The Role of Sustainable Interest Rate in facilitating Access to Credit by the Microenterprise Sector and a Best Practice in Caribbean Microfinance - The Jamaican Experience Presentation by: Paul A. Chin General Manager, Microfinance Services July 22, 2017

Areas of Focus Introduction Important Points to Note Policy Considerations The Jamaican Experience - The Development Bank of Jamaica Ltd (DBJ) Final Thoughts

Introduction High microcredit interest rates have been criticized since the microfinance movement started in the late 1970s. Why do Microfinance Institutions charge such high rates? The problem is that administrative costs are inevitably higher for micro lending than for normal bank lending. Microcredit interest rates can be legitimately high, however inefficient operations can make them higher than necessary.

Introduction Should Gov’t/donors subsidize interest rates in microcredit? Is it the role of donors or governments to cover some of the costs of credit? Research points to subsidized interest rates generally benefitting only a small number of borrowers for a short period. Interest rate subsidies (whether donor or government funds) oftentimes serve to distort the market. Interest rate subsidies are an inappropriate use of donor or government funds because they distort markets. Programs that target specific populations with subsidized interest rates have generally suffered low repayment rates, institutional dependency, and limited growth. Clients often view these loans as one-off “gifts” that need not be repaid.

Important Points to Note Micro/Small businesses and the poor generally consider access to credit to be more important than the actual cost of the credit. Microfinance clients can and do repay their loans and in many cases borrow again; indicating that there are positive benefits being derived from microcredit. A high rate of repayment indicates that the loans are in fact affordable.

Policy Considerations MFI interest rates must cover operating costs; however they must not fund inefficiencies. The Following are important Policy considerations: Increased Efficiencies - Technical Assistance Support to help reduce costs and increase productivity (Process improvements, training or IT improvements) Supportive Infrastructure – services that enable all institutions to perform more efficiently. E.g. - Credit bureaus help reduce costs associated with assessing credit worthiness of clients. Institutional Diversity – Different types of MFIs (e.g. – credit unions, MFI, Banks) have different cost structures and service different clients, ensuring competition and choices for clients

Policy Considerations Policy considerations (cont’d): Avoid setting interest rate caps – Rates that do not allow for cost recovery will result in eventual institution failure. Consumer Protection – Shielding consumers from unscrupulous lending and business practices; such as lending with no regard for ability to repay, deceptive pricing and abusive collection techniques. Financial Education and Literacy - educate consumers on how to be more responsible borrowers

The Jamaican Experience The Development Bank of Jamaica Ltd (DBJ) The coordination of all related interventions in the MSME sector on behalf of the Government remains the responsibility of the DBJ. DBJ CORE FUNCTIONS: Loan Origination & Portfolio Management Microfinance Lending Window Strategic Services (Capacity Building) Privatization & Public Private Partnerships Venture Capital

DBJ and the Microfinance Sector The strengthening of the micro and small business sectors through the provision of funding and technical assistance grants. Objectives outlined at the opening of the microfinance lending window in 2009: Provide wholesale funding to accredited Micro Finance Institutions (MFI) Strengthen the institutional capacity of MFIs through the provision of technical assistance to strengthen governance Increase transparency and information on the MFI sector through reporting and adherence to best practices

MFI Funding and Technical Assistance Euro 10 Mil Line of Credit - Approximately – J$1.4 Billion. First tranche of J$520 Mil (equivalent) received Jan 2017; with further drawdown of J$800 Mil (equiv.) expected in August 2017 Technical Assistance Grant – Euro 200,000 (approx. JMD$26.43 Mil) received in December 2015. J$24.19 Mil has been allocated to MFIs to undertake efficiency improvements, training and conference participation - all aimed at building their capacity.

