ASEAN MICROFINANCE CONFERENCE

Transcription

1 ASEAN MICROFINANCE CONFERENCE Keynote on Chalking out Road map for inclusive finance for financial institutions By Norbert Mumba Deputy Executive Director, Alliance for Financial Inclusion Chairperson, Senior officials and Dear Participants Let me start by thanking the organisers of this conference for inviting me to make remarks at this important conference and on a topic that we at the Alliance for Financial Inclusion are very passionate about. I feel very greatly honoured. Chairperson, it is well established that in Malaysia, as is the case in many countries in Asia and indeed Africa and around the world, small-to-medium enterprises (SMEs) are critical to economic development and prosperity. In this country and many others, SMEs provide the main refuge for the life for most of the population. It is therefore important and appropriate that we frequently take stock of the state of development of our SME sectors to ensure that both government and private sector interventions remain relevant. I believe that is the scope of this conference. Microfinance offers the first window of opportunity for micro and small businesses to have access to the formal financial system. The objectives of microfinance are to empower societies from an economic and social perspective by providing access to financial services, such as credit, savings and insurance facilities. In the current era microfinance institutions have also started to play a key role as catalysts for capacity building for micro industries in the areas of financial management and business planning. It is therefore important that Investments made by microfinance institutions must ultimately generate measurable social and environmental impact otherwise such investment will be meaningless and not sustainable. The key objective should be to uplift the poor from poverty and ensure a reasonable standard of living. In this context, quality access to financing, ideal products, pricing, competition policy and appropriate and proportional regulatory frameworks will continue to play a key part in ensuring that the unbanked are accorded an enabling platform to develop. AFIs focus therefore is to ensure that regulators and policy makers in the network facilitate those currently outside the financial system to access financial services as this will ensure economic sustainability. In ADB member countries SMEs account for over 90 per cent of enterprises and employ more than 50 per cent of the labour force. These statistics are comparable even in OECD countries. In Malaysia the ratio of SMEs to total enterprises is even higher at over 95 per cent. This therefore signifies that sound development of SMEs is of strategic importance to achieve inclusive growth.

2 Today we want to explore the issues facing micro-enterprises in accessing bank credit and the long-term implications of any market failure to provide capital to this important sector of our economy. Many studies including earlier studies conducted by the Gates Foundation indicate that traditional banks often refuse to finance low-income or unemployed entrepreneurs, no matter how viable their ideas are and yet microfinance has enabled access to finance to billions of people regardless of whether these are start ups or operating small and medium enterprises. The reluctance to provide finance is usually attributed to risk, cost and lack of skills. Fortunately, the rapid developments in mobile technology and wireless internet access is changing the landscape and microfinancing organizations are now leveraging this technology to avail financial services to individual business persons and small businesses. But why microfinance? We should address this question by answering four questions: 1. How important is the SME sector to our long term economic prosperity 2. Should the unique needs of SMEs be on the national agenda from a public policy perspective? 3. Does the financial system work well for SMEs and what are the challenges confronting lenders particularly microfinance institutions in providing SMEs with financing solutions? 4. How can we leverage on digital technology to enhance access, lower cost and improve delivery. In addressing these questions, we are reminded that; we have to get out of this mindset that the rich will do the business and the poor will have the charity Muhammad Yunus. Economic importance of SMEs In most countries SMEs are the largest employers and often the largest contributors to GDP. The micro and small business generates significant private industry value added and the greater of private sector employment. In most countries these sectors are responsible for over 40% of the employment. When it is said that SMEs are the engine room of the economy, this is an economic reality It is therefore important that microfinance is accorded the importance it deserves by providing a policy framework that will enable it to thrive and make a significant contribution to the economy. Financing SMEs Lack of access to affordable finance has often been cited as the main barrier inhibiting the growth of micro enterprises in most economies. Financing the productive capacity of the economy is critical to long term economic success. While banks, capital markets and investment vehicles provide financing options for large companies, micro and small enterprises are increasingly heavily dependent on the banking system as widely defined to include micro finance institutions. However it seems conventional banks are still sticky to their conventional banking models and lending to SMEs particularly small business is given limited priority. This scenario dictates that optional financing models be explored to ensure that SMEs continue to play a sustainable role in economic development. Needless to state that research

