Prof. (em.) Dr. Hans Dieter Seibel

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Presentation transcript:

Prof. (em.) Dr. Hans Dieter Seibel International Restructuring Experience in Commercial Banking and Microfinance Two Case Studies: Centenary Bank, Uganda Bank Rakyat Indonesia Prof. (em.) Dr. Hans Dieter Seibel 2010

Overview Centenary Bank, Uganda: Transforming a credit trust: first into a microfinance commercial bank, then into an MSME bank with a microfin. focus Bank Rakyat Indonesia I: Transforming microcredit village units (unit desa) into microbanking units (MBUs) Bank Rakyat Indonesia II: Restructuring the bank Lessons learned

Centenary Bank, Uganda: An African Flagship of Restructuring Transformation of a credit trust into a microfinance commercial bank

1983: Established as: Centenary Rural Development Trust Successful savings mobilization, serious loan delinquency problems.

1990: Board decides to transform the trust Technical assistance (TA) by German Savings Banks Association Management contract with IPC Frankfurt 1993: Transformation into a commercial bank: Centenary Rural Development Bank Mission: serving the economically disadvantaged people, esp. in rural areas

Introducing a highly effective individual lending technology: Analysis of total household activities, sources of income & repayment capacity cashflow-based lending an incentives-driven repeat loan system at 48% interest, “automatic third loans” at 32% interest flexible loan security requirements stringent enforcement of timely repayment backed by a system of computerized daily loan tracking instant recovery action in case of delinquency staff performance incentives focused on loan repayment

Results of transformation, 2002 Depositors: 316,650 Borrowers: 31,500 Total assets: $61.3m, Total deposits: $48.7m Loans outstanding: $23.05m ROA: 4% ROE: 27%

II. Transformation into an MSME bank, 2002 Solving the quality vs productivity dilemma: shifting incentives from repayment towards a balance of loan repayment and disbursement Solving the outreach vs. sustainability dilemma: adding finance for small & medium entrepreneurs No mission drift: microentrepreneurs constitute 99% of borrowers

Results of transformation, 2008 730,000 depositors 93,000 borrowers Employees: 1,250 Total assets: $228m Total deposits: $180m Loan portfolio: $151m PAR >30 days: 4.6% Loan loss rate: 0.73% ROA: 5.5% ROE: 35.4%

Lessons learned Centenary Bank has demonstrated the feasibility of: Self-reliance through savings mobilization Maintaining a focus on microfinance Combining ME with SME & corporate lending incl. graduation from ME to SME loans Consistently low default and high profit rates Combining outreach with sustainability

Bank Rakyat Indonesia (BRI): An Asian Flagship of Restructuring Transforming microcredit units into microbanking units (MBUs)

The units before restructuring: 1968 government-owned BRI re-established as a commercial and policy bank: Commercial lending acc. to banking criteria Concessionary programs for small farmers and MSEs 1969 BRI sole lender of a mass credit program for rice self-sufficiency Establishment of „village units“ as loan channels Heavily subsidized targeted credit Onerous procedures, delays, illegal charges Lending restrictions undermine productivity 3,617 units in 1983, staff of 14,300 Mounting arrears, >50% in 1982, heavy losses

Policy background of BRI unit restructuring, 1983 Decline in oil revenues Interest rate liberalization Withdrawal of central bank credit supply to BRI units Options: closing or restructuring the units BRI, 1983: Placed under new management with more autonomy TA by Havard Institute for International Development Redesigning the village units as Microbanking Units Feb 1984: Restructuring effective

Transforming credit channels into profitable self-financed microbanking units (MBUs) Placed under own administrative structure, supervised by BRI branches, audited by BRI regional offices Moved from rice planting areas to business centers No government programs handled at units MBUs as self-sustaining profit centers Substantial profit-sharing incentives for staff

New savings product „Simpedes“ Attractive interest rates with positive real returns unlimited withdrawals at any time Semi-annual prizes at public draws Immensely successful Generating increasing amounts of surplus liquidity

