Policies, Regulations and Systems That Promote Sustainable
                 Financial Services to the Poor and Poorest

                                                                    Ms Nancy Barry, President,
                                                                  Women’s World Banking, USA

Good morning. As you have heard, my name is Nancy Barry. I am the president of Women’s
World Banking. As was indicated by the great noise in the sky, Catherine ...., our policy
change manager at Women’s World Banking, and I have authored the paper. Our panelists
represent, based on my first-hand experience, real champions of micro finance as central
bankers. This is not a typical group of central bankers. We have Dr. Fakhruddin Ahmed,
Governor of Bangladesh Bank, who in his previous life as director of Would Bank, was
instrumental in making sure that PKSF got the financing it needed to do all the great things it
has done with MFIs in Bangladesh. We have Dr. Ishrat Hossain, Governor of State Bank of
Pakistan, and as all of you know, Pakistan is a relative latecomer in micro finance where
extremely exciting things are happening now. We have Mr Moulana Ibrahim, Deputy
Governor of Bank of Indonesia which houses the largest micro finance institution on earth,
with a whole system of NGOs and world banks active in this sector. We have Mr Ram Babu
Pant, the Deputy Governor of Nepal Rashtra Bank and as all of you know, the institutions in
Nepal, despite very difficult conditions, are doing much better than the commercial banks in
Nepal. And we have Mr Rick Lidio, Managing Director of Supervision and Examination
Sector, Central Bank of The Philippines, who has been one of the earliest students amongst
central bankers on how to build financial systems that work for the poor majority. Finally we
have Dr M A Mannan, the Executive Director of Credit Development Forum (CDF) of
Bangladesh in recognition of the extremely important role that country-level microfinance
network of practitioners play in building a robust microfinance sector that serves the poor in
an efficient, responsive and sustainable way.

Many of you in this room are the leaders in building financial services that work for the poor
majority. Panelists have equally important role to play in ensuring the policies, regulations
and the legal structures fits what the poor people need and fits the institutions that serve
what the poor people need.

I like to begin briefly by saying from whence I speak. As hopefully all of you know, Women’s
World Banking has a global network which is comprised of over 50 institutions that together
which provide lending services to over 50 million poor people and saving services to millions
more. In Bangladesh, the members of our networking are Shakti, ASA and Joutha Life
Insurance. In India, Share, SOWA, FWFWB and the new member is ICICI. In Nepal, LSD.
In Pakistan – KASHIF. In the Philippines NEBLES, and CARD. In Sri Lanka, SEEDS and
Janashakti. In Thailand, Bank Bakht and GSP. So as you can see there are institutions that
have very different structures, some are small, some are medium, some are large. What
they have in common is commitment to building financial services to work for the poor
majority and using their leadership to work with many actors seating at this podium to make
sure that policies and systems work for the poor majority.

At the global and local levels, we have been involved in the last 10 years in trying to get
financial policies to work for micro finance. So, when we talk about building big policies, we
need to begin by understanding what poor clients, particularly poor women want in micro
finance. What do poor women say they want? They value speed and convenience, they
want access to larger loans. They want respect and recognition and they care about interest
rates. We used to say in micro finance, it is not about subsidies, it is about access. With

competition, poor people, just like non- poor people, care and shop around for interest rates.
Low income women and men define micro finance broadly. They want business and housing
loans. They want short, medium and long term savings products. They want health and life
insurance and they are willing to pay what it costs to provide them sustainable access to
these services. So we clearly are not talking about micro credit only and that is why we refer
to micro finance.

And finally, and this may be controversial in this room. In the 20 countries including
Bangladesh, Bosnia, Morocco, when asked, women say they prefer individual loans to group
loans. Over time, they resent the time it takes staying in the groups and resent the need to
guarantee repayments by others. This in no way says the groups are not important. But we
need to be thinking about how to help migrate poor people from group lending approaches to
individual lending. So that translates into recognizing that poor people have no traditional
collateral. Most Central Bankers are used to evaluating risks on the basis of collateral of
loans. They want a variety of products on the asset building as well as the borrowing side.
They want service, they want flexible loans and they want to be able to migrate from group
to individual lending. And these dimensions need to influence the policies that are set up for
micro finance. What we are talking about and this now finally represents a consensus, even
CGAP is now using as its slogan, ‘building financial systems to work for the poor’. We need
a range of institutions. We need commercial banks, regulated MFIs, micro finance NGOs,
finance companies, cooperatives, credit unions, grassroots organizations.

