COMMERCIAL BANKS AND SPECIALIZED MICROFINANCE BANKS - PowerPoint - PowerPoint

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					COMMERCIAL BANKS AND
     SPECIALIZED
 MICROFINANCE BANKS
Commercial Banks and Specialized
     Microfinance Banks

    •   deposit-taking institutions (from the public)
    •   regulated
    •   supervised
    •   privately-owned, profit motivated,
        commercial orientation



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    Banks have entered the field
    of microfinance in three ways:
    • microfinance programs or NGOs have
      transformed into banks
    • microfinance practitioners have created
      banks and specialized microfinance
      banks
    • commercial banks have expanded their
      business to reach out to the poorer
      groups
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       Reasons why NGOs have
        transformed into banks
    • to access capital through deposit-taking
    • to raise capital through equity
      investments by shareholders
    • to increase borrowing capability
    • to offer a wider range of services to
      clients (in addition to deposit taking)


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    Reasons why commercial banks
       have entered the field of
            microfinance
    • diversification (given competitive environment)
    • profits of successful microfinance banks
    • public image
    • access to lines of credit from international
      financial institutions for onlending to
      microentrepreneurs
    • technical assistance
    • government requirements
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     Distinguish between different
            types of banks
    • full service private commercial banks
    • state-owned banks
    • specialized banks and finance
      companies




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      Three primary ways in which
    commercial banks are involved in
             microfinance:
    • lending directly to microentrepreneurs
    • lending to microfinance institutions
      which onlend to poor
    • lending to self-help groups of rural poor




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    Some of the structural aspects of
       banks are beneficial for
             microfinance:
     • requirements of being a regulated entity
       help ensure prudent management
     • private ownership
     • physical infrastructure (branches)
     • independent of donor resources
     • wide range of financial products
     • administrative and accounting systems
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       Drawbacks to commercial
       bank structure and status:
    • lack of commitment to microfinance and
      clientele (poor)
    • reporting and regulatory requirements are
      burdensome and often not appropriate for
      microfinance
    • hierarchical structure
    • different financial methodology
    • difference in staff training
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    • overhead
Issues To Be Discussed Related To
   Banks Involved in Microfinance

     1.Whom do the banks serve and with what
       services?
     2.What is their ownership and governance
       structure?
     3.What are their sources of capital?
     4.What regulation -- prudential and non-
       prudential
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            Who is Served and
            With What Services?
     • Generally larger clients
       – due to cost and lack of access to poor
     • Services
       – loans
       – deposits
       – checking accounts
       – payment transactions
       – smart cards/debit cards
       – issuing and accepting liability on letters of
         credit
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     – pawn brokerage services
     – payment guarantees
     – issuing negotiable debt securities
       (certificates of deposit, bonds, promissory
       notes)
     – financial leasing transactions
     – foreign currency transactions




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     And:
       – trust management services
       – brokerage services (purchase and sale of
         securities)
       – underwriting securities




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                 Legal Form

     • Joint stock company (open or closed)
     • Limited Liability Company
     • Cooperatives




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     •   Ownership
     •   Maximum ownership interest
     •   Limitations on foreign ownership
     •   Limitations on NGOs




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                  Governance

     • General Assembly
       – Approves the annual financial plan and
         report on performance
       – Approves annual results of banks activities
       – Elects the council of directors/supervisors,
         audit committee, external auditor
       – Determines remuneration of members of
         council of directors and external auditor

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              Governance (cont’d.)

     • Board of Supervisors/Council of Directors
       – Determines strategic goals of the bank and its
         policy
       – Approves/discharges members of management
       – Supervises management
       – Determines internal policy
       – Reports to shareholders at annual meeting
       – Approves internal auditor
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       – Determines remuneration of management
              Governance (cont’d.)

     • Management/Management Board
       – Governs day-to-day activity of bank in
         accordance with established policy
     • Managing Director

       Plus: Audit Committee
       – Tests compliance with policy

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         Sources Of Funding/Capital

     •   Share capital
     •   Borrowings
     •   Deposits
     •   (Donor funds)




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            Prudential Regulation
     a. Minimum capital
     b. Capital Adequacy Ratio
     c. Asset quality indicators/Loan classification
        and provisioning
     d. Unsecured loan limits
     e. Reserves requirements (% deposits)
     f. Reporting requirements
     g. Supervision
     h. Camel rating (capital adequacy, asset
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        quality, management, earnings, liquidity)
          Non-Prudential Regulation

     a.    Interest rates
     b.    Disclosure of ownership
     c.    Registration
     d.    Reporting/publication of financial
          statements



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     What Current Legal and
     Regulatory Limitations
     Challenge Banks Involved in
     Microfinance?


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          Prudential Requirements
     • Minimum capital
       – Should be lower minimum for microfinance banks
     • Capital Adequacy Ratio
       – Basel Accord recommends at least 8% of risk
         weighted assets
       – Advocate higher (20%) for small and
         microfinance banks
         • less diversified and higher risk portfolios than other
           banks
         • relatively high costs and high interest rates on loans
         • Banking regulators have little experience with
           microfinance
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         • for banks established by NGOs, capital may come
      Prudential Requirements (cont’d.)
     • Asset quality indicators/Loan classification
       and provisioning
       – although microfinance portfolios show lower
         delinquency than commercial bank portfolios,
         delinquency tends to be more volatile
       – microfinance banks should provision overdue
         loans (based on time overdue) more
         aggressively than commercial banks
       – regulations for loan provisioning usually require
         high provisions for unsecured loans, even
         where such loans are not overdue --
         inappropriate for microfinance banks
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     Prudential Requirements (cont’d.)

       – regulators should consider accepting
         additional indicators of asset quality such
         as historical performance of portfolios,
         statistical sampling of arrears and
         adequacy of management information
         systems
       – check for concentration of sectors, insider
         lending
     • Unsecured loan limits
       – microloans are generally unsecured
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          • use alternates (group guarantee)
     Prudential Requirements (cont’d.)

     • Reserves requirements (% deposits)
       – limits monetary expansion in the banking
         system and thereby controls inflation
       – the higher the requirement, the less
         deposit base available for on-lending (and
         therefore less opportunity to lend for
         microfinance)



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     Prudential Requirements (cont’d.)

     • Reporting requirements
       – reporting format used for large commercial
         banks may not be appropriate
         • typically banks are concerned with fewer, larger
           transactions
         • microfinance banks are more concerned with
           aggregate indicators




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     Prudential Requirements (cont’d.)

     • Supervision
       – bank examiners' typical review (30% of a bank's
         loans) is not feasible for microfinance portfolios
       – guidelines for documentation for loans are not
         appropriate for microloans
       – increase in administrative controls (in response
         to delinquencies and management weakness) is
         probably not appropriate for microfinance banks

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     Prudential Requirements (cont’d.)

      – supervision should carefully examine how
        microfinance banks manage risk, taking
        into account
        •   diversification of loan portfolio
        •   lending technology and products
        •   loan tracking systems
        •   qualifications of staff




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     Prudential Requirements (cont’d.)

     • CAMEL rating (capital adequacy, asset
       quality, management, earnings,
       liquidity)
       – regulators should compare banks with
         large microfinance portfolios with other
         microfinance banks (instead of commercial
         banks) because banks with large
         microfinance portfolios will have higher
         ratios of operational costs to average
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         portfolio than other banks
     Non- Prudential Requirements

     • Interest rate caps
       – one of the greatest deterrents to banks
         entering into microfinance is an inability to
         charge commercial rate of interest
       – yet cost of microfinance is higher because
         (i) smaller loans for work, (ii) high level of
         involvement with clients



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