines called “the four ‘R’s” to help along this process, which are: resources, risk, return, and regulations. Three of the “R”s come from a paper presented at the 2007 annual Commonwealth Finance Ministers’ meeting by Standard Chartered Bank Group Chief Economist Dr. Gerard Lyons, and the fourth “R” was added by the authors to this report.
The report identifies the following recommendations for MFIs seeking to commercialize:
- Resources: There ought to be more careful management of budget through controlling costs, while expanding the funding of resources and greater technology.
- Risk and Return: MFIs ought to ensure that the amount of risk that they are taking on is justified by the returns they are earning from region to region, and acknowledges that product innovation and diversification could help offset increased risk. Transparency within MFIs and the importance of adopting standard reporting practices are also emphasized.
- Regulations: The government’s involvement to help MFIs tackle many issues is essential to developing the microfinance sector.
The authors conclude by providing Dr. Gerard Lyons’ list of Steps that governments ought to take in order to help develop their microfinance sectors.
By Radhika Chandrasekhar, Research Assistant
Bibliography
[1] “Asia – Commercialise Microfinance.” On the Ground. Standard Chartered Bank (Hong Kong) Limited. August 31, 2009. http://www.microfinancegateway.org/gm/document-1.9.37784/Asia%20Commercialise%20Microfinance.pdf
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