Experiment: Franchising Microfinance June 2005

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3 India c ,000 rural branches 98,000 primary agricultural cooperative societies (PACS) 14,000 cooperative bank branches Thousands of mutual funds sellers Non-banking finance companies (NBFCs) 154,000 post office outlets World Bank Access Study: 41% of rural households have bank account 21% have access to credit from formal source 30% marginal farmers have bank account 13% have access to credit from formal source High demand. How do private banks reach rural areas?

4 Problem #2 – plenty of $$$, not enough MFIs Private banks see partnership model as a way to use MFIs to build rural reach But only 50 MFI partners, total MFI clients = 1-2 million Total demand = million households How can we expand MFI penetration to channel money from private banks into rural areas? Can this expanded MFI distribution network eventually take deposits and recycle money within rural communities?

5 What constrains MFI expansion? - Lack of huge subsidies for expansion - Need for local understanding from district to district - Organic branch-by-branch expansion model - Systems not designed to manage nationwide presence - MFIs hire loan officers, not branch managers

6 Is franchising a solution? Franchising: An arrangement between a franchisor (a manufacturer, a wholesaler, or a service sponsor) and a retail franchisee, which allows the franchisee to conduct a given form of business according to a given pattern of business and under an established name.

7 Can microfinance be franchised? Can running a branch-level microfinance operation make money? Can we quickly teach unskilled people to lend money? Do we need staff who are socially-motivated? How much control does an MFI really need to have? Can entrepreneurial fire drive growth and innovation?

8 Successful franchises McDonalds (fast-food) 25 years to reach 6000 outlets (>21,000 today) Curves (gym for ladies) 8 years to reach 6000 outlets (>8,000 today) New locations per year – 1,570 (’94-’04) New members per year – 731,200 (’94-’04) Revenues – >US$ 1 billion

9 The concept 1)Find rural entrepreneurs (franchisees) 2)Show them that running a branch can be profitable 3)Sell them the business package and training (how to open and run an MFI branch as a bank agent) 4)Provide on-going monitoring and support, plus the link to private banks for on-lending funds 5)In return, take an up-front fee and a share of income 6)Do this with as many franchisees as possible at once

Select Franchisee, train and equip: Systems, training, lending funds, monitoring Qualified rural entrepreneurs (Franchisee) Up-front fee, Revenue sharing Franchisor (Leading MFI) Towards increased geographical reach Commercial Banks Lending Funds: Franchisor negotiates lending funds External Investors Equity Funds: Access through credibility of franchisor CGAP funding to develop model

11 Constraint on MFI GrowthPossible Franchising Solution Lack of startup/expansion capitalFranchise model attracts capital from entrepreneurs and investors Need for local understandingEntrepreneurs are rural and will build MF operations in own locales Organic, branch-by-branch growthFranchisees make profits for franchisor from day one. Incentive = open as many franchisees as possible at once Systems can’t handle wide networkFranchisor business model becomes training and monitoring, not operations MFIs hire loan officers, not branch managers Find franchisees to run branch operations, let them hire loan officers Why franchising might work

12 Define the business model Start with a strong MFI (franchisor) Convert processes and systems into a business package Develop a training program Figure out which entrepreneurs would be eligible Develop franchise agreements Identify and select pilot entrepreneurs Run a pilot, and conduct independent evaluation of results Project plan

13 For Franchisee Driven purely by entrepreneurial motivations Franchisees access funds through franchisor’s relationships with banks Incentive to grow rapidly to recover their initial franchise purchase payment Potential to enable thousands of rural entrepreneurs to become lending agents in their own locales Model advantages

14 For MFI Franchisees help expand brand to new areas Franchisor incentivized to build systems to maximize the number of franchisees and hence expand rapidly Additional source of revenue for franchisor Option to expand products to include savings, insurance, money transfers, and others Potential to enable thousands of rural entrepreneurs to become lending agents in their own locales Model advantages

15 Regulatory Framework Support Infrastructure Low Profit Perception Mgmt Systems Skills Governance Capital Inappropriate Products and Staff Orientation POOR CLIENTS Environmental Institutional Channel Cost Convenience BANKING Branches, ATMs, etc. high cost Main Constraints for Banks