An index and study by The Economist Intelligence Unit
Global microscope on the microfinance business environment 2013
Supported by Global microscope on the microfinance business environment 2013
About this report
This report outlines the fi ndings of The Economist Intelligence Unit’s in-depth analysis of the microfi nance business environment in 55 countries. The index that underlies this report allows countries and regions to be compared across two broad categories: Regulatory Framework and Practices, which examines regulatory and market-entry conditions, and Supporting Institutional Framework, which assesses business practices and client interaction. The Microscope was originally developed for countries in the Latin American and Caribbean region in 2007 and was expanded into a global study in 2009. Most of the research for this report, which includes surveys, interviews and desk analysis, was conducted between June and July 2013. This year’s Microscope builds on last year’s study and analyses annual trends according to the new methodology implemented in 2011. This work was supported by fi nancing from the Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank Group; CAF— development bank of Latin America; the Center for Financial Inclusion at Accion and Citi Microfi nance.
The complete index, as well as detailed country analysis, can be viewed on these websites: www.eiu.com/microscope2013; www.fomin.org; www.caf.com/es/mipyme; www.centerforfi nancialinclusion.org and www.citimicrofi nance.com.
1 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
For further information, please contact:
Economist Intelligence Unit CAF banco de desarrollo de América Latina Lucy Hurst, Project Director: Dirección de Promoción de PYME y Microempresas [email protected] Manuel Malaret, Director: Leo Abruzzese, Global Forecasting Director and [email protected] / +58 212 209 2060 Project Consultant: Francisco Olivares, Principal Officer: [email protected] [email protected] / +58 212 209 6579 Romina Bandura, Project Manager: Saskia Luengo, Communications Officer: [email protected] [email protected] / +58 212 209 2353 Jimena Serrano, Analyst: [email protected] Holly Donahue, Project Marketing Manager, Center for Financial Inclusion at Accion [email protected] Elisabeth Rhyne, Managing Director: [email protected] Eric Zuehlke, Communications Director: Multilateral Investment Fund [email protected] / +1 202 393 5113 Inter-American Development Bank Sergio Navajas, Senior Specialist: Citi Microfinance [email protected] / +1 202 623 3268 Citi Microfinance team: Verónica Trujillo, Consultant– Access to Finance: [email protected] [email protected] / +1 202 312 4084 Alejandra Viveros, Head of Communications: [email protected] / +1 202 312 4074
The views and opinions expressed in this publication are those of The Economist Intelligence Unit and do not necessarily reflect the official position of the MIF, CAF, Center for Financial Inclusion at Accion or Citi Microfinance.
2 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
About The Economist Intelligence Unit About CAF The Economist Intelligence Unit is the business CAF—development bank of Latin America—has the information arm of The Economist Group, publisher mission of stimulating sustainable development of The Economist. Through a global network of and regional integration by fi nancing projects in more than 350 analysts and contributors, we the public and private sectors, and providing continuously assess and forecast political, technical co-operation and other specialised economic and business conditions in more than services. Founded in 1970 and currently with 18 200 countries. As the world’s leading provider of member countries from Latin America, the country intelligence, we help executives, Caribbean, and Europe, along with 14 private governments and institutions by providing timely, banks, CAF is one of the main sources of reliable and impartial analysis of economic and multilateral fi nancing and an important generator development strategies. For more information, of knowledge for the region. For more information, visit www.eiu.com. visit www.caf.com.
About the Multilateral Investment Fund About the Center for Financial Inclusion at The Multilateral Investment Fund (MIF), a member Accion of the Inter-American Development Bank Group, The Center for Financial Inclusion at Accion (CFI) supports economic growth and poverty reduction helps bring about the conditions to achieve full in Latin America and the Caribbean through fi nancial inclusion around the world. Constructing encouraging increased private investment and a fi nancial inclusion sector that reaches everyone advancing private-sector development. It works with quality services will require the combined with the private sector to develop, fi nance, and efforts of many actors. CFI contributes to full execute innovative business models that benefi t inclusion by collaborating with sector participants entrepreneurs and poor and low-income to tackle challenges beyond the scope of any one households; partners with a wide variety of actor, using a toolkit that moves from thought institutions from the private, public and non-profi t leadership to action. For more information, visit sectors; evaluates results; and shares lessons www.centerforfi nancialinclusion.org. learned. The MIF is a laboratory for testing pioneering, market-based approaches to About Citi Microfi nance development, and an agent of change that seeks to Working across Citi’s businesses, product groups broaden the reach and deepen the impact of its and geographies, Citi Microfi nance serves 150 most successful interventions. For more microfi nance institutions (MFIs), networks and information, visit www.fomin.org. investors as clients and partners in nearly 50 countries with products and services spanning the fi nancial spectrum—from fi nancing, access to capital markets, transaction services and hedging foreign exchange risk, to credit, savings, remittances and insurance products—to expand access to fi nancial services for the underserved. For more information, visit www.citimicrofi nance.com.
3 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Acknowledgements
The following researchers, country analysts and microfi nance specialists contributed to the report. We thank them for their contribution: Rodrigo Aguilera, Diane Alarcon, Federico Barriga, Ron Bevacqua, Naubet Bisenov, Ana Maria Camacho, Marco De Natale, Chris Dooley, Mark Fitzpatrick, Duncan Innes-Ker, Tom Felix Joehnk, Bernard Kennedy, Haris Komic, Paulius Kuncinas, Victoria Lai, Joseph Lake, Veronica Lara, William Lee, Angelah Madara, Dinka Majanovic, Sebastien Marlier, Scott Martin, Susana Martinez, Trevor Mugwanga, Robert Powell, Amila de Saram, Deen Sharp, Bjorn Van Wees, Martin Vieiro and Dana Vorisek. We would also like to thank the following independent consultants: Mike Kenny, Paul Kiestra, Vanesa Sanchez, Will Shallcross, Tom Scruton and Nick Wolf.
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Contents
Executive summary 6 Eastern Europe and Central Asia 41 Trinidad and Tobago 57 Microscope indicators 9 Armenia 41 Uruguay 58 Key findings 10 Azerbaijan 41 Venezuela 58 Regional findings 12 Bosnia and Herzegovina 42 Overall microfinance business 18 Georgia 42 Middle East and North Africa 60 environment rankings Kyrgyz Republic 43 Egypt 60 Rankings by category 19 Tajikistan 43 Lebanon 60 In Focus 22 Turkey 44 Morocco 61 From micro-credit to financial 22 inclusion Yemen 61 The regulatory challenge 23 Latin America and the Caribbean 45 Argentina 45 Sub-Saharan Africa 63 Microscope country profiles 28 Bolivia 45 Cameroon 63 Brazil 46 Democratic Republic of Congo 63 East and South Asia 29 Chile 47 Ghana 64 Bangladesh 29 Colombia 47 Kenya 65 Cambodia 30 Costa Rica 48 Madagascar 66 China 31 Dominican Republic 49 Mozambique 67 India 31 Ecuador 49 Nigeria 68 Indonesia 32 El Salvador 50 Rwanda 68 Mongolia 34 Guatemala 51 Senegal 69 Nepal 35 Haiti 51 Tanzania 70 Pakistan 36 Honduras 52 Uganda 71 Philippines 37 Jamaica 53 Sri Lanka 37 Mexico 53 Appendix: Methodology and 72 sources Thailand 38 Nicaragua 54 Vietnam 39 Panama 55 Paraguay 55 Peru 56
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Executive summary
After years of expansion, punctuated by the operating conditions for microfi nance in 55 setbacks of the 2008 global fi nancial crisis and the countries. MIF, CAF, the Center for Financial subsequent over-indebtedness crises in some Inclusion at Accion and Citi Microfi nance leading microfi nance markets, global microfi nance commissioned and funded The Economist continues on its growth trajectory. What began as Intelligence Unit’s fi fth annual effort to assign micro-credit some 40 years ago has evolved to ratings to microfi nance markets in these 55 include a broader portfolio of fi nancial services, countries. The Microscope 2013 also marks the and this portfolio is still expanding, both in terms seventh annual assessment of markets in Latin of services and client reach. Today’s leading America and the Caribbean. microfi nance institutions (MFIs) are leveraging the Over the years, the popular consensus on micro-credit platform to expand their offering of microfi nance has shifted across the spectrum with fi nancial services to a broadening population base. an anti-poverty silver bullet at one end and a threat In doing so, they are encountering other players in to the fi nancial solvency of the global poor at the this expanding industry, from traditional banks to other. The work of MFIs has pushed the developing mobile-communications companies. To explore this world closer to full fi nancial inclusion, thus evolution, the Microscope 2013 report features a reinforcing their role as a central player in poverty- special article that examines three cases from reduction strategies. Full fi nancial inclusion is the around the globe that highlight the ways in which next frontier for microfi nance—delivering a full fi rms have shifted toward broader fi nancial suite of fi nancial services to the world’s inclusion, demonstrate common characteristics disadvantaged populations brings with it among a diverse range of providers and describe a challenges similar to those MFIs faced offering potential structure for a more inclusive fi nancial- micro-credit to entrepreneurs at the base of the services ecosystem. pyramid. The cost of reaching ever-poorer clients is This shift toward broader fi nancial inclusion is a challenge. Nevertheless, MFIs, banks and their refl ected in the trends in innovative, yet prudent, partners are developing more effi cient methods of expansion and maturing client protection explored servicing their clients. Correspondent banking, in the Global microscope on the microfi nance agency relationships and mobile banking all offer business environment 2013 research programme. lower-cost ways for all types of fi nancial-service The Microscope 2013 also goes beyond these trends providers, including insurers, to increase the reach in its analysis to provide a comprehensive picture of credit, savings and payment services. of microfi nance, benchmarking the regulatory and Mobile banking is at the leading edge of
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fi nancial inclusion. Kenya’s now famous M-Pesa dispute-resolution systems. Transparent pricing for mobile-money service has inspired MFIs and microfi nance is fundamental to making sure that fi nancial-services providers in other countries, clients have the information to make the right while a related service, M-Shwari, now offers choices as they seek fi nancial inclusion. Top millions of Kenyans savings and short-term credit performers on pricing transparency in the on a mobile platform. Both services are Microscope 2013 (Armenia, Bolivia, Bosnia and contributing to a virtuous cycle of fi nancial and Herzegovina, and Peru) are also home to technological innovation in Nairobi. A number of competitive and dynamic microfi nance markets. The business incubators, accelerators and investors Microscope 2013 also examines dispute-resolution have based themselves in Kenya, forming part of a mechanisms to ensure that microfi nance clients burgeoning start-up scene. Impact investors have access to timely and affordable resolutions in including Accion Frontier Investments Group, the event of disagreements with lenders. No Grameen Pioneer Fund and Invested Development country achieved a perfect score, but nine countries are funding innovations in poverty reduction that improved compared to last year, including India, leverage the network effects of fi nancial inclusion. where a combination of government-led and MFI- In the best cases, MFIs’ renewed push toward led solutions has increased the effectiveness of full fi nancial inclusion incorporates the lessons dispute-resolution mechanisms for clients following that the microfi nance industry has learned over the the 2010 over-indebtedness crisis. On average, past four decades. The current edition of the clients in Latin America and the Caribbean had Microscope , documents, among other trends, how access to better-functioning dispute-resolution the inclusion of microfi nance-related information systems than in other regions. in credit bureaus in many countries is correcting Covering the 12 months to July 2013, the information asymmetry to reduce the incidence of Microscope 2013 evaluates the microfi nance over-indebtedness and multiple lending in industry across two distinct categories: Regulatory saturated micro-credit markets. Credit bureaus that Framework and Practices, including legal include positive information even help borrowers recognition for MFIs, national regulatory and to access new fi nancial services by providing a supervisory capacity, policies towards deposits and more complete picture to potential lenders.1 2 market distortions; and Supporting Institutional Incentivising borrowers’ good behaviour is one Framework, especially fi nancial-reporting standards step towards ensuring their inclusion in the global and transparency, credit bureaus, pricing, dispute fi nancial system. Yet, MFIs must be sure that their resolution and policies for offering microfi nance clients enter on a level playing fi eld, guaranteeing through new agents and channels. The index also that fi nancial products assist in reducing poverty, takes into account whether, and to what extent, not perpetuating it. The Microscope 2013 grades political shocks have affected the demand for national microfi nance business environments on microfi nance services and general country two standards of client protection to promote fair conditions. treatment of microfi nance customers and a healthy The Microscope 2013 used the same set of microfi nance industry: transparent pricing and indicators and methodology as the 2012 study, and an effort was made to increase consultations with 1 Barron, John M., and Michael Staten (2003). “The Value of Comprehensive Credit Reports: Lessons from the U.S. Experience.” MFIs, networks, regulators, consultants and http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.199.3397&r investors. We again interviewed a diverse group of ep=rep1&type=pdf stakeholders in order to include recent 2 Powell, Andrew, Nataliya Mylenko, Margaret Miller, and Giovanni Majnoni (2004).“Improving Credit Information, Bank Regulation and developments and policy changes in each country. Supervision: On the Role and Design of Public Credit Registries.” http://elibrary.worldbank.org/docserver/download/3443.pdf?expires=1 As in previous years, we conducted an online 378390529&id=id&accname=guest&checksum=7E71EDC5E82A638F777D0 37556CF1A3E survey to incorporate the views of an expanded
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community of microfi nance specialists. Lastly, we greater availability of fi nancing options for the contacted a broad range of individual microfi nance poor, from those with considerable work to do. The networks to gain additional in-country expertise index also fi lls an important data gap by and receive feedback on the study. quantifying the state of the regulatory and Although it is impossible to capture every operating environment of microfi nance. Lastly, the dimension of a country’s microfi nance index is intended to spur dialogue about sound environment, the index provides a means of policy and practice that will encourage positive distinguishing those countries with support for a reform in the microfi nance industry.