3 has establish a strong link between lending and GDP growth with estimates suggesting that an economy needs around $4 to $5 of debt to create $1 GDP growth. In Malaysia the story is no different. SMEs contribute 32% of Gross Domestic Product (GDP), 59% of employment and 19% of exports. (Census of Establishments and Enterprises 2005), revealed that SMEs constitute 99.2% of total business establishments in Malaysia or totaling 548,267 enterprises. Bulk of these SMEs (87%) are engaged in the services sector, while another 7% and 6% respectively are in the manufacturing an agriculture sectors. About 60% of total SMEs are in the distributive trade services subsector. In terms of size, the majority or 79% are microenterprises with less than 5 workers. It is also worth noting that SMEs provide employment to a large number of youth. The share of SMEs is negatively correlated with the age of the company. In other words, a significant percentage of firms operating in the economy i.e. 45% are young, operating for less than 5 years. Only about 12% of the SMEs are above 20 years, indicating that many may have either exited or graduated to become large firms. The distribution differs for large firms, whereby 60% of the firms are above 10 years About 78% of the SMEs comprise sole proprietorships and partnerships, 21.3% are private limited companies, while only 0.2% are public listed companies. This is opposed to large enterprises whereby majority or 94% are private limited or public listed companies. (source SME Masterplan ) Hopefully you agree therefore that the financing of SMEs is a key priority for most Governments and policymakers as these businesses provide a lifeline for most households and are key to economic and social development. However governments often create enabling policy and regulatory environments while service delivery is and should be left to the private sector. This conference is therefore timely in that the reviewing of current banking and microfinance models, legal, regulatory, consumer empowerment, competition and financing approaches deserve national effort. I therefore take opportunity to invite all of you to take advantage of the AFI network that facilitates development of tested policy solutions and provides an effective platform for policymakers to dialogue with the private sector. In this regard I wish to acknowledge and commend the efforts of Bank Negara Malaysia and indeed the Government of Malaysia for providing an enabling environment that has mitigated the challenges SMEs face and allowed microfinance institutions to flourish and provide SMEs the much needed finance to grow their business. Notwithstanding, SMEs are still faced with many challenges. Opportunities for financing micro and small enterprises Chairperson, statistics given above are representative of the opportunities in microfinancing and therefore calls for financing models that take into account the unique characteristics of this key economic sector. Both bank models and microfinance models must as a matter of convenience address the most cost effective way of providing financial services. Comparing Microfinance Models - Leonard Ajonakoh Fotabong Most microfinance models are fashioned to two extremes; either community based with social considerations in which case likely subsidised or purely commercial with likely high interest costs. I will not dwell much on bank models as these are well known and often follow conventional banking and lending. Instead I will explore Leonard Ajonakoh Fotabong s good summary of the various models as indicated below;

4 MC2 - model Is a micro-bank owned and managed by the members incorporating socio cultural, traditions, and religious habits of the community. It functions on the principle one man one vote. In other words building from the bottom Grameen Model Centrally managed, dedicated microfinance institution, groups of five, highly disciplined organizational structure. The focus is primarily on lending, but every group member must save a certain amount. SKS Model These are investors driven centrally managed credit company with resources from lenders and investors, a mega structure is set, that recruits and trains loan officers in charge of disbursing loans to villages. Scheduled banks provide loans to SKS model institutions. The beneficiary microfinance institutions gives out the money through the trained loan officers to beneficiaries at high interest rates Finca Model FINCA works with groups of members, usually all women. As soon as the village bank is inaugurated, it receives its first loan from the implementing agency (the local headquarters of FINCA or its affiliate) for on-lending to the individual members of the village bank. Complexities of the financial inclusion process The latest FINDEX data indicate a significant decline in financial inclusion numbers from 2.5 billion to 2 billion. While there may be se to celebrate the more are now into the formal financial system, it should dawn on all stakeholders that facilitating access to finance for the last 2 billion will be an involving challenge. Specific challenges relate to closing the gender gap do we have appropriate policies and products in place. Data do we have accurate and current data to enable development of appropriate policies. Technology are we leveraging technology to achieve scale, aid know your customer and minimize risk. The key stages to any national financial inclusion process include; a. Establishment of a national framework for financial inclusion b. Securing data to aid policy making c. Development of specific targets for financial inclusion d. Implementation; monitoring and evaluation of agreed targets Challenges and new opportunities Even without empirical research it is highly likely that the remaining 2 billion unbanked people will pose a challenge for various stakeholders that drive the financial inclusion process. The main challenges are likely to evolve around; a. Lack of financial education In the last mile financial literacy is likely to play a key role in convincing those that still remain outside the financial system to take up financial services. Financial literacy strategies and programmes should be re-aligned to be responsive to the special peculiarities of this group and more specifically those that may seek to access finance for business. Financial education programmes outlining the need for prudent financial management will be key for success

5 b. Lack of or limited data Another long standing key challenge for policy makers and financial service providers alike is the lack of accurate data to inform policy making and for the design of appropriate products and services. c. Lack of financial infrastructure Lack of financial infrastructure to including the presence of an effective regulatory framework to facilitate financial inclusion is still a challenge in a number of jurisdictions. d. Global standards The balance between financial inclusion and financial stability has always emerged as a big question for regulators and policy makers. A delicate balance is therefore required for one to complement the other. In the last decade, the world has witnessed dramatic changes in technology and MFIs have started to transform their business models to leverage the development in technology. In Africa countries such as Kenya and Tanzania innovations such m-pesa and m-shwari has seen the delivery of microfinance products using the mobile phone. This is proving effective owing to the unprecedented penetration of mobile technology. Improved technology has now made it possible to collect accurate and timely data. This has made identity, credit assessment and impact measurement easier. Scale brought about by mobile technology has led to reduction in cost. Mobile technology has also led to efficiency in service delivery. Micro finance providers can now make transfers in minutes rather than days. The digital platform is increasingly being used at relatively affordable cost to undertake consumer education programmes and improve debt management. Leading MFIs, as well as some promising start-ups, are driving evolution in the microfinance business model. The microfinance product and services design has been benefitting from greater business awareness and the application of rigorous impact measurement methodologies. For instance, the offering of individual microcredit products is increasingly replacing the traditional group-lending model. MFIs are now more flexible in their product offering and are designing tailored Microfinance products and are offering joint products with retailers, mobile phone operators etc. This approach has reduced the cost of microfinance products. However, regulators and service providers alike should address emerging relating to know your customer requirements, issuance of licences for financial services to non-bank institutions such as mobile phone operators and consumer protection provisions. Looking forward, microfinance is well positioned to fill the access to quality financial services created by the bigger market player s inability to provide for small businesses. On its part the Alliance for Financial Inclusion members resolved under the Maputo Accord to prioritise access to finance for small enterprises in national financial inclusion programmes. It is expected that microfinance institutions will be play a key role in servicing this key economic sector. I wish you a good meeting. Thank you!