1. Links between Banks & Non-Banks to promote Access to Financial Services for the Poor Douglas Pearce, CGAP ABA Annual Meeting 2003 San Francisco, August 10, 2003

2. 2 Banks and Microfinance lBanks have significant strengths as vs. specialist non-bank microfinance institutions l Wider range of financial services l Existing infrastructure & systems l Access to funds

3. 3 Banks and Microfinance lBut: l May not view poorer clients as attractive l Lack market knowledge l Inappropriate methodologies/services l Inflexible procedures l Attitudinal and career factors l Bank branches may not be viable lNon-bank financial institutions (NBFIs): l can be more flexible, innovative, closer to microfinance clients, more motivated

4. 4 Links between Banks and NBFIs offer a way forward

5. 5 Links between Banks & NBFIs can take the form of: Merger or takeover Loan/Credit Facility Sharing/renting facilities NBFI clients accessing bank services Bank contracting NBFI to conduct operations Banks providing front or back office functions Bank buying NBFI portfolio Bank creates Service Company Strategic Alliances Finance Ownership-based

6. 6 Links between Banks & NBFIs can take the form of: Merger or takeover Loan/Credit Facility Sharing/renting facilities NBFI clients accessing bank services Bank contracting NBFI to conduct operations Banks providing front or back office functions Bank buying NBFI portfolio Bank creates Service Company Strategic AlliancesOwnership-based Finance

7. 7 Bank providing Loan or Credit Facility lNBFIs = good SME clients lBank financing quicker to access & in local currency Bosnia: direct Bank-NBFI lending lMicrofinance NBFIs have lending arrangements with >4 banks Moldova: Bank lending to NBFIs, with ‘guarantee’ from NBFI network lMAIB lends to savings & credit associations (SCAs) lMoldova Microfinance Alliance creates & supports/monitors SCAs

8. 8 Constraints to Banks financing NBFIs lShort-term and high cost lNBFI Collateral lBanks may lack skills to assess risk presented by MF portfolio lReporting & financial management by NBFIs may not be acceptable lLegal and tax constraints to linkages lLack of trust/poor communication

9. 9 Constraints to Banks financing NBFIs: Responses lComplementary sources of funds lTechnical assistance & tools for banks in assessing NBFI risk lTechnical assistance, CGAP tools, to assist NBFIs in reporting, negotiating etc lMore conducive legal environment lPromote bank-NBFI communication and links [www.mixmarket.org]

10. 10 (Microloan) Service Company lProvides loan origination & administration services to a bank lUses specialized microfinance methodologies and staff lSelects clients & monitors loans, but loans on bank’s books lCan take advantage of bank’s capacity and services lIs not a financial entity, therefore easier to set-up lAllows for transparent relationship lMost appropriate for: l Banks with large branch networks l Banks that wish to expand into microfinance market l Banking sectors where strong competition for SME clients

11. 11 Sogesol, Haiti lLoan service company to Sogebank lSogesol originates & manages loans lMini-branches in or near Sogebank branches lSogebank books loans, providing teller function and support services lSogebank owns 35% of Sogesol lPortfolio $3.2 million, 6,500 active clients, av. loan balance $500

12. 12 Conclusions lBank-NBFI links offer way forward to scale, & financial services ‘for all’ lIn order to promote Bank-NBFI links: l Require NBFI reporting in line with good practice & IAS l Wean NBFIs off dependence on donor funds and don’t ‘crowd-out’ banks l Address any legal and tax constraints l Help ‘broker’ and facilitate linkages – and not just with guarantees…

13. 13 Further CGAP Resources include: Consensus Principles on Regulation & Supervision of Microfinance adopted by CGAP’s 29 member agencies in September 2002 Glossary of standard (micro)financial terms, ratios & adjustments agreed by leading donors and microfinance assessment/rating agencies Microfinance orientation for Central Bankers and Supervisors www.cgap.org www.microfinancegateway.org www.mixmarket.org