The Jordanian National Policy Framework for Microfinance Sector: Towards Inclusive Finance Majdoulin Abu-Dalhoum Head of Civil Society Institutions & Microfinance Section Presentation submitted for: Iraq MSME Access to Finance Workshop, In cooperation with IFC-WB & CGAP Beirut, Lebanon - October 16 th 17 th, 2011
Presentation Overview Rationale for updating the strategy The consultative process Vision for the sector Supporting national development goals Policy Objectives Opportunities and Challenges Key elements of the Strategy and Action Plan
Objectives of the Process To launch an national dialogue on the promotion of a more inclusive financial sector in Jordan Establish a common terminology for sector development Build a shared vision for the microfinance sector in Jordan Identify opportunities and challenges for growth Outcome: A revised national microfinance policy framework with broad based stakeholder support Explore the levels and types of support activities needed Identify appropriate roles of the various stakeholders operating in the sector
Consultative Feedback Main priority to develop a clear legal/regulatory framework for all MFIs operating under the sector MFIs Concern that there be actionable recommendations from this process in clear results on the ground Consensus on the need to organize the sector under the umbrella of the Central Bank Government Agencies Commitment by the CB to support the legal/regulatory changes needed to do so Full support of MoPIC to push the process forward in coordination with the SC Donors Interest in addressing some of the enterprise level constraints facing clients themselves Opportunity to support the legal / regulatory reform efforts through planned initiatives
Vision for the Sector To provide all Jordanians access to a range of high quality financial services that have the potential to enhance their economic well being and improve the quality of their lives.
Support to the National Development Goals The Micro and Small Enterprise sector is a key source of job creation and income generation for the poor and a powerful poverty alleviation tool Sustainable access to finance for micro and small enterprises will depend on the mobilization of local capital, particularly national savings Inclusive Financial Systems where all segments of society have access to a range of financial services and products in an efficient and cost effective manner are needed for economic development In order to build a truly inclusive financial sector it is necessary to have a sound policy, legal and regulatory framework that supports a continuum of service providers offering these services on a sustainable basis. Through the ratification of this strategy, the (GoJ) strives to develop the microfinance industry as part of the formal financial sector, which will be characterized by: 1.A continuum of financial service providers 2.A diversified range of demand-oriented financial services 3.A Competitive Capital Market 4.Financial transparency and a supportive infrastructure 5.Existence of non-financial services to MSE
Inclusive Financial Sector Accelerated Economic Growth Increased Investments Increased Savings Increased Productivity Ensure excess finance is allocated to investment opportunities Increase the stock of financial assets available for productive purposes financial sector deepening Ensure that excess liquidity is channeled to the most productive investments Poverty Reduction and Improved Standards of Living Provision of bank accounts for poor and low income people Mobilization of Savings of poor and low income groups Helps to builds assets Reduces vulnerability by building up reserves for income fluctuation Establishes a credit history for future access to funds Strengthens the productive assets of the poor Increases funds available for on-lending Creates and expands small businesses thus generating employment and increasing income
Stages of Development for Microfinance Consolidation Integration Expansion Start Up Outreach in Scale and Scope
Ultimate Integration Phase Products and Services Institutions Financing Market Wide range of demand oriented products and services available to distinct market segments Most institutions are regulated by relevant government entity. Downscaling of commercial banks, some MFIs diversify customer base through up-scaling, client protection systems are in place and functioning well Diverse mix of private capital available, growth in equity investments and saving deposits as source of funds High degree of competition, microenterprises have access to a diversified spectrum of products and services at competitive prices, clients have access to non-financial business development services to upgrade their skills and grow their businesses
State of current Microfinance Sector Expansion Phase Products and Services Institutions Significant interest rate differentiation, standard products, a few leading organizations experiment with product diversification Focused on expanding scale of operations, economies of scale have lead to efficiencies for most institutions Financing Increased diversity of funding sources, use of loans to fund expansion, interest rates set to ensure profitability and growth Market Some competition in urban areas with existing products Limited rural outreach
Achievements to Date (1) MFIs in Jordan have experienced strong and steady growth with an annual average increase in outreach of 28%, growing from 76,830 to 203,579 active clients during this five-year period. Also, maintained a strong gender focus with 71% of all clients served women.
Achievements to Date (2) Strong operational and financial performance of MFIs operating in the sector; (3) Client credit information sharing among MFIs to help prevent against over indebtedness and maintain good portfolio quality; (4) Increased diversity of commercial funding sources among MFIs to fund expansion and growth; (5) National microfinance association positioned to take a lead role in promoting sector development for its members.