Single general purpose credit product „Kupedes“ (1984) For everyone who is able to save and repay Loans from $2.50 to $5,000 (now $10,000) Flat monthly interest rate of 2% = 44% eff. p.a. 25% interest rate rebate for prompt repayment resulting in a 95% on-time repayment rate Small loans collateral-free Monthly instalments (now variable) 2008: Interest rates eff.p.a. after rebate 17%-25% nominal, 7-15% in real terms

MBUs 2008: Outreach & performance Number of MBUs: 4,300 Savings accounts 19.6 million Loan accounts 4.5 million Savings balance $5.9 billion Loans outstanding $3.9 billion NPL 1.65% ROA 9.8%

MBUs during the Asian financial crisis 1997/98 (collapse of the corporate economy & banking sector) Client confidence, growth of savings accounts: 1996 16.1 million 1997 18.1 million 1998 21.7 million 1999 24.2 million Stagnating credit demand, decline of loan accounts: from 2.6 million in 1997 to 2.5 million in 1998 and 1999 Robust loan recovery – 12-month loss ratio: 1996: 1.6% 1997: 2.2%; 2001: 0.5% Continual profitability – Return on average assets: 1996: 5.7% 1997: 4.7% 1998: 4.9% 1999: 6.1%

How the MBUs saved BRI during the Asian financial crisis The MBUs cross-subsidized the Bank through: a continual transfer of profits a transfer of surplus savings mobilized at village level to the branches An international reputation as the developing world‘s most successful microbanking network

Lessons from BRI‘s microbanking units With attractive savings and credit products, appropriate staff incentives and effective internal regulation and supervision, rural and peri-urban microfinance can be highly profitable Low-income people can save, and rural financial institutions can mobilize savings cost-effectively The demand for deposit services exceeds the demand for credit by a wide margin Effective loan monitoring and incentives for timely repayment are key success factors

Lessons Outreach to vast numbers of low-income people is the way to self-reliance and viability Catering to the poor, near-poor and non-poor enables FIs to increase transactions, to lower transaction costs and lending interest rates, and to increase profits Financial sector policies that are free of distortive interference are conducive to financial innovations (like the BRI MBUs) Savings-based self-reliance & profitability make MFIs crisis-resilient

Bank Rakyat Indonesia II: Restructuring the bank

Policy environment Since 1983 increasing financial sector deregulation 1988 law eases establishment of banks and branches Rapid expansion of private banking sector Many new private banks owned by conglomerates: borrowing cheaply on international markets to finance business expansion State bank lending under political influence: in 1989 BRI still handled >300 government programs Central bank unable to enforce prudential norms Banking sector out of control

Effect of Asian financial crisis on BRI: comparing 1998 with 1996 Devaluation: loss of value of total assets in US$ by 71% Surge of nonperforming loans ratio to 53%: Corporate sector most affected Microbanking sector barely affected From net profit of $101 million to loss of $3.3 billion ROA fell from 0.7% to –78% BRI technically bankrupt in 1998

The restructuring of BRI 1998: GOI decides to restructure BRI Restructuring in three phases: 1999: implementation of restructuring plan 2000: recapitalization ($3.0 billion, to be repaid) 2003: partial privatization (40.5%)

(1) Implementation of operational restructuring plan Resolution of NPLs and portfolio restructuring: $2.2 billion of corporate bad loans transferred to Indonesia Banking Restructuring Agency (IBRA) Corporate lending limited to 20% of portfolio

( Enhancing risk management: Risk rating system for small businesses Risk ratio standardization for medium businesses 2002 Risk management committee at highest level, subsequently consolidated in a Division for Compliance and Risk Management, covering 8 risks: operational, market, credit, liquidity, compliance, legal, strategy and reputational 2001: Work ethics program for 35,000 employees, appointing 1,000 as role models, change agents and motivators