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Microscope indicators
The three categories for this index and the 12 Scoring methodology: Each of the fi rst ten scoring indictors into which they are subdivided are as criteria are scored from 0 to 4, where 4=best and follows: 0=worst. Once indicator scores have been assigned, these are aggregated to produce an overall scoring Regulatory Framework and Practices range of 0-100, where 100=best. Overall scores and Regulation and supervision of microcredit rankings are calculated by attributing a 50% portfolios weight to Regulatory Framework and Practices and Formation of regulated/supervised microcredit Supporting Institutional Framework category institutions scores. Formation/operation of non-regulated microcredit institutions Finally, a third category, Stability, is added to the Regulatory and supervisory capacity for index to adjust each country’s score for political microfi nance (including credit and other instability. This category evaluates political shocks services) to the microfi nance sector and general political Regulatory framework for deposit-taking stability, which are combined into an aggregate score between 0 and 100. The index consults the Supporting Institutional Framework following formula in order to calculate the score Accounting transparency reduction for countries undergoing political Client protection: transparency in pricing instability: Client protection: dispute resolution Credit bureaus Percentage reduction to Supporting Institutional Policy and practice for fi nancial transactions Framework = [100 – Stability] x 0.25 through agents For a detailed description of the scoring Adjustment Factor: Stability methodology, please refer to the Appendix. Political shock to microfi nance Political stability
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Key fi ndings
Marking its sixth year at the top of the Microscope MFIs. Philippines ranked number four, as it ranking, Peru maintained its number one position, improved its score for credit bureau effectiveness demonstrating a well-equipped regulatory and reliability and increased usage of branchless environment, a competitive and innovative market, banking. While still at an early stage, the and leadership on both measures of client Philippines’ microfi nance credit bureau is growing, protection assessed by the study. IFRS as more MFIs join and share borrower data. In (International Financial Reporting Standards) have addition, widespread agent-banking options, been implemented and the banking regulator including micro-insurance agency relationships, oversees nearly the entire microfi nance-loan also boosted Philippines’ score. portfolio. A recent law regulating electronic money Kenya posted a lower overall score in 2013, held created a new class of transaction services back by a lack of oversight of compulsory savings at companies that opens up opportunities to extend non-regulated MFIs. However, credit-bureau fi nancial services on electronic platforms. improvements were a bright spot, as sharing of The remaining top fi ve countries from 2012 also positive and negative information on borrowers maintained their positions in 2013, although increased, but MFIs representing more than half of Bolivia’s and Kenya’s overall scores declined, while borrowers still need to be included in the system. Pakistan and Philippines sustained or improved Meanwhile, credit-bureau improvements also their scores on all indicators. At number two, contributed to Cambodia’s continued rise. After Bolivia’s score declined due to changes in its entering the top ten last year, the country jumped regulatory environment. A long-anticipated two more spots this year to number six, just behind fi nancial-services law took effect at the time of this Kenya. Cambodia’s credit bureau completed its fi rst analysis and included interest-rate caps and loan year of operation and MFIs have recognised the quotas for specifi c productive sectors. At the same bureau for helping them avoid lending to over- time, the reform will formalise all microfi nance indebted clients. In addition, an arbitration centre activity and expand fi nancial access. launched and could provide an alternative for Nearly tied with Bolivia, Pakistan followed at microfi nance dispute resolution. number three. The country saw the incorporation At the other end of the spectrum, Vietnam again of two new microfi nance banks (MFBs) last year placed last in the Microscope 2013 ranking, despite and the nationwide rollout of the microfi nance improvements that include the establishment of credit bureau after a successful pilot programme. the fi rst private credit bureau and a push toward The expansion of the bureau includes extensive mobile banking and electronic transactions. training and technical and fi nancial support for However, neither of these improvements
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specifi cally targeted microfi nance. Also at the improving overall scores than declining scores (30 bottom of the ranking, Haiti’s score dropped improving scores versus 19 declining scores), and several points as a result of weak governing the improvements outpaced the declines, institutions and a lack of regulation and demonstrating, on average, an enhanced global supervision of deposit-taking non-governmental environment for microfi nance compared to last organisations (NGOs). year. However, most of this year’s improvements Azerbaijan’s score increased the most, by 14 affected the Supporting Institutional Framework for points, with improvements in transparent pricing, microfi nance, while scores on Regulatory dispute resolution, use of credit bureaus and Framework and Practices actually declined overall. agent-based fi nancial transactions, pushing the Increased client-protection activities, the country’s ranking to 15th overall from 33rd last expansion of mobile banking and growth of credit year. In contrast, Ecuador fell 12 places, to 23rd, as bureaus drove the improvement in the Supporting non-regulated micro-credit institutions face more Institutional Framework. However, credit-bureau obstacles to operate, along with a loss of technical improvements were largely confi ned to countries expertise in the credit information system (CIS) that already had at least some basic reporting. As associated with the transfer of the private credit was the case last year, one-fi fth of countries in this bureau to a new public system. analysis still do not have a functioning credit Microscope 2013 showed more countries with bureau.
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Regional fi ndings
East and South Asia MFI operations. Elsewhere in the region, the microfi nance The 12 countries of the Asian region (seven in East industry continued to perform well in this year’s Asia and fi ve in South Asia) again ranked third analysis. Pakistan (3rd), Philippines (4th) and among the Microscope’s fi ve regions in overall Cambodia continued in the global top ten, with score, owing mainly to a relatively strong Cambodia improving from eighth to sixth place. A performance in Regulatory Framework and functioning credit bureau covering 80% of Practices, with the second-highest score in this microfi nance loans and a nascent dispute- analysis. As a whole, the Asian region had the resolution system were Cambodia’s main third-highest score on Supporting Institutional improvements. Pakistan’s credit bureau also shows Framework and was the third-strongest in terms of coverage of more than 90% of microfi nance clients. Stability. Overall, the region’s political stability A comprehensive package of technical and fi nancial improved. Political interference continues in Sri assistance has been fundamental to the success of Lanka’s microfi nance industry, but strong demand Pakistan’s credit-reporting system. In Philippines, has sustained the sector’s dynamism. In India, the similar assistance to expand the existing bureau’s wider effects of the Andhra Pradesh crisis have coverage of MFIs could increase its score next year. subsided and microfi nance institutions (MFIs) do India and Mongolia both improved their not consider political interference to be a major rankings, India from 22nd to 16th and Mongolia risk in the future. However, banks that bailed out from 25th to 21st. Scores in both countries were MFIs during the crisis may still face write-offs.1 The boosted by improvements in the dispute-resolution country’s micro-loan portfolio increased by 30% in systems for microfi nance clients. Vietnam remained 2012, refl ecting the strength of the industry’s at the bottom of the Microscope 2013 ranking, recovery. Nonetheless, in other parts of the region, while Thailand moved out of the bottom fi ve. Both political factors could pose a threat to countries improved their credit information microfi nance. In Nepal, regional-autonomy systems (CIS): in Thailand, all major fi nancial movements in parts of the country have institutions (FIs) are members of the National contributed to the politicisation of some Credit Bureau, and in Vietnam regulators licensed microfi nance workers’ unions that could disrupt the fi rst private credit bureau. On average, the Asian region leads globally in 1 Bhoir, Anita (August, 2013), “Banks may write off Rs 7200 crore debt policy and practice for fi nancial transactions through to microfi nance institutions.” Internet article accessed August 2013, http://economictimes.indiatimes.com/news/news-by-industry/banking/ agents, such as mobile and correspondent banking. fi nance/banking/banks-may-write-off-rs-7200-crore-debt-to- microfi nance-institutions/articleshow/21872024.cms Pakistan and Philippines lead the region, with four
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partnerships between mobile operators and MFIs in 30th last year. Kyrgyz Republic’s declining score Pakistan and electronic wallets and correspondent resulted from forthcoming interest-rate caps that relationships for micro-insurance in Philippines. would disadvantage MFIs in competition with the While such developments have targeted banking sector. In addition, Kyrgyz Republic lacks microfi nance and are driving fi nancial inclusion in formal dispute-resolution mechanisms. Armenia’s these two countries, elsewhere in the region mobile overall score was steady, while Bosnia and banking has been limited to commercial banks Herzegovina, Tajikistan and Turkey declined (Bangladesh and Indonesia, for example). Mobile- slightly. With no regulatory or institutional- banking options for microfi nance clients are lacking framework improvements this year, Turkey in China and are in their early stages in India. continues as the lowest-ranked ECA country, tied with Sri Lanka and Trinidad and Tobago for 50th Eastern Europe and place in the global ranking. Microfi nance in Turkey continues to be a marginal activity in a well- Central Asia regulated, technologically savvy banking sector. On average, scores rose in Eastern Europe and Only two MFIs exist, and the regulatory Central Asia (ECA), but countries in the region environment limits the entrance of new players. showed both the biggest gains and the largest Transparency is a strong point in the region. On declines. Improvements in Azerbaijan and Georgia, average, ECA countries posted the highest scores with two of the largest score increases in the for both accounting transparency and transparent Microscope 2013, pushed up overall scores, while pricing. Accounting transparency measures the Kyrgyz Republic posted the largest score decline in extent to which MFI accounting standards conform the study. Compared to other regions, ECA’s overall to international norms and transparent pricing is score was second to last in this ranking, but the an important measure of client protection. In region performed well on the Supporting Armenia, the central bank has developed a Institutional Framework category, outscoring every fi nancial-services shopping tool designed to help region except Latin America and the Caribbean. The clients compare competing products from different region posted the second-lowest scores for both FIs. Azerbaijan’s central bank has issued rules Regulatory Framework and Practices and Stability, promoting interest-rate transparency and the only scoring higher than the Middle East and North national MFI association has augmented these Africa in both categories. rules with a voluntary code of ethical standards for As in previous years, ECA’s Regulatory Framework regulated micro-lenders. and Practices score was pushed down by weak ECA countries continue to lag other regions in scores on the formation/operation of non-regulated mobile and branchless banking. The region’s score micro-credit institutions (lowest of all regions) and for policy and practice for fi nancial transactions the regulatory framework for deposit-taking through agents has improved, but is the lowest in (second-lowest). In four of the seven ECA the Microscope 2013. Commercial banks in Bosnia countries, regulated MFIs cannot accept deposits. and Herzegovina offer electronic and telephone- By contrast, all countries covered in the Microscope banking services, but MFIs have not adopted these 2013 in East and South Asia and Sub-Saharan technologies. In Georgia a newly registered Africa allow regulated MFIs to accept deposits. Of payment-service provider intends to launch a the ECA countries where MFIs can accept deposits, mobile-money solution later this year. Cash-in only Tajikistan’s regulations are not considered terminals and point-of-sale (POS) systems are on overly burdensome. the rise in Azerbaijan, increasing electronic Kyrgyz Republic posted the largest score decline transactions, but in Kyrgyz Republic the regulatory in the study, seven points, dropping it to 38th from system hampers mobile-banking innovation.
