MICROCAPITAL PAPER WRAP-UP: Inclusive Finance: The State of Microfinance Sector in ECA (Europe and Central Asia), 2008 Edition

Written by Justyna Pytkowska, Anne-Sophie Houyet, and Aneta Mach for the Microfinance Centre for Central and Eastern Europe and the New Independent States, 105 pages, available at: http://www.mfc.org.pl/index.php?section=NET&page=Other

This report covers several aspects of finance in the Central and Eastern Europe (CEE) and New Independent States (NIS) region including access to and use of financial services, the potential for micro-insurance, the supply of microfinance services, and the social performance of NGOs and non-bank financial institutions.Access to Financial Services

Access to financial services as a dimension of financial development is often overlooked due mainly to lack of data. Without access to financial services talented poor are limited to their own savings and earnings. Access refers essentially to supply of services, and should be distinguished from use of financial services. Barriers to access decline as per capita GDP rises. Measures such as bank branches and ATMs per 100,000, as well number of documents and minimum balance required to open a bank account are examined. In the Europe and Central Asia (ECA) region new member states of the European Union generally have better access to financial services than other countries.

Use of Financial Services

In the ECA region the use of financial services is positively correlated with country economic development and financial sector depth. The use of financial services is thus higher in western countries such as Hungary, Poland, the Czech Republic, Slovenia, and Croatia, versus eastern countries in the Caucasus and Central Asia. The paper examines share of households having a bank account versus household income, savings habits, attitudes towards savings, the use of credit, and borrower profiles.

International Remittances Flow in the ECA Region

For many ECA countries remittance flows are the second most important source of external financing after foreign direct investment. These flows are also large and constantly increasing, with total official remittances for 2007 amounting to USD 53 billion, which was a 30 percent increase over 2006. Countries of the former Soviet Union are some of the world’s largest recipients of international remittances as a percent of GDP. Official remittance figures also tend to underestimate actual flows as significant amounts are sent through unmeasured, informal channels such as friends, family, or by public transportation drivers. Remittances have a positive overall economic impact and most studies also show positive effects on poverty reduction. The average annual value of remittances per receiving household ranges between USD 800 and USD 1,600.

Market Potential for Microinsurance

The use of insurance products in the ECA region among both low-income and higher-income households is very limited, however there is considerable demand for these products. With the exception of Poland, insurance products have been used by less than 40 percent of each country’s population. There are three main reasons for people not using insurance products: lack of access, distrust, and price barriers. Health insurance was the most demanded of insurance products.

Supply of Microfinance Services

In the ECA region the total number of microfinance providers was 7,300 at the end of 2007, the bulk of them credit unions in Central and Eastern Europe, Russia, and Ukraine. Their total loan portfolio amounted to over USD 14.7 billion, a 37 percent increase year over year, representing a total of 5.1 million active microfinance clients across the region. Azerbaijan, Montenegro, and Tajikistan had the largest increase in borrowers, nearly tripling in the last two years. The overall penetration rate of the region remained at 1.9 percent of the economically active population. The number of savers reached 6.3 million and, similar to other metrics, was highest in the CEE and lowest in the Caucasus. The paper also examines the changes in funding structure for the various types of MFIs in the region. While commercially priced loans were the largest and fastest growing source of funds for NGOs/NBFIs, savings continued to constitute the largest source of funding for microfinance banks. The majority of borrowing for NGOs/NBFIs was in foreign currency (US Dollar and Euro). Interest rates for both microfinance banks and NGOs/NBFIs increased in 2007 ranging between 7.5 percent and 9.4 percent on average. Loan maturities were between 3 and 5 years. Debt-to-equity ratios increased on average for both NGOs/NBFIs and microfinance banks. Funding sources for credit unions continued to be largely from member deposits.

Social Performance of NGOs/NBFIs

The final chapter of the report examines the social performance of NGOs/NBFIs, specifically through a closer look at the composition of clients to see how the social mission of reaching the poor is being achieved. Generally the success of this mission- judging by the presence of low-income, women, disabled, youth, or refugee clients as a percentage of overall clientele – is underwhelming. In 2007 the percentage of poor clients amounted to 12 percent of ECA clients of NGOs/NBFIs. Women as a percentage of overall clients were 53 percent, a decrease from 57 percent the year before. Youth clients represented between 2 and 5 percent of borrowers. The total number of disabled borrowers was extremely low at 0.1 percent, and refugee/internally displaced borrowers amounted to less than 3 percent of total NGO/NBFI clientele.

By Laura Anderson, Research Associate

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