Capacity Building – Micro-entrepreneurs Voucher for Technical Assistance (VTA) Provides assistance to MSMEs that need business development services/support: The DBJ will pay 70% of the cost of the service or the value of the voucher, whichever is less. Each MSME can access a maximum of 2 vouchers Apply through AFI or online at www.dbjvoucher.com . For the 2016/2017 year, DBJ issued 503 vouchers to MSMEs

Financial Inclusion Objectives primarily aimed at increasing the level of access, use and quality of financial services available to all individuals across every segment of the economy Promoting a shift towards increased participation in the formal banking system. The DBJ programme is a component of an overall National Financial Inclusion Strategy The project will be implemented under two pillars and the main objectives are outlined following.

Pillar A - Mobile Wallets & Electronic Retail Payment Services (EPRS) Development & Growth 1. To assist in the introduction and promotion of services offered by mobile wallet operators and other electronic retail payments based financial products 2. To lend integrity to planned and approved mobile wallet deployments 3. To develop policy papers and recommendations aimed at removing the obstacles to growth and adoption of mobile wallet and ERPS in Jamaica. 4. To advance initiatives defined by the Bank of Jamaica and other Government institutions, in developing and sustaining the Jamaican mobile wallets ecosystem. A mobile wallet is a payment service through which businesses and individuals can receive and send money by way of a mobile device. electronic retail payment services (erps) means the issuance and management of retail payment instruments, with the exception of credit cards. These instruments can be tangible or intangible instruments, devices or mechanisms that enable an individual to make payments for goods or services or to transfer money.

Pillar A - Mobile Wallets & Electronic Retail Payment Services (EPRS) Development & Growth The primary initiative under Pillar A will be the hosting of a conference on Mobile Wallets and ERPS in Jamaica, aimed at raising awareness of the benefits of electronic payment systems and how they can contribute to inclusiveness within the financial sector.

Pillar B - Financial Education & Training for MFIs & Micro Entrepreneurs 1. To improve the financial knowledge of micro-entrepreneurs 2. To create improvements in the financial habits and practices of micro-entrepreneurs through sustained financial education and training over the medium to long-term. 3. To establish an ongoing financial education and training programme for micro-entrepreneurs in collaboration with MFIs. 4. To improve the confidence level in the formal banking system and increase trust in technology driven financial services such as mobile wallets and other ERPS.

Pillar B - Financial Education & Training for MFIs & Micro Entrepreneurs The primary initiative under Pillar B is the hosting of a series of workshops – My Money Workshop: Financial Empowerment and Technological Awareness Targeting audience micro entrepreneurs across the island. Participants, will be selected through the current network of MFIs and/or other government/umbrella agencies, Curriculum delivered in three (3) modules which include: The Importance of Financial Management; Making Good Financial Decisions and The Nature of Financial Services in Jamaica.

MFI Unit Performance 2016/2017 Target of $1,400 mil for loan approvals (increase of 27% or $300 million over the 2015/2016 target of $1,100 million) Final out-turn of $1,519.36 million in loan approvals to accredited MFIs exceeded target by $119.39 million or 8.53%. The total number of loans supporting this out-turn was 16,410; an increase of 4,730 or 40.5% more loans than the 11,680 recorded in 2015/2016.

MFI Unit Performance 2016/2017 (Cont’d) The Distribution/Trading sector accounted for 58.6% of total DBJ funds on-lent The Services sector accounted for 21.4% of funds; Agriculture and Manufacturing sectors, accounted for 10.6% and 3.9%, respectively.

MFI Unit Performance 2009 to 2017 Since the launch of the MFI lending window in 2009, a total of $5,747.98 Mil has been on-lent to MFIs Supporting 72,504 loans to micro and small businesses in the productive sector.

MFI Unit Performance by Sector 2009 to 2017 Distribution/Trading and the Services sectors – Average 54% and 26% respectively over the period. The Manufacturing and Agriculture sectors - Averaging 11% and 4%, respectively over the period.

Final Thoughts The best way to reduce microfinance rates and foster sustainability is to promote competition and innovation in the sector, both of which improve efficiency and lower prices. Educating consumers will give them the skills to make informed financial choices. The primary issue from a development banking perspective is the benefits to be derived from microfinance by clients/micro-borrowers.

Thank You www.dbankjm.com Development Bank of Jamaica Limited 11A – 15 Oxford Road Kingston 5, Jamaica