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Latin America and the pay movement and political interference. Interest Caribbean rates are not subject to government-imposed caps, and rules, like capital requirements, have been Latin America and the Caribbean (LAC) again led fl exible enough for existing MFIs to make the the other regions in the Microscope 2013 with the transition to the new framework. highest overall regional score, leading on In contrast, Bolivia’s recently passed Financial Supporting Institutional Framework, but ranking Services Law introduces formal interest-rate caps third on Regulatory Framework and Practices. In and quotas on loans, which will also put a strain in fact, only fi ve of the 21 LAC countries (Paraguay, the regulatory and supervisory capacity of the Honduras, Costa Rica, Guatemala and Haiti) scored Autoridad de Supervisión del Sistema Financiero higher in the Regulatory Framework category than (ASFI, the Financial System Supervisory Authority). on Institutional Framework. Latin America and the Moreover, a major tax change has hit the Bolivian Caribbean is also the most politically stable region microfi nance industry, which has limited the for microfi nance, scoring nearly 15 points higher in profi tability of regulated MFIs. Ecuador’s new the Stability category than second-placed East and regulatory framework for “popular” fi nance has South Asia. created uncertainty for MFIs. All lenders involved LAC countries captured half of the slots in the in popular fi nance are now subject to formal global top ten. Peru and Bolivia led the global regulation and interest-rate caps. Unlike rankings in fi rst and second place, respectively, Nicaragua, it is uncertain to what extent the new while Colombia, El Salvador and Dominican regulations will be tailored to match the size of the Republic also made it into the top ten. Peru’s institutions overseen. The regulatory burden could microfi nance market features low barriers to entry increase operating costs, while interest-rate caps and a competitive marketplace, characterised by limit profi tability, likely curtailing smaller MFIs’ adequate supervision and solid credit bureaus. ability to offer services to the lowest-income Although Bolivia again ranked 2nd overall, segments of the population. There are similar changes in the regulatory environment have concerns among MFIs in El Salvador, where newly negatively affected its score. Improvements in established interest-rate caps could force some pricing transparency, fi nancial transactions MFIs into bankruptcy and limit credit availability. through agents, and regulatory capacity in At the same time, Ecuador’s transfer of credit- Dominican Republic pushed the country into the bureau responsibilities from the private to the global top ten this year. Panama nearly tied with public sector has created the resulted in the loss of Dominican Republic to remain in the top ten but expertise and is likely provoke the loss of diffi culty starting new non-governmental information while the transfer is on-going. The organisation (NGO)-MFIs and uncertainty on technical capacity of the private bureau has been supervision of co-operatives contributed to the diminished by the departure of many of its country’s slightly declining score. A weak employees prior to the transition. Despite regulatory environment in Mexico also pushed it developments in Ecuador, LAC leads all other out of the top ten, as evidenced by the regions on the inclusion of microfi nance postponement of regulation of non-profi t savings information in credit bureaus. and loan co-operatives (S&Ls). Governments in several countries improved A number of LAC countries implemented regulation of fi nancial agents, creating regulatory changes during the past year, with both opportunities for further innovation in positive and negative implications for the correspondent and mobile banking, but, to date, microfi nance operating environment. Nicaragua’s implementation of these new services is still at the microfi nance regulatory framework has increased pilot stage. New regulations allow FIs in the confi dence in the industry following a 2009-10 no- Dominican Republic to increase market penetration
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by offering banking services via authorised agents, posted the lowest overall score and the lowest including hotels, pharmacies and supermarkets. scores in all three categories. Scores in the Since 2011, Nicaragua’s national fi nancial Regulatory Framework and Practices category were regulator has built a regulatory system for unchanged. In general, regulation creates electronic and mobile banking, but, to date, it still obstacles to micro-credit provision in the region, does not cover non-regulated MFIs. Nonetheless, although the formation of regulated MFIs is easier larger MFIs are working with mobile operators to in Morocco and Yemen. In fact, the region posted expand their services via mobile-telephone the second-highest average score for formation of banking. Recent regulations in Panama provide the regulated/supervised micro-credit institutions, just framework for mobile and other forms of electronic behind Sub-Saharan Africa. However, deposit banking, and use of agent banking is higher than taking at regulated MFIs is a weak spot: MFIs regional averages. Moreover, Uruguay has also cannot accept deposits in Lebanon and Morocco, recently enacted regulations on correspondent and regulations are burdensome in Egypt and banking. Yemen. New regulations in client protection increased The regulatory environment in MENA has seen pricing transparency in El Salvador and enhanced few changes during the past year. Notably, consumer rights in dispute resolution in Honduras. Morocco updated its Microfi nance Associations Law While El Salvador’s Usury Law capped interest and additional rules and regulations are rates, it also abolished commissions related to forthcoming. The main impact of the Law has been lending, creating a more transparent pricing to encourage consolidation among smaller micro- system for consumers. As a whole, the LAC region credit associations (MCAs). However, some ranks third on transparent pricing. microfi nance professionals have criticised the Law Improvements to dispute resolution in Honduras because it does not assist MFIs in transforming into have shortened response times, removed commercial banks, nor does it assist MFIs that requirements that only allowed for in-person claim would prefer to remain NGOs. In Egypt, a long- submission and increased reporting requirements awaited update to the 2002 NGO Law that also regarding disputes and their resolutions. LAC leads regulates MFIs operating as NGOs is still under globally on dispute resolution; all countries in the consideration. Legislation specifi c to the region have a dispute-resolution mechanism, microfi nance industry has been delayed repeatedly although the resources assigned to these due to political turmoil. mechanisms vary by country. Peruvian MFIs must At 35th, Morocco is the highest-ranked MENA publish client-dispute statistics online, while both country in Microscope 2013, moving up three Brazil and Trinidad and Tobago use ombudsmen in places from last year after improvements in dispute the regulated fi nancial sector to help resolve resolution. Lebanon held steady at 40th in the disputes. Mexico’s fi nancial services consumer- global ranking, while Yemen increased one place to protection agency offers both conciliation and 44th due to its improving security and rebounding arbitration services, and a pending banking-sector microfi nance industry. Egypt’s score dropped reform would increase the agency’s ability to issue slightly, but its ranking improved to 49th from sanctions and resolve disputes. 50th last year. Political instability continues to hamper further development in the microfi nance Middle East and North Africa industry, delaying regulatory reforms. Morocco is the most stable MENA country in this Although the four countries of the Middle East and study. Yemen continued to improve its stability for North Africa (MENA) region showed slight microfi nance operations, as the security situation improvements in the Supporting Institutional stabilised in the country and MFIs began to return Framework and Stability categories, the region still to areas they had previously considered off-limits.
15 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
By the end of 2012, the number of microfi nance just ahead of East and South Asia. The region clients in the country had risen by 47.8% compared posted the highest score in the Regulatory to the beginning of the year. The political Framework and Practices category, but scored situations in Egypt and Lebanon reduced their second-lowest, only beating the Middle East and stability scores slightly, but Yemen’s gains meant North Africa, in the Supporting Institutional MENA’s regional average improved. Framework category. As a whole, SSA was slightly Client protection in the region is still in the early more stable than East and South Asia, but both stages. Morocco’s score on dispute resolution scored well below Latin America and the Caribbean improved as a network of government-sponsored in Stability. local tribunals have been able to provide more Overall scores in SSA increased this year, but rapid resolution of complaints than the traditional regional leader, Kenya, edged lower, while still court system. In addition, a national code of ethics maintaining its fi fth-place ranking. Unregulated for MFIs obliges them to increase client-protection savings mobilisation by some NGO-MFIs and inter- activity. MENA’s performance on pricing communal violence that affected some MFI transparency is a weak spot for the region. None of operations reduced Kenya’s score, despite the countries in the region imposes legal improvements in credit-bureau usage and an requirements for interest-rate transparency for increase in overall political stability. Uganda (joint micro-borrowers, and transparency efforts are 8th) was the second SSA country in the global top entirely voluntary. In Egypt, MFIs do not routinely ten this year, with a score buoyed by a favourable disclose interest rates, but a majority of MFIs in political and macroeconomic environment for Lebanon do voluntarily disclose rates. Yemen’s microfi nance. Ghana also improved its score this central bank is considering regulations that would year, rising from 15th to 13th, placing it within mandate more transparent pricing in microfi nance. striking distance of the top ten. Improvements in Lebanon is the only country in the region pricing transparency and usage of credit bureaus without a credit bureau available for MFIs. In resulted in the increase, despite a score decrease Egypt, Morocco and Yemen, regulated MFIs have related to the slow development of mobile-banking some level of access to existing bureaus or access options in the country. to bureaus specifi cally focused on microfi nance. SSA leads the world in Regulatory Framework and Yemen’s microfi nance CIS lacks complete Practices, garnering the highest scores for the information, but participation in bureaus in regulation of micro-credit portfolios, the formation Morocco and Egypt is higher and prevents multiple of regulated MFIs and regulation for deposit-taking borrowing. Mobile and correspondent banking is MFIs. In fact, all SSA countries in this analysis still in the pilot stage in MENA countries. In allow regulated MFIs to hold a range of deposits Lebanon, Internet and mobile communications without overly burdensome regulation. Deposit- remain expensive, but, in Yemen, two mobile taking MFIs in leading countries, including Kenya, microfi nance money-transfer services will soon be Madagascar, Senegal and Uganda, offer both available. Yemen’s central bank has not issued demand and term deposits to clients. Countries in regulations to keep pace with these innovations, the region continued to update their regulatory although it is consulting with the World Bank and frameworks in the past year, including changes in plans to do so by the end of 2013. Cameroon and Senegal that could negatively impact MFIs, and updates in Democratic Republic Sub-Saharan Africa of Congo, Nigeria and Tanzania that improve the microfi nance operating environment. MFIs in Sub-Saharan Africa (SSA) maintained its ranking as Cameroon face increased reporting requirements the second-highest-ranked region in Microscope from the Central African Banking Commission 2013, behind Latin America and the Caribbean and (CABC), but many MFIs will struggle to comply with
16 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
the quarterly reporting requirements because of transactions and savings and short-term credit limited access to electricity and the Internet. As a products via mobile devices. Kenya is the only result, the requirements are unlikely to be enforced country in the Microscope 2013 to receive the in the near term, but could inhibit MFI growth into highest possible score on policy and practice for rural or less-developed areas in the future. In fi nancial transactions through agents. Its regional Senegal the lowering of interest-rate caps in 2014 peers have lagged behind Kenya’s development of could limit the growth of small and medium MFIs. mobile banking. In other countries it is not clear The rate cap for MFIs will be reduced from 27% to whether regulation has helped or hindered the 24%. Not all MFIs respect the current 27% limit due development of mobile-banking services. The to high costs of operation in challenging areas, government of Ghana passed facilitating and small and medium MFIs will face diffi culties regulations early on, but the country’s score on operating at the 24% cap. However, larger MFIs this indicator has declined because mobile-banking that frequently receive fi nancing at preferential services are still in the pilot stage. However, rates from development agencies and commercial Uganda has nearly 9m mobile-money customers, banks will fi nd it easier to respect the new limit. while the industry is still unregulated. Meanwhile, Positive regulatory changes include the in the Democratic Republic of Congo, existing Democratic Republic of Congo’s new Microfi nance mobile infrastructure is an impediment to mobile- Law that will take effect in February 2014 and banking innovation. increase control mechanisms for lenders. In transparency in pricing, SSA lags most regions, Specifi cally, the Law limits unfair competition and except the Middle East and North Africa. Ghana was improves client protection. All three recognised the only country in the region to increase its score types of MFIs can offer credit, but only on transparent pricing this year. Ghana’s microfi nance companies can accept deposits. In participation in the Transparent Pricing Initiative Nigeria, the central bank issued revised supervisory has resulted in the publication of standardised guidelines that prioritise organic growth in the pricing data from 40 MFIs, covering 76% of micro- microfi nance industry; MFIs cannot apply directly borrowers in the country and has increased the for national licences without fi rst operating as local pricing information available to potential clients. In and state entities. In addition, the central bank has the remaining SSA countries, fewer than half of assumed a more proactive role in regulating MFIs MFIs comply with transparent-pricing regulations. and is using a risk-based approach to supervision. Ghana is also a leader in dispute resolution, along Similarly, Tanzania’s central bank is also shifting to with Nigeria. In Nigeria, the Consumer and a risk-based approach for MFI supervision and Financial Protection Division of the central bank decentralising responsibilities through supervisory and the Consumer Protection Council have helped branches in several regions in Tanzania. aggrieved customers receive refunds without Sub-Saharan Africa has been at the centre of the engaging in a lengthy judicial process. Nonetheless, development of mobile banking for microfi nance, in most other SSA countries, dispute-resolution especially in Kenya, where millions of mobile users mechanisms do not work well in practice. have access to extensive agent networks for