Key Performance Indicator Comparisons Comparison Group Average Return on Assets (ROA) Average Operational Self Sufficiency (OSS) PAR > 30 Days Operating Expense/Lo an Portfolio Median Loans / Loan Officer Average Loan Balance/ GNI per Capita Debt to Equity Ratio x All Jordan 7% 133% 1.30% 20% 278 30% 1 Global FSS 2.6% 116% 3.8% 16% 278 27.4% 3.3 Arab FSS 7.0% 144% 2.3% 17.9% 257 12.3% 1.1 All Arab 3.4% 123.5% 2.8% 20.9% 202 12.9%.9 Source: MIX Market and Sanabel 2009 Benchmarks.
Key Challenges for the Microfinance Sector in Jordan: 1. At the Legal\ Regulatory Level 2. At the Industry Support Level 3. At the Retail Level 4. At the Enterprise Level
(1) Legal/Regulatory Level No clear legal obstacles for the provision of services Lack of legal/supervisory consistency No need to obtain special permission to lend Most MFIs operating freely as companies with open access to commercial capital Banks able to freely operate in the market, with certain conditions on unsecured lending The market is fragmented with a range of institutional types: forprofit and not-for- profit companies, government and donor agencies, specialized MFI and NGOs No streamlined process for handling registrations, tax treatment, reporting, client protection and transformation issues Increasing start up costs and barriers to market entry No Consumer Protection Regulations The CBJ does not have mechanisms in place to promote / enforce consumer protection among bank clients MoIT supervises market conduct and fair pricing Neither expressly address the rights of microfinance clients
(2) Industry Support Level Commercially Oriented Financing Emerging national level association A private credit information system exists for MFIs Most MFIs have access to local currency debt financing at prime rates MFIs support and buy in Need for start up support: legal structure, governance, etc. MFIs independently gathering and exchanging client credit history information Credit Bureau under the CBJ Will be operational this summer and will be open for MFI participation High penetration of mobile phone usage Presents potential for mobile banking
(3) Retail Level Small number of MFIs The top five MFIs account for 88% of the market share Good Operational Performance Strong Financial Performance Productivity is good Excellent portfolio quality Operating Costs are high Current pricing structure among MFIs reflects the current cost of capital Profitability levels high The vast majority of MFIs are covering both operational and financial costs High Levels of Transparency Mix Market, Sanabel, various rating agencies Timely, up to date local reporting continues to be a challenge
(4) Enterprise Level Unmet Demand Limited Product Choice 30% of the labor force in Jordan works in the informal sector - 380,000 workers 200 bank loans per 1,000 adults (compared to over 850 for high income countries)* 900 deposit accounts per 1,000 adults (1,800 for high income countries) Standard credit products on offer Limited availability of housing loans, educational credit, insurance, etc. Savings only available through the banks Potential Market Distortion Between products offered by MFIs and those by government agencies MFIs rely on a voluntary code of ethics Need for greater financial literacy among clients
Policy Framework Objectives Increase access to a range of inclusive financial services to all poor and low-income people in Jordan Support innovation in new product development and alternative delivery channels Ensure the efficient and responsible growth of the industry as part of the formal financial sector
Strategic Priorities (A) Developing a Unified Regulatory Framework (B) Promoting Supportive Industry Infrastructure (C) Spurring Market Expansion and Innovation (D) Ensuring Sustainable Funding
Strategy Priority (A) : Developing a Unified Regulatory Framework Actions To Be Taken 1. Draft Specific Microfinance Legislation 2. Develop a Self Regulatory Regime Key Activities/Projects 1. Support the development of the proper legislation, either in the form of a specialized law or regulations, to define and rationalize activities in the sector. 2. Establishment of and participation in a working group of sector representatives to inform the process and ensure that the resulting rules and regulations promote rather than hinder the development of the microfinance sector. 3. Support the development of adequate internal capacity within the CBJ to play this new oversight role and to develop its supervisory capacity to support a range of institutions operating in the banking sector. 1. Review and specify the role of the national association (Al- Ittihad) under the new regulatory framework and develop clear guidelines to ensure the successful functioning of this body, including details concerning the proper governance structure and of the mandatory nature and requirements of membership. 2. Provide physical space for hosting Al-Ithad s operations.
Strategy Priority (B) : Promoting Supportive Industry Infrastructure Actions To Be Taken 1. Build Capacity of the National Association 2. Consumer Protection Mechanisms Key Activities/Projects 1. Support the development of the association s strategic and business plan covering its activities over the next 3 years to support the revised policy framework. 2. Strengthen the governing statutes, mechanisms and appropriate legal status of the association. 3. Develop the association s internal policies and procedures to support its role as a self-regulatory body. 4. Participate actively in the activities and meetings of the National Association. 1. Include consumer protection standards in evolving regulations as a requirement for legally registered MFIs. 2. Focus on transparency with clients in all areas of service delivery. 3. Develop a code of ethics in dealing with clients. 4. Opening more channels for clients to convey their feedback.
