1. Eight Business Model Breakthroughs for Microfinance Presentation of Work in Progress, October 24, 2006 Task Force on Microfinance

2. The Challenge of Scale in Microfinance Microfinance is a recognized tool for addressing poverty and empowering the poor. Despite the important accomplishments of microfinance institutions, most of the potential clients of microfinance still lack access to quality financial services. Why? Needed: Business models that can bring microfinance to scale

3. The Forum of Young Global Leaders (YGL) A unique, multi-stakeholder community of the world’s most extraordinary leaders who are 40 years old or younger and who are ready to dedicate a part of their time and energy to jointly work towards a better future. The 2020 Initiative – defining a vision for a world where sustainable economic development replaces the plague of poverty around the globe. In association with the World Economic Forum

4. YGL Microfinance Task Force Objectives Public Awareness Private Sector Engagement Conducive Regulatory Environment Specific Microfinance Projects

5. The Breakthroughs Project of the YGL Task Force Search for business model breakthroughs, especially related to scale and efficiency. Leaders from microfinance join counterparts from business and other sectors to exchange experience. ACCION International facilitates. Eight key breakthroughs identified and presented here. Work will continue on: Potential impact Obstacles to expansion Pathways to widespread adoption Final paper to be presented at the World Economic Forum in early 07.

6. Conventional Wisdom in Microfinance Widely held “truths” may block a breakthrough. Loan officers are the cornerstone of good microfinance. Microfinance is about lending for “productive” purposes. Every MFI needs a custom- tailored IT system. Microfinance clients won’t use new technologies.

7. Four Dimensions of Breakthroughs Innovate for MF Clients Adapt technology to fit Microfinance clients Upgrade MFI capabilities Prepare MFIs to apply the innovation Attract new players, support structures Examples: credit bureaus, software companies Foster policy or regulatory change Innovations bring need to revise regulations

8. Breakthrough 1. Payment Systems Exercise Make automated payment systems available to microfinance clients Benefits to Clients and MFIs Client convenience and security Increased MFI efficiency; lower cost Penetrate difficult locations Mechanisms Card products: debit, credit, prepaid, etc. Devices: ATMs, POS, cell phones Challenges Few MFIs are members in payment networks Products designed for middle class market Clients are used to cash, as are vendors they use

9. Breakthrough 2. Mobile Phones Exercise Turn cell phones into payments devices Benefits The ultimate in client convenience Low income clients already love cell phones Mechanisms Cooperation between Telcoms and Banks Sim card becomes payment vehicle Text messaging to transfer money Challenges Infrastructure preconditions Per-transaction fees high Security vulnerabilities make regulators skeptical

10. Breakthrough 3. Automate Credit Underwriting Promotion/ Sales Evaluation/ Approval Loan officer caseloads are constrained by elaborate loan evaluation, approval & collection processes – both group and individual methods Credit scoring could shrink these steps and increase loan officer productivity Scale facilitated by high quality credit bureaus Challenges: Regulations on credit bureau development Lack of national I.D. system Credit scoring for microfinance still in development Resistance at MFIs to changing old methods Payments/ Collections Renewal The Credit Underwriting Process Disbursement

11. IT System Basic Ops. Connected Networked Recoverable IT System Basic Ops. Connected Networked Recoverable Breakthrough 4. Improve MFI Information Technology Financial Management and Reporting Data Mining Credit Scoring Understanding Customers Social Performance Monitoring Connect to Payment Systems ATMs, Cards, International Money Transfer Streamline Customer Interface Teller transactions Loan Approvals MFI systems must perform all these functions well.

12. Breakthrough 5. New Channels to Reach Customers: Retail Networks Traditional Model MFIBranch. Loan Officer/ Branch cashier Customer Use of Retail Agent. Many models are possible. MFIBranch -- ? Retail Agent (Pago Facil) Customer Retailer as Delivery Channel Retailer (Elektra) Retail StoreCashier/Clerk Retailer Becomes MFI Customer

13. Breakthrough 6. Offer Clients a Full Suite of Products Monoproduct Full ServiceCredit VarietyCredit & Savings Credit: Group Individual Credit: Group Individual Housing Consumer Small business Credit: Individual Group Housing Consumer Vehicle Small business Pawn loans Savings: Current accounts Programmed savings Fixed deposits Insurance: Life insurance Property insurance Health insurance Money Transfers and Payments: National International Utility bill payments Credit: Group Individual Housing Consumer Small business Vehicle Fixed asset Pawn loans Savings: current accounts Programmed savings Fixed deposits Payments: Utility bills From Mono to Multi-product

14. Breakthrough 7. Leverage the Mainstream Financial System Bank Alliances With MFIs Concept: MFIs Reach Clients More Effectively Conventional bank loan to MFI (many examples worldwide) Investment banking services (Citibank and Compartamos bonds) Bank purchases MFI portfolio (ICICI partnership model) Bank uses MFI as deposit collection agent (Brazil model of banking correspondents) Banks as Retailers Concept: Banks Have Advantages MFIs Cannot Duplicate NGO-MFIs become banks (BancoSol, Mibanco, Compartamos, etc.) Bank establishes microfinance subsidiary (Pichincha, Sogebank) Bank adapts consumer lending to microfinance market (Banco de Trabajo, Peru) Bank provides savings and payments services but not loans (Post Office Savings Banks) Mainstream banks offer: low cost of funds, known brand, branch infrastructure, technology, connection to payment systems.

15. Breakthrough 8. Create a Supportive Policy Environment Basic Minimum Conditions for Microfinance to Operate Stable macroeconomic and political situation Liberalized financial sector with quality supervisors Microfinance Friendly Microfinance-Specific Concerns No interest rate caps – market-determined Government respects its role as rule-setter, not service provider May have special categories for microfinance Forward Looking Policies & Regulations Keep Pace with New Developments Policymakers pursue access to financial services for all as goal Regulators work with industry to ensure security for new technologies such as cell phones Regulators and industry cooperate to ensure consumer protection A country’s policy environment may determine whether or not microfinance takes off.