17 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Overall microfi nance business environment rankings
Weighted sum of category scores (0-100 where 100=most favourable)
Rank Country 2013 Score Change Rank Country 2013 Score Change 1 Peru 82.5 +2.7 29 Bosnia and Herzegovina 45.2 -0.1 2 Bolivia 69.8 -2.0 30 Mozambique 44.0 - 3 Pakistan 69.7 +2.3 31 Georgia 43.4 +9.7 4 Philippines 67.9 +4.6 32 Costa Rica 42.1 +2.4 5 Kenya 61.1 -1.7 33 Guatemala 41.4 - 6 Cambodia 60.3 +4.6 34 China 39.1 +4.7 7 Colombia 58.5 +2.5 35 Morocco 38.3 +4.6 =8 El Salvador 53.8 -2.5 36 Tajikistan 36.0 -0.3 =8 Uganda 53.8 +2.2 37 Madagascar 35.9 - 10 Dominican Republic 53.6 +7.5 38 Kyrgyz Republic 35.1 -7.0 =11 Panama 53.5 -0.1 39 Senegal 34.4 +0.3 =11 Paraguay 53.5 +1.5 40 Lebanon 33.3 -0.2 13 Ghana 53.3 +2.3 41 Bangladesh 32.8 - 14 Nicaragua 52.9 +9.0 42 Jamaica 31.8 +0.3 15 Azerbaijan 52.4 +14.0 43 Cameroon 31.7 +0.1 16 India 52.0 +6.3 44 Yemen 31.0 +0.6 17 Uruguay 51.5 +7.3 45 Argentina 28.8 - 18 Mexico 51.1 -2.5 46 Dem. Rep. of Congo 28.4 -0.1 19 Chile 49.9 -1.9 47 Nepal 28.3 -3.0 20 Brazil 49.1 -0.1 48 Thailand 27.6 +2.2 21 Mongolia 48.9 +4.7 49 Egypt 27.3 -0.1 22 Rwanda 48.4 -0.2 =50 Trinidad and Tobago 26.5 +2.4 23 Ecuador 48.3 -4.3 =50 Sri Lanka 26.5 -1.7 24 Nigeria 48.2 +4.8 =50 Turkey 26.5 -0.1 25 Tanzania 47.9 +1.4 53 Venezuela 26.1 +0.9 26 Armenia 47.4 - 54 Haiti 25.8 -3.3 27 Honduras 47.2 +0.9 55 Vietnam 25.6 +4.1 28 Indonesia 46.5 +2.2
18 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Rankings by category
Regulatory Framework and Practices (Weighted 50% in the overall index)
Rank Country 2013 Score Change Rank Country 2013 Score Change =1 Peru 80.0 - =28 Cameroon 45.0 - =1 Philippines 80.0 - =28 Chile 45.0 - =3 Pakistan 75.0 - =28 Costa Rica 45.0 - =3 Uganda 75.0 - =28 Guatemala 45.0 - =5 Cambodia 70.0 - =28 India 45.0 - =5 Kenya 70.0 -5.0 =28 Senegal 45.0 - =7 Bolivia 65.0 -5.0 =28 Tajikistan 45.0 -5.0 =7 Paraguay 65.0 - =28 Yemen 45.0 - =7 Tanzania 65.0 +5.0 =37 Bangladesh 40.0 - =10 Colombia 60.0 +5.0 =37 Dem. Rep. of Congo 40.0 - =10 Mongolia 60.0 - =37 Georgia 40.0 - =10 Rwanda 60.0 - =37 Uruguay 40.0 - =13 Azerbaijan 55.0 +10.0 =41 Armenia 35.0 - =13 Dominican Republic 55.0 +5.0 =41 Egypt 35.0 - =13 El Salvador 55.0 -5.0 =41 Lebanon 35.0 - =13 Honduras 55.0 - =41 Morocco 35.0 - =13 Madagascar 55.0 - =41 Nepal 35.0 - =13 Mozambique 55.0 - =41 Vietnam 35.0 - =13 Nicaragua 55.0 +10.0 =47 Bosnia and Herzegovina 30.0 -5.0 =13 Nigeria 55.0 +5.0 =47 Haiti 30.0 -5.0 =21 China 50.0 - =49 Argentina 25.0 - =21 Ecuador 50.0 -5.0 =49 Jamaica 25.0 - =21 Ghana 50.0 - =49 Sri Lanka 25.0 -5.0 =21 Indonesia 50.0 - =49 Thailand 25.0 - =21 Kyrgyz Republic 50.0 -10.0 =49 Turkey 25.0 - =21 Mexico 50.0 -5.0 54 Venezuela 20.0 - =21 Panama 50.0 -5.0 55 Trinidad and Tobago 15.0 - =28 Brazil 45.0 -5.0
19 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Supporting Institutional Framework (Weighted 50% in the overall index)
Rank Country 2013 Score Change Rank Country 2013 Score Change 1 Peru 90.0 +5.0 =28 Guatemala 40.0 - 2 Bolivia 80.0 - =28 Jamaica 40.0 - =3 Bosnia and Herzegovina 70.0 +10.0 =28 Mongolia 40.0 +10.0 =3 Pakistan 70.0 +5.0 =28 Rwanda 40.0 - =5 Armenia 65.0 - =28 Trinidad and Tobago 40.0 +5.0 =5 India 65.0 +10.0 =34 Argentina 35.0 - =5 Uruguay 65.0 +15.0 =34 Lebanon 35.0 - =8 Chile 60.0 - =34 Mozambique 35.0 - =8 Colombia 60.0 - =34 Tanzania 35.0 - =8 Ghana 60.0 +5.0 =34 Thailand 35.0 +5.0 =8 Kenya 60.0 +5.0 =34 Uganda 35.0 - =8 Panama 60.0 +5.0 =34 Venezuela 35.0 - =8 Philippines 60.0 +10.0 =41 Bangladesh 30.0 - =14 Azerbaijan 55.0 +20.0 =41 China 30.0 +10.0 =14 Brazil 55.0 +5.0 =41 Sri Lanka 30.0 - =14 Cambodia 55.0 +10.0 =41 Tajikistan 30.0 +5.0 =14 Dominican Republic 55.0 +10.0 =41 Turkey 30.0 - =14 El Salvador 55.0 - =46 Egypt 25.0 - =14 Mexico 55.0 - =46 Haiti 25.0 - =14 Nicaragua 55.0 +5.0 =46 Kyrgyz Republic 25.0 -5.0 =21 Ecuador 50.0 -5.0 =46 Nepal 25.0 -5.0 =21 Georgia 50.0 +20.0 =46 Senegal 25.0 - =23 Honduras 45.0 +5.0 =51 Cameroon 20.0 - =23 Indonesia 45.0 +5.0 =51 Dem. Rep. of Congo 20.0 - =23 Morocco 45.0 +10.0 =51 Madagascar 20.0 - =23 Nigeria 45.0 +5.0 =51 Vietnam 20.0 +10.0 =23 Paraguay 45.0 - =51 Yemen 20.0 - =28 Costa Rica 40.0 +5.0
20 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Stability (Adjustment factor, which reduces the score in Supporting Institutional Framework by 25% of the political stability share)
Rank Country 2013 Change Adjustment Rank Country 2013 Change Adjustment Score Factor Score Factor 1 Costa Rica 92.5 - -1.88% =28 Nicaragua 70.0 +27.5 -7.50% =2 Brazil 87.5 - -3.13% =30 Armenia 67.5 - -8.13% =2 Uruguay 87.5 - -3.13% =30 Cambodia 67.5 - -8.13% 4 Jamaica 85.0 +5.0 -3.75% =30 Cameroon 67.5 +2.5 -8.13% =5 El Salvador 82.5 - -4.38% =30 Nigeria 67.5 - -8.13% =5 Indonesia 82.5 -2.5 -4.38% =30 Pakistan 67.5 - -8.13% =7 Colombia 80.0 - -5.00% =30 Rwanda 67.5 -5.0 -8.13% =7 Dominican Republic 80.0 +5.0 -5.00% =30 Venezuela 67.5 +20.0 -8.13% =7 Mexico 80.0 - -5.00% 37 Chile 65.0 -25.0 -8.75% =7 Panama 80.0 - -5.00% =38 Azerbaijan 62.5 - -9.38% =7 Senegal 80.0 +10.0 -5.00% =38 India 62.5 +25.0 -9.38% =7 Trinidad and Tobago 80.0 - -5.00% =40 Lebanon 60.0 -5.0 -10.00% =13 Ghana 77.5 - -5.63% =40 Tajikistan 60.0 -2.5 -10.00% =13 Guatemala 77.5 - -5.63% 42 Tanzania 52.5 -25.0 -11.88% =13 Mongolia 77.5 - -5.63% 43 Honduras 50.0 -25.0 -12.50% =13 Mozambique 77.5 - -5.63% 44 Kenya 47.5 -20.0 -13.13% =13 Peru 77.5 +2.5 -5.63% =45 Bosnia and Herzegovina45.0 -25.0 -13.75% =18 China 75.0 - -6.25% =45 Haiti 45.0 -25.0 -13.75% =18 Georgia 75.0 +10.0 -6.25% =45 Nepal 45.0 -22.5 -13.75% =20 Argentina 72.5 - -6.88% =45 Thailand 45.0 - -13.75% =20 Bolivia 72.5 +5.0 -6.88% =49 Bangladesh 40.0 - -15.00% =20 Ecuador 72.5 +7.5 -6.88% =49 Yemen 40.0 +25.0 -15.00% =20 Paraguay 72.5 +25.0 -6.88% =51 Dem. Rep. of Congo 35.0 -5.0 -16.25% =20 Philippines 72.5 - -6.88% =51 Madagascar 35.0 - -16.25% =20 Sri Lanka 72.5 +20.0 -6.88% =53 Kyrgyz Republic 22.5 - -19.38% =20 Turkey 72.5 -2.5 -6.88% =53 Vietnam 22.5 - -19.38% =20 Uganda 72.5 +50.0 -6.88% 55 Egypt 15.0 -2.5 -21.25% =28 Morocco 70.0 - -7.50%
21 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
In focus
This article was From micro-credit to fi nancial sort of bank account, including 75% of those prepared by inclusion earning less than US$2 per day—a lack of access Dr Paul Kielstra that impedes economic activity in any number of (Independent Microfi nance institutions (MFIs) are leveraging the ways. Accordingly, fi nancial inclusion (the consultant). The micro-credit platform to expand their offering of provision of a wide range of appropriate fi nancial author would like to fi nancial services to a broadening population base. services to the poor) has garnered increasing thank Elisabeth Rhyne, Meanwhile, other type of companies are also attention in development circles. Elisabeth Rhyne, Carlos Danel, Rudy starting to provide such services to customers at managing director of the Center for Financial Araujo, Sergio Navajas, Michael Joseph and the bottom of the economic pyramid. This article Inclusion at Accion, explains: “Over the past 20 Rajiv Sabharwal for the examines three cases from around the globe to years, the momentum has been credit-driven. In interviews. highlight how fi rms have shifted towards broader recent years, though, you have a shift from credit fi nancial inclusion; it also demonstrates common to payments and savings as the main products.” characteristics across a diverse range of providers This shift involves more than simply a new focus and describes a potential structure for a more on a wider range of products; important changes in inclusive fi nancial-services ecosystem. the sector have created a complex mix of players seeking to enhance fi nancial inclusion. Existing Micro-credit: A limited solution microfi nance organisations (MFOs) had already For many years, microfi nance consisted almost been evolving as micro-credit grew. In Ms Rhyne’s exclusively of micro-credit—the provision of loans words, “A socially motivated and, originally, to the world’s poor, especially women, typically to donor-driven movement has become an industry.” help recipients establish or expand very small Now, institutional development is progressing businesses. The idea has been highly successful: further. Traditional banks and fi nancial services the Microcredit Summit Campaign—a non- companies are seeking to tap into the markets that governmental organisation (NGO) that surveys microfi nance has uncovered with their own tailored providers on an annual basis—reports that, in savings and loan products. Similarly, technology is 2011, 195m clients worldwide had such loans, up allowing disruptive fi nancial service models, in from 31m in 2000. particular around payment systems. These Even while demonstrating that the world’s poor changes, for all their potential benefi ts, also bring can be reliable credit customers, the growth of regulatory challenges. micro-credit has also highlighted the overall lack The three case studies in this article—a micro- of fi nancial services available to many of them. credit NGO that became a bank; a telephone According to the World Bank’s Global Financial company that developed an extensive mobile- Inclusion Database1, 2.5bn people are without any payments system, and a bank that has actively pursued the market at the bottom of the pyramid— 1 Global Findex database: http://datatopics.worldbank.org/ fi nancialinclusion/ help illustrate the practical efforts to increase
22 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
The regulatory challenge
Carlos Danel, co-founder and executive vice-president of Mr Araujo adds that regulators that have developed such an Compartamos Banco, notes, “The good news [about fi nancial understanding and capacity are more willing to allow innovative inclusion] is that many are now willing to provide these services. The change. This has reduced the sometimes excessive caution of the downside is that you have all kinds of different standards and, in some past among regulators. He says that, now, “Most have changed their cases, too many institutions chasing too few clients. We need sensible approaches, so that they are moving forward avidly in supporting and appropriate regulation.” supervisory approaches to fi nancial inclusion,” while maintaining Creating the right regulation, however, is not simple. Rudy Araujo, appropriate prudence. secretary-general of the Association of Supervisors of Banks of the Specialised units or expertise within regulatory agencies also Americas (ASBA), points out that regulators face as steep a learning help with another current challenge. Increasingly the mission of curve as everyone else in understanding the sometimes novel products regulators is being expanded beyond guaranteeing fi nancial stability, and services being used to promote fi nancial inclusion. They need, he to promoting fi nancial inclusion and providing consumer protection explains to be open-minded and “understand the intentions of the for poorer clients. Mr Araujo is wary of the risks involved. “The most product, whether it will generate risk to the fi nancial system and, if important downside is a confl ict of interest. Our role is to ensure so, to fi nd a way to incorporate it in a supervisory framework.” Adding fi nancial stability, not to promote products, services or operators: to the complications, oversight of this market increasingly involves that is the market’s responsibility.” interaction with companies and regulators from other industries, Overall, however, Mr Araujo is positive. Regulators in Latin such as telecommunications. “We do not necessarily speak the same America, he says, have “been very successful in supporting the language,” he notes. “Finding common ground can be diffi cult.” process of fi nancial inclusion.” Looking ahead, specifi c challenges Mr Araujo says that, in addition to developing a thorough certainly remain, such as improving corporate governance in practice understanding of these products and their providers, the more and addressing the risks of companies serving this market, most successful Latin American regulators have not integrated them importantly to be able to adequately deter their being used by directly into existing regulatory frameworks, but in their supervisory money-launderers or terrorist funders. Nevertheless, he is hopeful. approaches. Instead, “The key is to create a special unit with a “Microfi nance is part of the landscape because we worked for many different mindset,” which encompasses both traditional regulatory years to make it a segment of the fi nancial infrastructure. Success has systemic stability concerns and the particular social objectives to do with public policy, how we approach regulation, and how we involved in fi nancial inclusion. engage the industry in a productive conversation.”