Many methodologies, many structures, if we are going to provide the needs to these millions
of poor people. We need standards, outreach to poor, portfolio quality, efficiency, financial
sustainability, financial integration, at whatever size, that meet the high standards, they need
the policies, regulations and legal structures that fits what works in micro finance, they need
access to finance and capacity building that fits the institution’s size and stage. And those
institutions that demonstrate prudence and soundness need to be able to mobilize voluntary

What is important to note in the whole evolution in micro finance globally is that we have
maintained in the last 10 years, a relatively equal distribution in outreach between NGOs,
banks and cooperatives. Much of the policy work in micro finance, unfortunately, has been
limited to a very narrow sliver of getting structures in place that enable NGOs to become
regulated for-profit financial institutions. After 10 years of this narrow focus, what we find is,
less than 1% of the outreach globally and 5% in Latin America, where most of this effort has
been focused, is in converted MFIS.

So the policies need to reflect these 3 major sets of actors, banks, NGOs and cooperatives.
The pillars of sustainable financial systems for the poor are, first, building transparency and
performance standards for all institutions in micro finance. Secondly, having banking
regulations that fit the needs of micro finance portfolios, whether those portfolios are in the
hands of a bank or a specialized MFI. We need legal structures that enable those NGOs that
want to convert because they want to mobilize savings from the public into regulated MFIs.
And we need an institutional infrastructure which reflects finance, capacity building and

On promotion of standards, this is I think the base of everything. Transparency and
performance standards help all MFIS and banks improve performance and to integrate into
the domestic financial system. There’s a lot of attention among donors to donor- funded
equity funds, hard currency loans. The key is actually building domestic capital markets that
work for micro finance.

And networks have a major role to play, country level networks. If you look at Sadaan in
India, if you look at the Coalition of Standards, now the Council, in the Philippines. If you look

at many of the networks in this region, they actually begin by building an agreement on the
definitions and performance indicators that all institutions will use. And then getting
institutions to actually fork over the data using these common definitions, which is often very
difficult, and then publishing that data on individual and aggregate levels. That alone can be
an extremely important policy move.

We will see the role of wholesaling organizations such as PKSF and similar organizations in
Nepal and the Philippines have very similar roles that they can and do play in having
rigorous standards for who they finance that again creates transparency and performance in
the industry. And finally we have the emergence of rating agencies such as …., Planet
Finance, and Micro Rate which again are important in providing assurances to local and
foreign sources of funding that these institutions are being operated on a sound basis.

The key in terms of micro finance operations in understanding the idiosyncrasies of micro
finance. You cannot just take the banking system and push it down to MFIs. You need to
recognize the transactions costs are high in micro finance. Therefore institutions need to be
able to charge what it costs to provide sustainable access which means relatively high
interest rates. Clients lack conventional collateral. We see many countries including the
Philippines that have created micro loans as a loan class along with consumer lending,
corporate finance, etc., with portfolio quality and a good methodology for evaluating risk in
lieu of collateral. We see MFIs have simple MIS and accounting. Therefore, they should not
be loaded with heavy paperwork requirements. Rigour but simplicity in reporting.

We see that savings is as important to clients as is lending and therefore we need to have
the structures that allow high performing MFIs to mobilize deposit from borrowers and from
the public as regulated structures. We see that MFIs have many small branches and central
banks tend to be very stingy in passing out approval of new branches. They will argue that
there are too many branches in the country. Actually, there are not too many branches
serving poor people in the country. So the small branches that are outreach vehicles need to
get relatively rapid approval.

Loan officers are not traditional bankers and therefore often the salary structures that apply
to mainstream banks do not work for micro finance and you need to be able to pay
performance based incentives.

On legal structures for micro finance, MFIs that seek to mobilize savings from the public
need to be regulated. MFIs that want to mobilize large amounts of equity and commercial
loan funds may seek to be regulated. And the key features for the legal structures that for
regulated MFIs are relatively low minimum capital requirements, appropriate capital
adequacy ratios which we find can be relatively similar to that of commercial banks.

Ownership structures are really addressing the issue of local versus foreign ownership.
Unfortunately in east Africa, the recent legislation on MFIs actually precludes local control of
these institutions by saying that the originating NGO cannot own more than 20% or 33%.
Who’s going to provide the rest? It will be donors and donor-funded funds which I think don’t
really know as much about micro finance as the local institutions that created them.