Strategy Priority (B) : Promoting Supportive Industry Infrastructure Actions To Be Taken Key Activities/Projects 3. Information Hub 1. Participate in national credit bureau to reduce cross-debted and over-indebted clients. 2. Continue to improve the quality of data shared in the selfreported database by diversifying and increasing the information. 3. Invest in extending the system capabilities to reflect full compiled data with the current and any impending. 4. Research and Development 4. Develop monthly reporting formats and feedback. 1. Cooperate with consulting missions and arrange for fellowships for organizations working on industry development in Jordan and the area. 2. Activate the role of the technical committee that is charged with considering/studying issues affecting the Microfinance industry and make appropriate recommendations to the board of National Association and Government on dealing with such issues. 3. Develop a cooperation agreement between Al-Ittihad and the regional Arab network Sanabel to ensure coordinator and dissemination of industry best practices as well as sector wide lessons learned both within Jordan and Mena Region. 4. Undertake a demand study to assess the potential for micro savings mobilization as a future source of funding for the industry. 5. Study the feasibility of introducing Islamic microfinance and insurance (Takaful)
Strategy Priority (B) : Promoting Supportive Industry Infrastructure Actions To Be Taken 5. Social Performance Monitoring Key Activities/Projects 1. Standardize and increase the market research/client surveys to improve and expand the disbursement of the industry services and resources that have the highest beneficial impact on the standard of living for the poor and unemployed population. 2. Undertake impact study on clients to measure the sectors capacity, success/ failure reasons. 6. Financial Literacy 1. Communicate with clients on monthly basis to discuss the status of their respective loans 2. Develop a comprehensive internal manual with procedures to better educate and equip the target market with much-needed information and tools to reduce overindebtedness. 3. Support raising client awareness.
Strategy Priority (C) : Spurring Market Expansion and Innovation Actions To Be Taken 1. Promote New Product Development Key Activities/Projects 1. Conduct market research to find gaps in the market for new products 2. Develop new products that will increase depth and breadth of outreach (i.e. home improvement, education, environmental conservation, etc.) 3. Work to apply the necessary surveys and market studies in order to provide our clients with various products matching their growing needs 4. Study the market needs and segments to create new products that would fulfill such funding needs 5. Undertake proper marketing analysis, market demand, break-even analysis and pricing/sector analysis. 6. Provide non-financial services, i.e. educational grants, in-kind contributions and non-specific ceiling financial donations. 7. Cover the deceased clients' loans and create new voluntary insurance umbrella for the clients. 8. Develop loan products that will serve new needs in the market such as education, health services, youth development and wholesale supply chain financing 9. Study the possibility of providing non-financial services. 10. To apply a market survey covering the economical sectors and project characters in our branches areas. 11. Develop and hand out customer satisfaction surveys regarding current product portfolio and prospective products and services.
Strategy Priority (C) : Spurring Market Expansion and Innovation Actions To Be Taken 2. Explore Innovative Delivery Channels Key Activities/Projects 1. Adapt the latest technologies to serve the microfinance target market (i.e. mobile banking, computers and the internet to support education, etc.). 2. Diversify the mode of client contact and loan payment to include the more innovative services such as mobile banking; in order to promote time and fiscal efficiency for both client and company. 3. Partner with an ICT (Information and Communications Technology) Association such as int@j to explore potential and feasible technology that will provide branchless banking 4. Establish joint programs with reputable development entities. 5. Open new branches in both rural and urban areas where demand for financial services exceeds supply.
Strategy Priority (D) : Ensuring Sustainable Funding Actions To Be Taken Key Activities/Projects 1. Fill market gaps 1. Support DEF in reviewing its strategic objectives and plan for becoming an effective apex facility for MFIs operating in the market. 2. Provide technical assistance to DEF to help it review its funding policies and develop financing terms and incentive schemes for MFIs to help meet key governmental development objectives, including increased outreach to poverty pockets and rural areas. 3. Build capacity of DEF to identify and monitor a portfolio of loans to MFIs. 4. Continue to provide direct and indirect financing to underserved populations in poverty pockets through: o Universities Students Loans o Pioneer Projects (loans) o Rural Women empowerment o Social Security Corporation retirees financing o Income-generating (Islamic Finance)
Strategy Priority (D) : Ensuring Sustainable Funding Actions To Be Taken 2. Support to MFI transformation 3. Strengthening operations and governance practices Key Activities/Projects 1. Launch the process of transformation into a for profit company. 1. Monitor and maintain institutional best practices 2. Improve institutional efficiency and productivity to reduce operational costs 3. Improve the Human Resources practices to establish a desirable, high-quality work environment 4. Build institutional capacity needed to transform into a for profit company. 5. Prepare and equip staff and upgrading their skills 6. Engage the board of directors in the activities of the company 7. Strengthen program governance with establishment of independent audit committees, ALCO committees, Board meeting structures etc. 8. Streamline policies and procedures (online application etc.) 9. Improve the process of loan disbursements in terms of speed and quality
Ongoing Steps Cabinet approval on the strategic policy framework Implementation of the action plan SC role in Supervision, M & E