fi nancial inclusion, as well as shedding light on from international organisations and donors. We how this trend might develop. had a product, but did not have the fi nances. Our hunch was we could fund ourselves.” Loan A micro-credit NGO evolves repayments were high enough that Compartamos’s In 1990, a Mexican NGO, Compartamos, started micro-credit activity was profi table. providing micro-loans to women to invest in their Accordingly, in 2000 the company incorporated own businesses. Rather than serving individual as a for-profi t fi nance business and, in 2006, clients, each person receiving credit was, and still obtained a full banking licence, becoming is for the organisation’s main product, part of a CompartamosBanco. In 2007 the original investors, group of 12 to 50 women who mutually guaranteed largely development organisations, sold around each other’s debts. 30% of the shares in an initial public offering (IPO), Carlos Danel, co-founder and chairman of the making Compartamos a publicly traded fi rm. This board, recalls, however, that over the following sparked a substantial debate within the NGO decade, fi nancing restrictions impeded scaling-up. community, in which some criticised the company As an NGO, he says, “We could only have funding for profi ting excessively from the poor by charging
23 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
very high interest rates and argued that, after the A mobile service fi nds a new route to fi nancial IPO, Compartamos would favour shareholder inclusion interests over those of their clients. The growth of mobile-payment services run by Mr Danel responds that Compartamos’s interest telecommunications companies has done much to rates are competitive for Mexican microfi nance, widen fi nancial-service provision at the bottom of where rates are substantially higher than in many the pyramid. The best known of these, by far, is countries, and have continued to decline since the Kenya’s M-Pesa. IPO. Moreover, the company’s loans and clientele A joint project of Vodafone and Safaricom, are the same type as before. He sees a strong registered M-Pesa users put money into their board, with a clear sense of mission, as the key to accounts via local agents and can then send funds maintaining focus. electronically to other individuals with accounts— Whatever the possible risks, Compartamos’s such as remittances to family members—or pay commercialisation allowed massive expansion. In businesses registered with the service. The 2000, after 10 years, it had just 64,000 clients. numbers demonstrate M-Pesa’s dramatic success. After another 12 years or so with access to capital Since launching in 2007, the service has registered markets, the bank now provides loans and micro- 15.2m members among Kenya’s 35m-strong adult insurance to a total of 2.5m clients in Mexico and, population, around two-thirds of whom are regular through subsidiaries, in Guatemala and Peru, users and many of whom are otherwise unbanked. making it Latin America’s largest microfi nance Total transactions are around US$1bn per month, bank (MFB). or a little under one-third of national GDP. While This activity, however, made the narrow utility transforming how Kenyans do business, the of micro-credit clear. “A lot of microfi nance telecoms fi rms have built a substantial asset: providers,” says Mr Danel, “start with lending. But Safaricom earns more from M-Pesa than from SMS at a certain point they realise that inclusion is and data traffi c combined, while the service about providing a range of products,” especially provides the bulk of Vodafone’s Kenyan income. savings, which he calls the “the pre-eminent Underneath the technology, M-Pesa’s fi nancial-inclusion product.” A leading driver development has parallels with that of micro- behind Compartamos obtaining a banking licence saving providers. One is the creation of a widely was the legal capacity it gave to take deposits. dispersed physical network, where clients can Now, the bank is running a pilot project to offer easily make deposits or withdrawals. “Few mobile this service, which it expects to roll out across initiatives across the world reach scale because of Mexico soon. Doing so, however, will entail the effort needed in human capital across the signifi cant change, in particular creating a large country,” says Michael Joseph, managing director physical network of locations where savers can of mobile money at Vodafone and former CEO at make deposits and withdrawals. In the four Safaricom, who oversaw M-Pesa’s creation. Mexican states covered by the pilot, this already Accordingly, he says, one key to M-Pesa’s success involves 3,200 outlets working with Compartamos’s has been substantial investment, “to create a huge banking correspondent subsidiary, Yastas. distribution network of mostly little mom and pop Beyond its pragmatic evolution to meet the stores. It is ubiquitous: people don’t have to go challenges of fi nancial inclusion, Mr Danel sees more than 300 metres.” Compartamos as having a wider impact in Mexico: Another element of success, Mr Joseph says, has “Twenty years ago, if you wanted a working capital been “to focus clearly on the initial customer of M- loan, you had to come to us. Today, there are Pesa, the one at the bottom of the pyramid.” This [many] more providers. An industry has been born. has driven change almost as thorough- going as This poses challenges but is much better for that of Compartamos. M-Pesa was always meant to clients.” enhance fi nancial inclusion, but the specifi c form
24 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
this took in its pilot stage was to ease payments largest private bank, activity in this fi eld is quite between existing micro-lenders and their clients. familiar. As early as 2001, its purchase of Bank of Users, however, quickly adapted the system to Madura gave it a microfi nance operation in Tamil make a much wider range of payments, few of Nadu. Similarly, its rural-expansion strategy, which which involved micro-credit. By its formal launch, overcame a rocky start, began in 2005. M-Pesa was recast as a payment service, especially According to Rajiv Sabharwal, board member of for urban workers to send remittances to rural ICICI Bank responsible for, among other things, relatives. Companies quickly realised the benefi ts inclusive and rural banking, the bank’s strategy of accepting payments this way, and even charities focuses on “creating reach and providing need- now regularly publish M-Pesa account details when based credit and savings products.” In order to do soliciting donations. this, the hallmark of ICICI’s fi nancial-inclusion Users have pushed the system further. One in six efforts is breadth, of both channel and offering. It Kenyan users of M-Pesa or a competing mobile- is rapidly building up its own infrastructure by payment service, for example, store money in their opening so-called Gramin banks: rural branches in accounts while travelling, for reasons of security. previously unbanked villages. These offer Now M-Pesa is building on this sort of activity. A agricultural loans, other business loans and basic new micro-savings and loan facility created in the savings accounts. Since 2010, it has opened up 350 last year, M-Kesho, allows people, at no cost, to Gramin banks, bringing its total to 656, or around put amounts as small as a penny into regulated, one in fi ve of all its branches, and it expects to interest-earning savings accounts. After saving for open another 150 by March 2014. 90 days, customers can apply for short-term micro- More recently, the company has begun loans. Within six months of launch, Mr Joseph deploying what it calls “branches on wheels”: fully reports, 1.4m people have begun saving. “This is a equipped mobile branches with two employees revolution in Kenya,” he says. “To get a loan there, each, which can provide the same range of services you normally have to travel and fi ll in a form. This as Gramin banks. These cover a circuit, so that they has no forms at all.” are present in the same location at the same times In following its customers, M-Pesa, like micro- throughout the week, allowing the same vehicle to credit providers, has broadened services in pursuit service several villages. of greater fi nancial inclusion. It, too, is affecting The bank has also engaged in extensive the wider market. Mr Joseph notes that banks have partnership activities. As Mr Sabharwal explains, increasingly integrated into M-Pesa because it despite his sector’s strengths, and “considering provides cheaper payment services than they can. the extent of the task at hand, collaborative efforts More importantly, he adds, “[Kenya’s] banks have are required to ensure the success of fi nancial seen that there is business to be done at the inclusion.” Rather than expanding its own bottom of pyramid.” microfi nance operations, since 2007 ICICI’s Microfi nance Practice has co-operated with A bank widens its client base through existing MFIs. By doing so, it has built up the partnership capacity of both. Under the bank’s partnership The Reserve Bank of India (RBI, the central bank) model, MFIs identify and recommend clients, which has been pushing the country’s fi nancial services the bank then fi nances directly. The MFI oversees sector to include an estimated 700m unbanked loan repayment and the two institutions share the citizens. Using regulation and exhortation, it is risk. The bank also participates in microfi nance by encouraging banks to open one-quarter of all new securitising certain MFI loan portfolios as a whole. branches in currently unserved rural villages. Finally, ICICI does fund certain female borrowers However, for the bank of Industrial Credit and directly through self-help group-bank linkages. Investment Corporation of India (ICICI), India’s These strategies have allowed ICICI to provide
25 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
loans to 3.5m clients. savings, loans and insurance, the blurring of For the savings of clients at the bottom of the boundaries will only increase. pyramid, the bank has another model. It has Common features will include a range of low- partnered with 29 “business correspondents” cost fi nancial-services offerings and a similar (some are businesses, but most NGOs). infrastructure for customer interaction. The Correspondents provide rural clients with emerging model also has two seemingly “doorstep access” to interest-bearing bank micro- contradictory elements, both of which are savings accounts through individuals, called essential: easily accessible mobile-based bandhus. Using technology developed by the bank, technology, and a widespread physical presence in the bandhus take biometric and electronic account customers’ communities, with numerous agents or devices into the fi eld, with which they can identify employees. clients and then carry out account transactions Achieving these goals presents distinct with them directly. Collectively, Mr Sabharwal challenges for different types of organisations. reports, through new branches and business Banks will frequently require cultural change. In Mr correspondents, ICICI has opened 16m basic Joseph’s experience, they lack “the mindset and savings accounts. cost structures that let them get into fi nancial Finally, ICICI is tapping into mobile payments inclusion. The way they think makes it very diffi cult through existing providers. Earlier this year, it and to do transactions at a low price.” The solution may Vodafone rolled out an M-Pesa service in Mumbai, not be wholesale change so much as developing Delhi, Kolkata, West Bengal, Bihar, Rajasthan and specialist capabilities. Sergio Navajas, senior Uttar Pradesh. This is in addition to a similar specialist in the Access to Finance Unit at the mobile-money service launched in February 2013 Multilateral Investment Fund, part of the Inter- in Chennai with Aircel and one with Tata American Development Bank Group, notes that the Teleservices in Mumbai and Delhi, announced in most successful banks in this area “understand December 2012. that, with this type of client, you need a different ICICI’s experience shows that traditional brick set-up.” As a result, he says, these lenders have set and mortar bank branches are relevant to fi nancial up departments separate from the rest of the inclusion. They cannot, however, be the whole institution to focus on these clients. story. Reaching the unbanked, says Mr Sabharwal, MFIs understand their clientele well, but are involves substantial product and service delivery entering into other, unfamiliar areas. Ms Rhyne and product customisation, while delivering high says they “have a lot to learn in terms of being standards of customer service. The effort will not better at being a bank—things like offering fee- only help rural development; it should be good for based services, the facility to pay bills, and other ICICI’s bottom line. “Over the longer term, the kinds of money-transfer services.” They also may bank believes that rural India provides signifi cant require patience. Mr Navajas notes that, while business opportunities,” he concludes. expanding into savings is a welcome development, this should not happen “before the [microfi nance] A future of convergence? institution is strong enough.” These organisations These three cases indicate that, whatever their could also require their own cultural shift. roots, organisations that successfully enhance Whenever other players attempt to serve the fi nancial inclusion will share certain attributes. bottom of the pyramid, Mr Danel sees “a tendency This convergence is already happening, says Ms among social providers to be gatekeepers, saying Rhyne. “It is strongest in Latin America, where that those without social goals should not be banks have probably gone most heavily into competing. Clients are looking for good products at microfi nance and microfi nance organisations have good value. They don’t mind if it comes from a become banks.” With payment services providing social company or not.”
26 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
The convergence, however, will probably not be Conclusion total. M-Pesa, says Mr Joseph, is unlikely to become a fully fl edged bank because “it is not our A diverse range of providers, drawn by market need core area.” Each company will bring distinct and opportunity, are creating a fi nancial services strengths. Mr Navajas has noticed, for example, sector aimed at the bottom of the economic that traditional banks initially tend to do better at pyramid. From starting points as different as NGOs, savings products than micro-credit ones. Rather banks and telecoms fi rms, they are developing the than reinvent the wheel, companies will work characteristics—often very similar—to serve these together to combine their strengths in ways similar customers. Rather than becoming identical, these to ICICI today. The most likely market outcome is providers will likely create an economic ecosystem an ecosystem of fi rms that sometimes compete and where competitive advantage will defi ne distinct sometimes co-operate, depending on the particular roles. service. What role will remain for microfi nance social enterprises and NGOs in this market, which has grown in their wake? They are not about to disappear, says Ms Rhyne. “One function of the social sector,” she says “has been to develop the frontier.” Once, this was the unbanked as a whole; now it tends to be in remote, agricultural areas, among the very poor or with groups facing discrimination. Eventually, she hopes, the frontier will expand further and these too will be part of the population served by the new breed of fi nancial- services providers.
27 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Microscope country profi les
The following section provides a brief profi le of the country profi les is meant to be a high-level microfi nance business environment and indicates overview; it is not intended to provide a complete key changes since last year for each of the 55 outline of the legal environment or represent a countries in this study. Countries are listed in comprehensive account of all recent activity. For alphabetical order and are organised by region. more in-depth analysis and regulatory detail, Each country profi le is presented in two parts: the please visit the “country profi le” tab of the Excel fi rst section contains a brief background on the model, available free of charge at www.eiu.com/ country’s microfi nance industry, and the second microscope2013; www.fomin.org; www.caf.com/ section outlines key developments since last year. es/mipyme; www.centerforfi nancialinclusion.org Please note that the information selected for the and www.citimicrofi nance.com.