In the Philippines for example, you can have foreign ownership in rural banks. Maybe that’s
going too for. But certainly local control is key. High performance standards and appropriate
tax treatment. If we want these MFIs not to migrate away from financing poor people, you
need to look at the tax burden which can be very heavy and actually force institutions up
market. The world has plenty of banks. We are not talking of banks for the poor.

The role of government. I find that this slide works in every single country because
governments tend to do at least one of these things wrong. Governments need to promote

micro finance as a key vehicle in tackling poverty and as a vital part of the financial system.
Governments need to create the policies, regulations and legal structures that encourage
responsive, sustainable micro finance. Government agencies should not be providing retail
micro-finance. Wherever we see that, it is politicized, clients don’t repay and it wrecks the
market for the good institutions. Governments need to encourage a range of regulated and
unregulated institutions and a variety of methodologies.

Government should not back one model and that means saying either that every NGO
should become a bank or that every NGO should replicate Grameen or ASA. We need a
variety of models to keep the industry innovating. Governments should encourage
competition, capacity building and innovation to lower costs and interest rates in micro
finance. And the single biggest thing that can ruin micro finance is governments placing
ceilings on interest rates for micro finance. That is a guarantee that it will not be sustainable,
that it will not grow and we all know that poor clients do not get un-poor in their 1st , 2nd or 3rd

So you actually need to build sustainable institutions that can cover their administrative cost,
their financing charges, provisioning and actually have a return so that they are able to grow
their capital base. And, in return for no ceilings, I think the time has come for MFIs to really
look at interest rates because we cannot hide behind inefficiency as was said on the 1st day.
And we need to really work to get transaction costs down and make sure the interest rates

And finally, governments have a major role to play in supporting autonomous, wholesale
structures. That means wholesale structures that are free of political interference, that are
able to make their own decisions on how quickly or slowly to disburse funds, based on the
number of good, small, medium or large MFIs that are seeking finance. And this vehicle, I
think, is critically important in the development of micro finance as we have seen here in

There is a need, a happening of paradigm shift in retail banking with the poor. From a
compliance culture which tends to dictate low interest rates, low repayments, low know your
customer, minimal loan amounts, low, sporadic and shallow outreach relative to demand, to
a sustainable approach to micro finance, interest rates that cover costs and enable profits,
excellent portfolio quality, understand household economies, economic activities of the poor,
financial products and processes that respond to poor households and enterprises, high
outreach and impact. And I think the experience of……Indonesia, in migrating from this
compliance culture to a sustainable huge micro finance institution has really led the way and
we will hear today about how other banks have followed suit. With the financial sector crises
of the late 1990s, the banks are very wary of corporate finance and recognize that micro
finance is the base and backbone.

So, different actors have different roles to play. Micro finance practitioners and networks
have roles in building standards, in organizing the voice of the industry to be partners with
policymakers in policy change, in catalyzing the creation of the needed institutional
infrastructure, in developing the market. We just spent the last weekend in India where the
members of our network actually were focused on how to build competitors, how to get the
commercial banks involved beyond self-help groups in micro finance. And so, the biggest
single constraint in micro finance is not macro policy. It is retail capacity and we, as
practitioners, really need to focus on getting other institutions involved. Policy makers and
regulators need to promote micro finance and integrate it into the financial system,
encourage a range of structures and methodologies, adjust regulations and legal structures
to fit micro finance and promote the creation of institutional infrastructure.

External actors support building financial systems, provide funding that fits the institution
stage, help build local currency financing and capital markets. We have enough hard
currency floating around and MFIs do not need hard currency in most markets. And we need
to have donors that actually not only encourage but use their own high standards.

As an ex-World Banker, I can say donors often do not practise what they preach and can
fund the wrong end of the stick. So we need to hold each other accountable.

So, challenges for this decade. Outreach. Expand outreach to millions more by increasing
MFI capacity, mobilizing mainstream banks and building domestic capital markets. Focus an
assets, help poor people build assets, not just debt. Focus on cutting transaction cost in
micro finance through new technologies and channels.

Culture. This I think is the most important thing. Building a culture among MFIs, bankers,
policymakers and founders in micro finance based on trust and transparency, shared
standards, generosity in sharing what works and what not, and mutual accountability for
results. And building financial policies and systems that work for the poor majority.

Now we will hear how, in these extremely important countries of Asia, central bankers are
building policies and systems that work for the poor majority. Thank you very much.
(End of speech)

I will now switch hats to my role of Chair and it is with great pleasure that I introduce Dr
Fakhruddin Ahmed of the Bangladesh Bank.


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