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Financing Microfinance for Poverty Reduction

Marilou Jane D Uy,

Director Financial Sector Operations and Policy,
The World Bank

I would like to start by thanking the organizers of the Micro-credit Summit for inviting me to
share my thoughts. I am always humbled when I come to Bangladesh and talk about micro-
finance as I know that this is clearly the country where outsiders like us have a lot more to
learn from than to share. In line with the theme of today’s session, I’ll focus on certain global
trends that I see in the structure and the financing of the micro-finance industry as well as
share some thoughts on the role of appropriate regulation and information sharing as the
industry moves forward.
Micro-finance institutions are growing, extending their reach and developing new products
and services for their clients. The new key words for these institutions include “convenience,
reliability, continuity, and a flexible range of services.”1 In other words, “poor people want
what many of the less poor already enjoy.”2
Bangladesh, our host country for this event, provides an excellent example of these
changes in micro-finance and the diversity of approaches. Grameen Bank has
introduced “Grameen II,” a new approach that includes credit, pension, savings, and
insurance products. BRAC Bank has recently introduced remittance services. The
Resource Integration Center (RIC) caters to the elderly poor, a highly vulnerable
group. PKSF is experimenting with nineteen Partner Organizations to deliver financial
services to the poorest of the poor. There are scores of other innovative examples in
Bangladesh that I don’t have the time to mention now, both within the large NGOs,
such as ASA, and a host of smaller NGOs.
Outside Bangladesh, institutions of all types involved in the micro-finance practice-banks,
financial cooperatives, credit unions, postal banks-are increasingly catering to the multiple
financial needs of the poor. In many countries, the structure of the industry today in terms of
institutional types and diversity of services differs strikingly from that of the mid 90s (e.g.,
Ecuador, Peru, El Salvador, Tanzania, Uganda, to name of few). This diversity, especially
the demand for savings services, has also brought into the industry more and more
regulated financial institutions, and with them new modalities of financing the business.
The micro-finance field is changing fast, first because MFIs are growing and offering
an ever increasing menu of products and services and second, because banks, credit
unions and other non-bank institutions are entering the field and quickly surpassing
NGOs as the dominant institutional form. The statistics clearly show a growing
presence of formal, regulated institutions among the MFIs is the world.
As the micro-finance industry evolves, the importance of sustainability and profitability will
only grow. The evolution of the industry has brought some improvement in overall
sustainability, often derived from scale economies at larger institutions and correspondingly
higher returns on assets and equity. However, nearly one-half of the MFIs reporting to the
Micro Banking Bulletin are not financially self-sustaining, and this is likely to be a sample
tilted towards better performing MFIs.

Morduch, Jonathan, and Stuart Rutherford, “Micro-finance : Analytical issues for India.”
Background Paper, The World Bank, April 2003, Pg.2
Morduch and Rutherford, (op.cit).

NGO-MFIs have debt-to-equity ratios of about 1.5. Banks and regulated financial
cooperatives, not surprisingly, usually work with much higher levels of leverage- of about 6
to 1- and thus also need to have upgraded systems and lending technologies to support this
approach. In order to offer savings products and take deposits, MFIs and others in the
market will need to show that they can operate prudently, and on a sustainable and
profitable basis. This is a very important framework for creating an industry with the
resources to respond to client demands with innovation and new quality products and
There are also other, growing sources of commercial financing for MFIs. A recent CGAP
study shows that foreign investment in micro-finance is about 1.1 billion US dollars, with
about 80% as debt, 15% equity and around 5% in guarantees. These foreign investment
have come mostly from the private sector funding arms of bilateral and multilateral agencies
and partly from private capital through what is now called Social Investment Funds. The
proportion of the latter is small, but appears to be increasing rapidly. At the World Bank
Group, IBRD/IDA has lent close to 200 million US dollars a year for micro-finance, and its
private sector arm -the IFC- has substantially increased its lending for micro-finance,
reaching 90 million US dollars in FY-03 alone.
The emergence of Social Investment Funds is worth highlighting. There are debt funds (e.g.
Deutche Bank), equity funds (e.g. Profund in Latin America, Shore Bank in Asia, OSI in
Eastern Europe and Micro-Vest globally). Out of the 1.1 billion in total foreign investment in
micro-finance around $ 250 million US dollars is being channeled through Social Investment
Funds. The most remarkable part of this is that in the next twelve months, Social Investment
Funds will increase funding to around $550 million US dollars, largely through the creation of
ten new Funds and partly through increased investment in existing funds.
What can policy makers, donors and the MFIs themselves do to adapt to the changing
environment for micro-finance and benefit from a new financing paradigm based on
mobilizing domestic resources via deposits and other market-based investment resources?
There are clearly several areas where public policy can have a role but in the interest of time
I will elaborate on only two issues today where policymakers can play an important role in
meeting the demands of the micro-finance industry-(1) creating an appropriate regulatory
environment for micro-finance and (2) developing market institutions-such as improved
financial infrastructure and information sharing-which can support an efficient and
competitive micro-finance industry.
As MFIs grow and begin mobilizing commercial resources beyond grants and
donations, central banks and regulators are increasingly being called upon to regulate
and supervise MFIs under existing or new legal and regulatory frameworks. As MFIs
operate in diverse institutional formats, integrating micro-finance into the financial
sector does not mean that all MFIs should or need to be regulated. Country experience
has demonstrated that regulations that recognize different tiers of institutions, both
regulated and unregulated, is an effective means of protecting the safety of savings and
the financial system while not posing undue restrictions on the innovative nature of the
micro-finance sector. The aim is to build strong institutions of all types to provide
services on a sustainable basis under shared performance standards and to develop
appropriate prudential regulations and staff capacity for supervising regulated
institutions. Intro duction o f the second part
I know that there has been a fair amount of thinking on regulation in many countries,
including Bangladesh, and that this area is still a work in progress. It is important that a
balance be struck between excessive regulations that hinder the dynamism of the micro-
finance industry and the need to safeguard the financial system and in particular poor
people’s savings. It is also clear that a ‘one size fits all’ type of regulation will not work since
the type and scale of micro-finance providers in Bangladesh and other countries varies
widely. One option that can be considered for micro-finance operations is a tiered regulatory

structure where the extent of supervision varies according to the extent of savings mobilized
and size of the organization. There are now a number of country experiences in micro-
finance regulation for others to learn from; for instance lessons from Indonesia and
Philippines may be useful where a tiered regulatory structure, catering to different types of
institutions is in place.
As the micro-finance industry develops towards a more commercial setting, it will
benefit greatly from better financial information and knowledge sharing. This will
include improved, transparent financial information that meet good financial reporting
standards. There may also be greater opportunities for improved credit information
among micro-lenders via institutions such as private credit reporting firms (credit
bureaus) or public credit registries. Improved credit information has been
increasingly playing a key role in modern lending technologies to small borrowers,
largely because it helps to create “reputation collateral”-a significant benefit for the
poor borrower.R……………….. commercial part conclusion
To summarize, the micro-finance industry is moving- it has to move- in the direction
of diversification of services, institutions and sources of financing Moving towards
private sources of financing and towards the development of more formal institutions,
such as MFI banks, will help leverage these resources and contribute to all of our
objectives of expanding access to micro-finance. Public policy needs to facilitate this
trend through maintaining macro stability, a liberalized interest rate structure,
appropriate regulations adapted to the varying needs of MFIs and reliable and
transparent information infrastructure. Last part of the micro finance industry
Thanks very much.