28 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
which depend heavily on fi nance from commercial East and South Asia banks; and MFIs that depend on loans from the donor-backed wholesale lender, PKSF. ■ Bangladesh ● The lack of effective credit bureaus and a ban on deposit-taking by MFIs has restricted growth of the Key characteristics of the microfi nance business industry. At the same time, a high unmet demand environment: for savings in rural areas persists. This has led to ● The microfi nance industry in Bangladesh is the emergence of unregulated, illegal savings among the more mature (over three decades old) institutions. Both the MRA and the government within the region. Microfi nance in Bangladesh is have recently stepped up efforts to curb these not limited to the provision of fi nancial services, illegal institutions. but includes livelihood services, which range from poultry-raising to education. The market continues Key changes and impacts since last year: to grow, despite exceptionally high market ● The long-running issues between the penetration. government and Grameen Bank, the institution ● Bangladesh is home to three of the world’s founded by micro-credit pioneer, Muhammad largest providers of microfi nance: Grameen Bank, Yunus, is unlikely to be resolved before the BRAC and ASA. The industry grew signifi cantly in national elections at end-2013, nor is it likely to 2002-07, but the top three MFIs have since have an impact on the operation of the bank. The deliberately scaled back growth to a more government, which owns only 3% of the bank, has sustainable level. The top ten microfi nance been mulling over a break-up of Grameen Bank, in institutions (MFIs) account for nearly 90% of total a bid to gain control of the institution. There savings and more than four-fi fths of total loans. appears to be no legal basis for such a move and The availability of commercial capital will be critical practitioners do not believe that the political battle to the continued growth of the industry, in between the Awami League government and Mr particular of tier-two MFIs. Yunus will impact the industry. ● The Microcredit Regulatory Authority (MRA) ● There have been no regulatory changes since regulates non-governmental organisations (NGO)- the MRA published a full body of legislation in MFIs registered under fi ve different laws. Although January 2011. The MRA has issued licences for 700 the MRA Act also covers co-operatives, it has not NGO-MFIs covering all the major providers who sought to include these within its purview. Banks choose to operate under this legal form. An are regulated by Bangladesh Bank (the central interest-rate cap of 27% has remained in place. The bank). Grameen Bank, the country’s largest MFI, is cap and general cost pressures have forced MFIs to regulated by a separate law, which established the take steps to become more effi cient and to improve Grameen Bank Project as a specialised bank in the quality of their portfolio. Many MFIs have done 1983. so by increasing their loan size, a development ● The MRA licenses NGO-MFIs. In January 2011, it that practitioners say threatens to reduce fi nancial issued a detailed set of regulations for the access of the poor. operation of micro-credit. There is an interest-rate ● In February 2013, the government passed the cap of 27% (on a declining-balance basis) that can Co-operative Societies (Amendment) Bill 2012. The be charged on micro-credit loans. Law is part of an effort to regulate more strictly ● Apart from Grameen Bank, under current predatory savings institutions. Policymakers are regulations MFIs cannot mobilise public deposits. keenly aware of the risks of ignoring these loosely This splits the market three ways: Grameen Bank regulated institutions following the collapse of a (which has more savers than borrowers); US$400m ponzi savings scheme in 2012. microfi nance providers such as BRAC and ASA,
29 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
● In June 2013, Bangladesh Bank published draft companies to implement International Financial guidelines on agent banking for banks. The Reporting Standards (IFRS), but the Ministry of guidelines establish a regulatory framework for Economy and Finance has not prioritised agent banking services. Under the new rules, banks implementation for microfi nance-service providers, are allowed to use NGO-MFIs registered with the giving them a deadline of 2016. The NBC mandates MRA as bank agents. In practice, no MFI has been that all MFIs under its supervision use its allowed to offer money-transfer services through prescribed chart of accounts, which contains gaps mobile phones. in comparison to IFRS. ● Bangladesh’s bank-led mobile banking model ● The Ministry of Economy and Finance regulates has facilitated greater use of mobile technology. telecommunication activities, but there are as yet no Around 5m people are using mobile-banking regulations for mobile banking. According to local services. The central bank has granted 25 banks experts, there are three or four MFIs in different permission to operate mobile-banking services. As stages of developing mobile-banking capabilities. of mid-2013, 17 banks were providing services So far, agent banking utilising innovative through 70,000 outlets, with around 450,000 technologies has expanded slowly in Cambodia. transactions per day. Key changes and impacts since last year: ● The ease of setting up a regulated institution is ■ Cambodia evident in the growing number of licensed MFIs, which totalled 37 in July 2013, up from 32 at the Key characteristics of the microfi nance business end of 2011. However, the NBC has increasingly environment: granted MFI licences to institutions lending to small ● Licensing, regulation and supervision of and medium-sized enterprises (SMEs), rather than microfi nance service providers is conducted by the strictly to those offering microfi nance. A review of National Bank of Cambodia (NBC, the central bank) SME lending regulations is underway, and a re- under the Law on Banking and Financial licensing of institutions is planned for 2013-14. Institutions of 1999 (LBFI). The regulatory ● In 2013 the NBC signifi cantly raised annual framework permits regulated micro-credit service licensing fees for regulated MFIs. The new fees providers to operate as limited companies, of apply to head offi ces and branches, raising which there are two types: banks and non-bank operating costs for MFIs. microfi nance institutions (MFIs). Pursuant to the ● As an alternative to lengthy court proceedings LBFI, the NBC issued a prakas (regulation) on the to resolve commercial disputes, the National licensing and registration of specialised Arbitration Centre (NAC) was offi cially launched in microfi nance service providers in 2000. Based on March 2013. The private sector largely led the this regulation, the vast majority of LLCs providing development of the body, with the support of the microfi nance services take the form of non-bank International Finance Corporation (IFC). Still in its microfi nance institutions (designated MFIs by the nascent stage, however, jurisdiction of the NAC vis- regulator), which are also regulated by the NBC. à-vis Cambodian courts remains unclear. Also ● The legal framework sets conditions for uncertain is how the NAC will enforce its arbitral regulation versus supervision, based on size. awards. Institutions meeting certain criteria as large MFI ● The Credit Bureau of Cambodia (CBC) was must obtain a licence from the NBC and become launched in March 2012 to tackle over- regulated. Medium-sized institutions must register indebtedness resulting from multiple borrowings with the NBC; those that are smaller need not. and market saturation (especially in urban areas). Seven MFIs have licences to accept deposits. As of June 2012 the CBC had recorded 80% of MFI ● National requirements are in place for loans and 90% of bank loans.
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■ China on this issue. There are no requirements for standardised disclosure in product advertisements Key characteristics of the microfi nance business with regard to non-interest costs and fees, annual environment: effective rates, or to distinguish between fl at and ● Although the provision of rural credit is rising as declining rates. However, generally, MFIs regulated a priority for the government, microfi nance is in its by the CBRC are transparent about their loans and infancy in China, and includes a variety of fees. institutions: 6,700 micro-credit companies (MCCs), credit-only, which offer afew small loans; 800 Key changes and impacts since last year: village and township banks (VTBs), which operate ● The government is encouraging provision of as small banks; rural credit co-operatives (RCCs), rural lending, through the wider establishment of rural commercial banks (RCBs) and rural co- regulated entities. There is a drive to boost the operative banks (RBs), 2,411 in total, which offer number of VTBs in rural areas, although these do rural fi nancial services; downscaled commercial not necessarily make micro-loans. The number has banks, with broad outreach; and unregulated risen to 800 over the past year. There has been institutions, such as non-governmental consolidation, as more RCCs were converted into organisations (NGOs) and Village Co-operative RCBs. Funds (VCFs). ● The CBRC is making a serious effort to improve ● The regulatory capacities of the People’s Bank of accounting standards at regulated institutions China (PBC, the central bank) and the China through consolidation and reforms. Banking Regulatory Commission (CBRC) are ● The number of MCCs rose dramatically in 2012, relatively strong, so the institutions that fall under but the increase in the number of institutions does their authority are well regulated. Resources for not necessarily translate into increased micro- regulating MFIs are limited, compared with those lending—the majority of these are involved in for the main banking sector. MCCs are supervised small-business lending, not rural microfi nance in by provincial-government fi nancial offi ces, whose the traditional sense. capacity are much weaker and vary among regions. ● Regulators appeared to take a relatively NGOs and VCFs, which compose a small part of the accommodative approach to new innovations in total microfi nance industry, are subject to little microfi nance, particularly in peer-to-peer lending oversight, but cannot accept deposits and and through e-commerce platforms, which hold represent no systemic risk. promise in boosting provision of micro-loans ● Regulations for MCCs provide signifi cant across a larger swathe of the country. Mobile- geographical and ownership limitations, which banking activities are at pilot stage and policy is inhibit these institutions from achieving signifi cant not yet prohibitive for these activities. Regulators economies of scope or scale. Consequently, do not appear to be loosening regulatory competition is limited. Commercial banks are restrictions on NGOs, however. encouraged to downscale into fi nance for small and medium-sized enterprises (SMEs), but there is limited uptake owing to worries over taking on ■ India perceived greater risk for smaller rewards. The government places greater emphasis on expanding Key characteristics of the microfi nance business rural credit coverage, through setting up more environment: CBRC-regulated MFIs in unbanked areas. ● The Reserve Bank of India (RBI, the central ● Standards of transparency with regard to fees bank) regulates two types of institutions that and interest rates vary substantially between MFIs engage in microfi nance activities: banks and non- in China, and there is little industry-wide guidance bank fi nancial companies (NBFC)-MFIs. Following
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the crisis in Andhra Pradesh (AP) in 2011, the RBI fl exible and pragmatic. Following the removal of a has put in place regulatory changes that helped 26% interest-rate cap in August 2012, the RBI reassure market participants and instigated rapid granted NBFC-MFIs further breathing space when it growth in total loans in 2012. The RBI recognises increased existing margin caps in May 2013 (fi xing that its role is not only to regulate, but also to the margin cap for all NBFCs, irrespective of size, at develop microfi nance and the political support of 12% to March 31st 2014). However, with effect microfi nance by the national government. It from April 1st 2014, margin caps may not exceed should be noted that most institutions that are 10% for large MFIs and 12% for the others. The conducting microfi nance activities in India are not margin caps remain controversial, with some banks or NBFCs and therefore are not under the investors saying that they unnecessarily curtail regulation of the RBI. private equity fl ows into microfi nance. The ● The fi nancing of Indian microfi nance is operating margin cap in the medium term is dominated by commercial debt. MFIs have been expected to put signifi cant pressure on MFIs to paying for this heavy reliance on commercial bank reduce operational costs. funds. Somewhat counter-intuitively, total loan ● The new 40% Priority Sector Guidelines growth has been around 30% and there has been guidelines for foreign banks with over 20 branches an equal rise in the equity fl ows funding NBFC- is expected to increase bank funding to MFIs over MFIs. There has been a shift from a focus on the near to medium term. Following an RBI quantity (rapid loan growth) to quality (more announcement in February 2013, large NBFCs are sustainable loan growth). now allowed to submit applications for banking ● Credit bureaus have started to make a difference licences. Large MFIs are able to apply, provided in spotting clients with multiple loans. However, they have minimum capital of Rs5bn (US$90m) and they still constitute an imperfect tool to deal with at least 25% of their branches are in rural areas. the problem of over-indebtedness, because of the ● The proposed Microfi nance Bill has been many informal sources of fi nance that are not pending in parliament since 2007. Among other covered by the credit bureaus. things, the Microfi nance Institutions (Development ● The regulatory framework provides for a dispute- and Regulation) Bill could open up deposit-taking resolution system in the microfi nance industry. restrictions on non-governmental organisation There has been a vast improvement in client (NGO)-MFIs, but any liberalisation is likely to be protection following the AP crisis and new limited and closely supervised. The Bill has been regulations that resulted from the crisis. completely recast and, if adopted, will have a profound impact on the microfi nance industry, but Key changes and impacts since last year: its fate is uncertain. Parliamentary elections are ● Microfi nance total loan growth is estimated to due in 2014 and passage of the Bill is not a priority. have risen by around 30% year on year in fi scal It is seen as far superior to the 2007 version and 2012/13 (April-March). There is increasing refl ects the lessons from the AP crisis. Some expect evidence of the fl ow of bank funding returning to the Bill to be recast again, in case it is not passed the microfi nance industry (particularly outside AP). in the current legislature. There has been a surge in equity funding and, at an estimated 1% of total loans, the portfolio at risk is ■ Indonesia small. This positive development is somewhat counterintuitive, because it comes only two years Key characteristics of the microfi nance business after a major crisis in AP, the country’s biggest MF environment: market, and a signifi cant slowdown of the Indian ● Indonesia’s microfi nance industry is among the economy. largest in the world, with over 50,000 microfi nance ● The RBI’s overall regulatory approach has been institutions (MFIs), of which the majority are
32 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
characterised by low growth in outreach and severely limited the use of e-money. Mobile and ineffi cient systems. They cite a lack of access to electronic banking has spread, but is still limited. affordable capital as their main constraint. There is ● There is no effective dispute-resolution no legal defi nition of microfi nance, but Bank mechanism for microfi nance borrowers in place. Indonesia (BI, the central bank) defi nes micro- However, there have been a number of high-profi le credit as loans of up to Rs50m (US$5,500). The legal cases involving credit card holders and existence of large-scale subsidised programmes issuing banks. The cases have contributed to and institutions puts private MFIs at a greater public awareness of consumer rights and disadvantage. The biggest programmes are the resulted in the creation of a Consumer Complaints World Bank-funded National Programme for Unit located within BI, but the Unit does not cover Community Empowerment (PNPM) and the so- MF clients. It deals with complaints from called revolving fund agency (LPDB) set up by the consumers of commercial banks and, to a much Ministry of Co-operatives, Finance and Industry. lesser extent, from rural banks. Bank Danamon is one of the largest banks involved in microfi nance with a portfolio of small traders Key changes and impacts since last year: and micro-entrepreneurs, worth around US$1bn. ● In January 2013, parliament passed a long- ● The market for microfi nance is highly pending Microfi nance Institutions Bill with a view fragmented and demand for micro-loans outstrips to providing legal certainty for microfi nance supply. Around one-fi fth of Indonesia’s population providers (LKM). The new Bill establishes that a of 234m lacks access to fi nancial services. High LKM must take the legal form of either a Perseroan demand has allowed private operators to thrive, Terbatas (PT, limited liability company) or koperasi despite the state’s heavy involvement in rural (co-operative). In the former case, 60% of the fi nance. The private bank with the fastest-growing shares must be owned by a regional government or MF unit is Bank Tabungan PensiunanNasional region-owned company. The remaining 40% may (BTPN). be owned by either an Indonesian national or a co- ● Banks and other fi nancial institutions are free to operative. Non-governmental organisation- set interest rates on loans; they do not face microfi nance institutions (NGO-MFIs) and informal excessive documentation and the capital-adequacy providers of microfi nance feel that the Bill does not ratios are not excessively burdensome. address their needs. ● The main informal providers of micro-credit are ● There has continued to be interest from foreign co-operatives. Co-operatives must register with the investors in entering MF in Indonesia. The routes Ministry of Co-operatives. There is a capital vary from investment in private providers, such as requirement of Rs100m to establish a savings and BTPN, to establishing venture-capital fi rms. BPRs are loan co-operative (S&L). Co-operatives are not increasingly partnering up with organisations such closely regulated or supervised and capacity as Bank Andara, a wholesale bank for MFIs, in order constrains them from playing a greater role in to bring more services to their customers, such as providing MF. clearing cheques and access to liquidity lines. The ● The prudential standards, know-your-client new Otoritas Jasa Keuangan (OJK, the fi nancial (KYC) principles and anti-money laundering (AML) services authority) is slowly taking over regulatory requirements faced by microfi nance banks (MFBs) functions from BI. Non-bank fi nancial companies are the same as those faced by all banks in the (NBFCs) are already being supervised by the OJK; country. Non-formal MFIs are not subject to these banks are scheduled to be supervised by the OJK standards, have very little oversight and face few from 2014. The OJK is staffed by people from BI and restrictions on deposit taking. the Finance Ministry. It is still too early to say ● BI has regulations for e-money. However, an whether the OJK’s regulatory capacity will compare Rs5m limit on e-cards and mobile phones has favourably with the previous institutional set-up.