Implementation cont‘d Business strategy redefined: Focus on MSME (target: 80% of portfolio), particularly micro and consumer lending (lowest NPL ratios) Product innovation (eg, online savings, ATM, investment banking) Operational efficiency improvement: office automation

Implementation cont‘d Organizational efficiency improvement: mergers of regional and audit offices, voluntary resignations Accounting and management information system (MIS) enhancement

(2) Recapitalization (2000) July 2000: New boards of directors and commissioners Management performance agreement with GOI up to Dec 2003 July/Oct 2000: Injection of $3.0 billion recap bonds (to be repaid) Results of restructuring as of Dec 2000: NPL ratio at a historic low Profits resumed All financial indicators meet regulatory requirements

(3) Partial privatization (Nov 2003) Nov 2003, Initial Public Offering, listing on the Indonesian Stock Exchanges Share offerings oversubscribed 15 times Ownership, Nov 2003: Government: 59.5% Public: 40.5% (44.7% domestic, 55.3% foreign) Ownership, Dec 2008: Government: 56.8% Public: 43.2% (18.3 domestic, 81.7% foreign)

Restructuring in figures (in billion US$) 1996 1998 2003 2008 Assets 14.4 4.3 11.2 22.5 Loans 5.4 5.6 14.7 GOI recap. bonds - 3.3 1.5 Deposits 8.1 5.3 9.1 18.4 Equity 0.76 (3.1) 0.95 2.04 Net profit 0.10 (3.3) 0.31 0.54

BRI: assets, loans, deposits, equity, 1996-2008 (in million US$)

Restructuring (performance ratios, in %) 1996 1998 2003 2008 CAR 8.7 (61.5) 18.9 13.2 NPL 10.6 53.0 6.0 2.8 ROA 0.7 (77.8) 4.0 4.2 ROE 5.3 n.a. 43.4 34.5 NIM (3.2) 9.5 10.2

BRI: CAR, NPL, ROA and ROE, 1996-2008

BRI portfolio composition & NPL ratio, 2008 Segment Loan size up to US$ Portfolio in % NPL in % Microbanking 5,000* 26.6 1.02 Consumer 20,000 19.0 1.08 Small commercial 500,000 27.6 3.52 Medium commercial 5 million 7.7 6.33 Corporate >5 million 19.1 4.53 Total 100.0 2.80 Total in billion US$ 14.71

Decisive factors in restructuring BRI Prudential regulation and effective supervision Commercial and social mandate: Focus on MSMEs, commercial centers, remote areas New management team: Fit and proper tests Performance contract Commitment to good corporate governance: Effective risk and compliance management Corporate culture: Commitment to performance excellence Open communication Incentives for management, staff, owners, customers Partial privatization =>> market discipline

Lessons from BRI External environment: Unprecedented systemic crisis Recognizing the options: closing, merging or reforming banks Conducive policy and regulatory framework: Prior deregulation followed after the crisis by prudential re-regulation and effective supervision by an autonomous central bank, enforcing prudential standards Political will: Comprehensive transformation of BRI

Governance and ownership: Independent boards of directors and commissioners Guarantee of no interference by government Code of conduct Feasibility of successful transformation by domestic management with commitment to excellence Partial privatization: Effective market discipline Commitment to profitability and accountability Majority government ownership compatible with excellence

Strategy: Commercial and social mandate: Profit optimization and social service Focus on MSME (80% of portfolio) Inclusive outreach: Rural and (peri-) urban sectors Comprehensive area coverage Micro-, consumer, small commercial, medium commercial, corporate Cross-subsidization within the micro portfolio =>> lowering of average transaction costs, securing future markets

Profit orientation: Main focus on micro, small commercial and consumer lending as the most profitable market segments Stringent risk management, esp. of the corporate agricultural portfolio (=>> value chain financing) Self-reliance: Savings-based Full range of financial products and services

Institutional change: Compatibility of inclusive outreach, self-reliance and profitability under domestic leadership, given the political commitment to institutional autonomy and performance excellence The political will is crucial!

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