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● The regulatory and supervisory environment for ● The Credit Information Bureau LLC (CIC) was microfi nance remains in transition. BI has established in April 2009 and has 18 shareholders developed draft regulations for private-credit from the fi nancial sector, including the main bureaus (PCBs), but there is signifi cant political commercial banks and the main sources of opposition to surrendering BI’s monopoly on credit microfi nance. The CIC aims to provide information information to a private entity. about current and prospective borrowers to all ● Regarding transparency in pricing, banks are sources of micro-credit in Mongolia, but its required to publish clear prime lending rates technological capabilities are still in their infancy. (those offered to their best customers and Along with the CIC, the BOM maintains a Credit institutions, accounting for a large share of the Information System, which serves as a database of total loan portfolio)that comply with regulations. the borrowers from commercial banks and a small ● The issuance of guidelines on branchless number of NBFIs. Data collection has been banking and agents by BI is still pending. BI has improved, both in terms of scope of information granted a handful of commercial banks the right to collected and coverage, but it remains incomplete. conduct pilot projects on agency banking. The ● Most microfi nance lending continues to occur fi ndings of the pilots are expected to feed into through traditional channels, such as bank guidelines that would provide a framework for branches and automated teller machines (ATMs). fi nancial transactions through agents and allow Larger banks, such as Khan Bank and XacBank, fi nancial institutions (FIs) to make better use of however, are developing their mobile-banking existing technologies. technology services to better enable clients to access fi nancial services from anywhere in the country. ■ Mongolia Key changes and impacts since last year: Key characteristics of the microfi nance business ● The government has made a strong push to environment: promote fi nancial-sector lending to small and ● The Bank of Mongolia (BOM, the central bank), medium-sized enterprise (SMEs). An SME Credit which is responsible for regulating commercial Program channels funds through banks to SMEs banks and microfi nance institutions (MFIs), and that have been screened by provincial councils, the Financial Regulatory Commission (FRC), which and was signifi cantly ramped up in 2011. A Credit is responsible for regulating non-bank fi nancial Guarantee Fund provides guarantees for loans by institutions (NBFIs), such as credit unions (CUs), banks and NBFIs to SMEs up to an amount of act as the key regulating institutions in the Tg100m (aroundUS$73,000) per borrower. These country. Consequently, all MFIs are affected may distort lending patterns in ways that affect the equally by regulations set by the BOM. The BOM is microfi nance industry. generally viewed as a competent regulator, but the ● The Mongolian legal system provides several FRC is seen as ineffective, lacking funding, avenues for dispute resolution between a borrower equipment and staff. Regulations do not make it and the lending institution, but there are many diffi cult for MFIs to do business in Mongolia. weaknesses within the dispute-resolution process. ● Commercial banks—most notably Khan Bank and Dispute resolution, while poorly developed, does XacBank—are the main providers of microfi nance not appear to pose signifi cant problems for products in Mongolia. Khan Bank, for instance, customers or MFIs. According to numerous experts, maintains the lion’s share of the microfi nance Mongolian fi duciary laws are comprehensive and market, with over 300,000 active borrowers. civil courts are effective in addressing disputes Smaller MFIs, such as Credit Mongol, have around between MFIs and customers when they arise. 2,000 active borrowers. ● Most Mongolian businesses and fi nancial
34 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
institutions (FIs) regularly issue fi nancial RRDBs were formerly state-run, but four out of fi ve statements based on local accounting standards. are now privately owned. The largest government The biggest players in the microfi nance industry, player is the Agricultural Development Bank (ADB), notably commercial banks like XacBank and Khan which provides wholesale funds to related Bank, as well as MFIs backed by major international standalone co-operatives (Small Farmer Co- groups, tend to have relatively sound accounting. operatives). Nevertheless, there is a dire need for greater ● As of June 2012, 33 fi nancial intermediary NGOs transparency and more effective use of professional (FINGOs) were in operation and are currently accountants in many smaller MFIs, and greater registered with the central bank. FINGOS and adherence to International Accounting Standards MFDBs can take deposits from their members. (IAS) is still necessary. FINGOs also have a limited banking licence, which ● ATMs and branches of both major and minor allows them to borrow from commercial banks for MFIs continue to expand throughout the country, client-lending purposes. These borrowings usually although the majority of ATMs and branches are fall under the mandatory deprived-sector lending located within the city centres. E-banking is portfolio of commercial banks. expanding in line with the spread of more ● Public and private institutions are regulated sophisticated mobile phones. identically. Although there are no interest-rate restrictions in Nepal, the role of government institutions has kept lending rates low, at 18-24%. ■ Nepal Key changes and impacts since last year: Key characteristics of the microfi nance business ● A moratorium on all A, B and C-class fi nancial environment: institutions (FIs) has led to a surge in applications ● Nepal’s microfi nance market is highly for MFIs (D-class). NRB is processing applications fragmented, with very few players of signifi cant for new MFIs, but faces pressure from existing size, refl ecting Nepal’s geography. Microfi nance licence holders. services are ubiquitous in the Terai region along ● NRB has been trying to channel more money the border with India and along the country’s main into microfi nance by raising lending ceilings for highways, but thinly spread or absent in Nepal’s “deprived-sector lending” for A, B and C-class FIs remote regions. by 50 basis points in its monetary policy for fi scal ● Nepal Rastra Bank (NRB, the central bank) year 2011/12. The central bank has acknowledged regulates commercial banks, development banks, that access to microfi nance remains “very poor” in fi nance companies and microfi nance development Nepal’s mid-Western and far Western regions. It banks (MFDBs). It considers Nepal overbanked and has improved incentives for providers of MF to has stopped licensing banks with the exception of enter these areas, but with limited success. microfi nance development banks (MFDBs). NRB ● In its monetary policy for fi scal year 2011/12, gives priority to those MFDBs willing to offer NRB said that the establishment of a Micro Finance services in remote areas. Around 40 licence Authority for regulation, inspection and applications are pending with NRB; two have been supervision of MFIs would be given “utmost approved since 2011. The IMF has recommended priority”. The Microfi nance Act, however, under that a 2011 moratorium on banking licences be which such a separate regulator would be extended to MFDBs. established, has not yet seen the light of day. ● The main formal providers are upscaled non- ● The concept of customer-protection principles is governmental organisations (NGOs) and regional still very poorly developed in Nepal. However, a few rural development banks (RRDBs). As of July 2013, MFIs have begun to review their policies. As of July there were 26 of these institutions in operation. 2013, 12 institutions had endorsed The Smart
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Campaign, signalling a commitment to requirements and, in 2011,the SBP expanded the implementing client-protection principles. scope of potential microfi nance clients by raising ● Regulation regarding microfi nance might see the maximum income level for clients who can some improvement following the election of a new qualify for microloans. The SBP does not impose government. Elections are now scheduled for interest-rate caps, but it does limit the size of November 2013. The thrust of the central bank’s loans. policy seems to veer not towards licensing any ● The Microfi nance Credit Information Bureau more MFIs, but to push for MFIs to become MDBs. (MF-CIB) was rolled out in June 2012 and 2.2m New licences will be given to organisations records (out of a total client base of 2.4m focusing on districts that do not have MFIs. borrowers) have been recorded. The MF-CIB will be ● Over-indebtedness in rural areas has emerged as a positive registry (with information on all clients a key concern. In a bid to mitigate risks and in the with an outstanding loan, rather than just absence of a microfi nance credit bureau, banks defaulters) and will cover all types of players now voluntarily share information about clients serving the industry. seeking loans above Rs30,000 (US$430). ● A microfi nance credit bureau that will be part of Key changes and impacts since last year: the existing credit bureau is expected to be ● Two new MFBs were incorporated in the past established by early 2014. It will be an expansion year (Waseela Microfi nance Bank in May 2012 and of the existing Credit Information Bureau (CIB), Advans Pakistan Microfi nance Bank in November which monitors A, B and C-class FIs. 2012), which has brought the number of MFBs to 10. Six of those 10 banks are licensed to operate nationwide. The US-based Foundation for ■ Pakistan International Community Assistance (FINCA) has announced it will also invest, indicating both the Key characteristics of the microfi nance business supportive regulatory environment and the growth environment: potential of the industry. ● Pakistan is one of the few countries in the world ● Branchless (agent) banking continues to grow that has a separate legal and regulatory framework in Pakistan, led by mobile-banking agents. There for microfi nance banks (MFBs) and is generally are now four tie-ups between mobile-phone considered to have one of the most enabling operators and MFB. Person-to-person transfers, environments for microfi nance regionally and bill payments and airtime top-ups still accounted globally. The framework allows specialised MFBs for the vast majority of transactions, however; and commercial banks—the two types of regulated savings deposits and withdrawals and loan microfi nance service providers in Pakistan—to repayments are a small portion of the market, and, extend a range of microfi nance services to poor in most cases, such transactions are handled “over and low-income customers through various the counter”, in which the bank agent, not the arrangements, including mobilising deposits. client, uses the mobile phone. ● The 2001 Microfi nance Institutions Ordinance of ● New initiatives in pricing transparency and the State Bank of Pakistan (SBP, the central bank) client protection will be launched in 2013, provides a regulatory framework under which MFBs strengthening the social performance of the can be established or commercial banks can industry. downscale. ● The Securities and Exchange Commission of ● The SBP has attempted to support the growth of Pakistan (SECP) issued draft rules for micro- the industry, while maintaining its stability. In insurance in June 2013, which included not only 2010, it tightened prudential regulations that the basic rules of the segment, but also client- apply to MFBs, increasing minimum-capital protection requirements.
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■ Philippines ■ Sri Lanka
Key characteristics of the microfinance business Key characteristics of the microfi nance business environment: environment: ● The Bangko Sentralng Pilipinas (BSP, the ● The government is a key player in the delivery of Central Bank) continues to promote an enabling microfi nance services. According to the Mahinda environment for microfi nance, seeing it as one of Chintana, the 10-year development framework its key poverty-reduction efforts, and ensuring that covering the fi rst term of the existing government, there is no direct lending by government agencies around 65% of micro-credit is supplied through the (only wholesale lending). government. ● The industry remains quite fragmented, as there ● Sri Lanka-s regulated microfi nance industry is no one dominant institution type, set of consists of the Regional Development Bank (RDB); institutions, or network and multiple regulatory the Samurdhi Bank Societies (SBS); Co-operative and supervision regimes, due to the diversity and Rural Banks (CRBs); the Thrift and Credit-Co- scale of the types of service providers. operative Societies of the SANASA network; non- ● Agent banking is quite advanced, including e- governmental organisation-microfi nance wallets, mobile access to bank accounts, and institutions (NGO-MFIs); and other fi nancial correspondent relationships for micro-insurance, entities, including commercial banks and fi nance remittances and government to person (G2P). companies. ● The existing regulatory framework in the Key changes and impacts since last year: microfi nance industryis weak and implementation ● A new law allowing foreign ownership of up to is lax. For example, pawn brokers (Pawn Brokers 60% in rural banks was passed in early 2013. Ordinance of 1942), moneylenders (Money Lending ● A new regulation permitting agents to re-sell Ordinance of 1918), and Rotating Savings and micro-insurance products was issued. One chain of Credit Associations (ROSCAs, known as cheetus in pawnshops is selling almost 1m policies per month. Sri Lanka; Cheetu Ordinance of 1935) are all ● New Central Bank circulars were issued, regulated by existing long-standing laws, but supporting development of microfi nance and rural implementation and regulation are weak. fi nance. ● The lack of a cohesive regulatory and supervisory ● A private-sector initiative by microfi nance framework for the microfi nance industry remains a institutions (MFIs), thrift and rural banks and non- barrier to development. governmental organisations (NGOs), led to the ● Although MFIs do not deliberately mislead creation of the Microfi nance Information Data and clients, much can be done to improve the way MFIs Sharing System (MIDAS) in 2012. In mid-2013, calculate and communicate prices. membership had grown to 13 MFIs, many of which actively operate in the Visayas or central part of the Key changes and impacts since last year: country. Efforts to expand coverage nationwide to ● The microfi nance industryhas been on hold for more MFIs are on-going, with the membership the past couple of years, awaiting the passage of applications of 10 MFIs under review. MIDAS is the Microfi nance Act by parliament. Until the Act is piloting the inclusion of positive borrower passed, unregulated MFIs are operating in a legal information. vacuum. ● A geospatial mapping product is being ● Donor funds to the microfi nance industry are conducted, covering all fi nancial-access points diminishing. This is attributed, in part, to the across the country. upgrading of Sri Lanka by the World Bank to a lower-middle-income country in late 2010. ● The Finance Business Act passed in 2011 has
37 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
had a negative impact on the microfi nance Finance. The SFIs are examined by the BOT and are industry. Entities not licensed under this Act are subject to Basel II regulations, but do not operate prohibited from using the word “fi nance” in their on purely commercial principles. name, creating a hurdle for new NGOs and entities ● Under the Civil Procedures Code, an interest- registering the phrase “microfi nance” in their rate ceiling of 15% is in place for lending by names. The Act also prohibits the mobilisation of unoffi cial fi nancial institutions (FIs). The central public deposits, unless the entity is licensed under bank has set a ceiling of 28% for combined interest the Banking Act or Finance Business Act.There has and service charges on all personal consumer been a crowding-out of smaller MFIs by fi nance loans; there is an interest-rate ceiling of 20% for companies that are now engaged in providing credit-card loans. Other loans, such as corporate microfi nance services. loans, are not subject to caps on interest rates. ● Growth in the telecommunications sector has the potential to lower costs and facilitate the Key changes and impacts since last year: delivery of inclusive fi nancial services to MFIs and ● The provision of microfi nance continues to be their clients. dominated by government-sponsored schemes, including the VF. In late 2012, the government announced plans to inject US$2.6bn in additional ■ Thailand capital into a network of nearly 80,000 village funds. The government aims to raise the number of Key characteristics of the microfi nance business VF customers to 20m by 2016 (up from from 13m at environment: end-2012). It also wants to make the village funds ● Microfi nance in Thailand is generally a a “one-stop service to help solve problems at the government-sponsored activity. Thailand’s Village village level”. There are also plans to create a Fund (VF), one of the world’s largest micro-credit people’s bank, a central bank for the VF, and a schemes, leaves little room for the development of “nation fund”, a state-backed fi nancial vehicle that private-sector provision of microfi nance. Non-state supplies the funds. providers of microfi nance currently cannot ● The primary concern of policymakers is a surge compete on cost. of household debt from 40% of GDP a few years ago ● Rising income levels, a surge in household debt, to around 70% currently. The BOT has encouraged a state that generally questions non-governmental the expansion of commercial banks into organisations (NGOs) and an extremely high rate of “microfi nance”. However, commercial banks’ MF fi nancial inclusion are the main obstacles to portfolios remain small. Although, in principle, the microfi nance through new, non-state channels. BOT and the Finance Ministry favour the entry of According to the Bank of Thailand (BoT, the central new (private) providers of MF, highly subsidised bank), 96.5% of households have access to government programmes and stringent regulations fi nancial products. preclude the entry of new MFIs or the expansion of ● The BOT has unveiled a plan to allow new and existing small private providers of MF. qualifi ed microfi nance service providers to enter ● The Finance Ministry appears to be concerned the market. The BOT only regulates commercial about the fi nancial health of 35,000 savings groups banks and specialised fi nancial institutions (SFIs) (SHGs), thousands of co-operatives and other and has no specialised capacity to regulate or informal providers of MF, which remain supervise MFIs. unregulated and whose client bases often overlap. ● The main providers of microfi nance—including Attempts by the Finance Ministry to create a two state-run behemoths, the Government Savings database of these clients to tackle possible over- Bank and Bank of Agriculture and Agriculture Co- indebtedness have made only limited progress. operatives—are regulated by the Ministry of ● The government is pursuing an agenda of
38 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
fi nancial inclusion to improve access to fi nance in ● Overall, the provision of fi nancial services to the poorer regions, particularly in the north-east, a key low-income demographic remains a government- government stronghold. The administration is dominated activity as part of both its social-welfare likely to expand the use of existing tools of efforts and the Communist Party’s political and patronage, such as the Bank for Agriculture and social stability agenda. This is not likely to change, Agricultural Co-operatives (BAAC) and the as a Prime Minister’s Decision was issued on March Government Savings Bank (GSB). 1st 2012 that states categorically that, “100% ● Thailand has one centralised credit bureau State-owned banks and banks where the State system, called the National Credit Bureau (NCB), holds controlling share…shall be actually the key covering credit information from retail borrowers force of the credit institutions system.” to small and medium-sized enterprises (SMEs) and ● An improving regulatory framework has allowed corporates. All major FIs, including SFIs, are two programmes to transform into licensed MFIs, members of the NCB. Further, the NCB is operating but these may be the exception, rather than the more effectively in comparison to credit bureaus of rule, in part because the regulatory requirements other East Asian countries. are excessively onerous relative to the low capacity ● A technical-assistance project by the Asian of the small, semi-formal programmes to meet Development Bank (ADB) is currently reviewing the them and transform. Moreover, the benefi ts of legal, regulatory and supervisory framework for transformation (ability to accept deposits and microfi nance. One of the key objectives of the access commercial wholesale funds) are offset by three-year project that ends in February 2015 is to regulatory and reporting requirements and taxes. strengthen the capacity of the Bureau of Financial ● The 2010 Law on Credit Institutions requires Inclusion Policy and Development (FIPD) to regulated MFIs to publish rates and fees. Both conduct its supervisory responsibility. regulated and non-regulated MFIs and state-owned providers clearly state interest rates in leafl ets and advertisements before disbursing loans. There are ■ Vietnam still many small, unregulated programmes, however, that are not subject to this Law, and Key characteristics of the microfi nance business there is no prescription to use declining-balance environment: calculations. MFIs get around interest-rate caps in ● There is a plan for the development of the part by charging “membership fees”, which are not microfi nance industry until 2020, which was issued included in the interest-rate calculation. in December 2011 by the prime minister, and which ● Few support structures exist for microfi nance will focus on extending the regulatory framework operators, including technical advisory services, and completing the rules and regulations required funding, quality and standards protocol, data to implement the Credit Institutions Law of 2010, gathering and consolidation (with common the main Law governing all credit providers, defi nitions), or auditors with specifi c MF including microfi nance institutions (MFIs). experience. Building the capacity of MFI staff through training is also a focus of the industry development plan. Key changes and impacts since last year: However, the 2020 plan does not clearly envision ● Multiple efforts by donor agencies are ongoing new entrants into the market or a more commercial to try to improve the regulatory framework and approach (for example, ending interest-rate caps), supervisory capacity of the State Bank of Vietnam nor is there any discussion of a change in the role (SBV, the central bank), but the process is slow of the big state banks (VBSP and VBARD) in the because of weak capacity inside the SBV, the provision of credit. political weakness of SBV relative to the Women’s Union and the Ministry of Finance, which manages
39 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
the state-owned banks, and the general fact that microfi nance is not a major priority of the SBV. ● The government has begun to promote agent banking, focusing on cards and “cashless” transactions, although this is aimed more at clients of mainstream banks than at MFIs, who do not have the information-system capacity to handle such transactions. ● In November 2007, Private Credit Bureau Investment Joint Stock Company (PCB) was established, with initial charter capital contributed by the top 11 commercial banks in Vietnam. It took two years to fi nd a suitable international partner, and only in March 2013 did the SBV grant the PCB and its partner, CIRF, a licence to operate as a credit bureau. When operational, the new credit bureau will gather positive and negative credit information on individuals and businesses from eligible lenders, which now include 22 fi nancial service providers, but these are commercial lenders and not microfi nance service providers. For microfi nance clients, the ADB and IFC are said to be planning to provide support for developing a credit bureau, but no action in this area has begun yet.
40 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
system. Most liquidity is in foreign currency, which Eastern Europe and has exposed smaller players, including micro- Central Asia lenders, to foreign-exchange risks. Foreign lending has grown twice as fast as lending in local currency.
■ Armenia ■ Azerbaijan Key characteristics of the microfi nance business environment: Key characteristics of the microfi nance business ● Supervisory authorities have the capacity to environment: monitor lending activities, including micro-credit, ● As of June 2013, micro-lending was composed but are more focused on managing risk than credit of around 10 downscaling banks, one specialised growth. Lending conditions remain relatively tight microfi nance bank, 97 Non-Bank Credit as a result. Organizations (NBCOs), and 108 (unregulated) ● Consumer protection in Armenia continues to be credit unions (CUs). among the highest in emerging markets, with a ● The 2009 Law on Non-bank credit organisations high degree of transparency demanded by (NBCOs) has clarifi ed the regulatory environment authorities on credit pricing. for NBCOs. However, although the new Law put ● Competition for funding is high. Smaller players NBCOs under the supervision of the Central Bank of in micro-lending are struggling to compete with the Azerbaijan Republic (CBAR), so far the CBAR larger banks that target the same client segments. has adopted a light-supervision approach. ● Double-digit growth in micro-lending is normal ● Only banks are allowed to take deposits, and for these markets, with micro-lending representing obtaining a new banking licences (either greenfi eld a high share of total lending. or via M&A) is virtually impossible in the current consolidation phase promoted by the CBAR. Key changes and impacts since last year ● According to the World Bank’s Doing Business Key changes and impacts since last year: 2013 report, in 2012 Armenia made starting a ● In May 2013, the cost of using the Credit Bureau business easier by establishing a one-stop shop was reduced by 50% and its use has continued to that merged the procedures for name reservation, grow across banks and NBCOs. A new private credit business registration and obtaining a tax bureau (PCB) is expected to launch in 2013 with identifi cation number and by allowing for online the support of the IFC. company registration. ● A 2012 CBAR regulation increased fi vefold the ● One new project developed by the Central Bank minimum-banking capital requirement, which will of Armenia is the design of a “fi nancial-services come into effect in January 2014. shopping tool”, through which all fi nancial ● The CBAR has issued new rules promoting organisations have to send a description of their interest-rate transparency, applicable to both banks offerings (credit, deposit, credit cards and and NBCOs. The Azerbaijan Microfi nance Association insurance). (AMFA) is currently working with the CBAR and ● Overall economic growth is accelerating, regulated micro-lenders to establish a voluntary creating more demand for loans among small and code of ethical standards for the industry that will medium enterprises (SMEs). include client-protection principles to help them ● One of the challenges facing local lenders is the improve their transparency in pricing. scarcity of local currency in the domestic market ● The country has witnessed moderate progress in and the increased dollarisation of the fi nancial alternative delivery channels through a signifi cant
41 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
increase in the number of cash-in terminals and Key changes and impacts since last year: points-of-service (POS) and further negotiations ● The dispute-resolution system has been on a mobile-banking framework. improved since 2011, owing to the fact that, in the RS, there is an ombudsman for fi nancial services. As of mid-2012, the legislation introduced the ■ Bosnia and Herzegovina same function within the respective Banking Agency in BiH. Key characteristics of the microfi nance business ● In May of 2013, a Bill on client protection environment: passed both parliaments and is currently ● Setting up greenfi eld microfi nance institutions undergoing a public debate, which is set to last 60 (MFIs) and forming new non-governmental days. This Bill would grant greater client organisations (NGOs) has traditionally been protection for fi nancial services users. relatively easy in both the Federation of Bosnia and ● Amendments to the Law on MCO and the Law on Hercegovina (BiH) and the Republika Srpska (RS), Banks have been proposed to parliament. These are with the bureaucratic burden considered still undergoing parliamentary procedure, and the manageable. All microfi nance organisations (MFOs) future implications of these changes are still in BiH are regulated. According to legislative and unknown. regulatory requirements, MFIs can be established by either three domestic or foreign natural persons, or by one domestic or foreign legal entity. ■ Georgia ● There is a difference between the two entities and regulations regarding the microfi nance institutions Key characteristics of the microfi nance business (MFIs), especially related to lending ceilings, which environment: are in place in both jurisdictions. The main ● Georgia enjoys the most liberal business regulatory constraint remains the overall size of environment in the Caucasus and Central Asia. Its loans, which is set at a maximum US$6,400 for a main source of challenges is geopolitical tensions microfi nance centre (MCF) and a maximum and domestic politics. These do not directly impact US$32,000 for a micro-credit company(MCC). The micro-credit development, apart from adding to diffi culty for micro-lenders operating in BiH is risk premium and the general economic related to the challenges of transforming from an environment in the country. MCF to an MCC. While there are diffi culties and ● Georgia has distinguished itself by following a differences across entities, neither types of MFI have relatively balanced regulatory-reform path. It has interest-rate caps or unfair public competition. improved immensely in reducing the complexity ● Commercial banks have policies and services for and cost of regulatory processes, as well as e-banking and phone banking that also apply to strengthening legal institutions, and it ranks quite micro-loan payments. Loan applications still need highly in transparency in business regulation. to be completed at MFI offi ces, however, and MFIs ● Georgia has established a state-of-the-art do not have their own mobile-banking systems or company-registration system, with widespread platforms. availability of one-stop-shops, and a well ● There are two credit bureaus: one is private (LRC functioning and effi cient electronic company Credit Bureau) and the other was established by the register. Central Bank, the Central Registry of Loans. The state- run credit bureau includes all credit data for the entire Key changes and impacts since last year country. Financial institutions (FIs) therefore have a ● In 2013 Georgia expanded access to credit by good overview of the number of loans and amount of amending its civil code to broaden the range of debt carried by a potential client. assets that can be used as collateral.
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● Georgia also strengthened its secured point scoring. The Usury Bill, passed by parliament, transactions system through an amendment to the but not yet signed by the president, will impose an civil code allowing a security interest to extend to interest-rate cap on micro-loans, which is likely to the products, proceeds and replacement of impact the country’s scores next year. collateral. ● The Bill on exchange of credit information, ● Georgia made signifi cant progress in the number discussed in parliament, may fi nally help transform of procedures needed for obtaining credit (as the country’s sole not-for-profi t credit bureau into measured by the Doing Business Index, decreasing a fullyfl edged commercial venture. Better credit- to two in 2013 (down from nine in 2004). information exchange is expected to address over- ● In terms of innovations, there is now a new indebtedness. entity, which has registered with the National Bank of Georgia (NBG, the central bank) as a Payment Service Provider (PSP) and intends to launch a ■ Tajikistan mobile-money solution service this year. Key characteristics of the microfi nance business environment: ■ Kyrgyz Republic ● As of March 31st 2013, there were 46 micro- lending funds (MLFs), 44 micro-lending Key characteristics of the microfi nance business organisations (MLOs) and 35 micro-credit deposit environment: organisations (MDOs). Only MDOs are allowed to ● As of June 30th 2013, the National Bank of the take deposits, and not all of these actually do so, Kyrgyz Republic (NBKR, the central bank) lists 337 owing to limited demand for such services. micro-credit companies (MCCs), 91 micro-credit ● The National Bank of Tajikistan (NBT, the central agencies (MCAs), fi ve microfi nance companies bank) concentrates its supervision on commercial (MFCs) and 189 credit unions (CUs) as microfi nance banks and MDOs. Non-deposit-taking microfi nance providers. Some commercial banks also offer institutions (MFIs) are only lightly supervised. micro-credits. Low entry barriers have resulted in ● The business environment for microfi nance is the proliferation of very small institutions. hampered by the embryonic state of thecredit ● Only MFCs are allowed to take deposits and bureau, which was launched in 2013. these are limited to time deposits. The only MFC that was actually taking deposits became a Key changes and impacts since last year: commercial microfi nance bank (MFB) in 2012. ● MFIs are legally required to provide maximum ● While the regulatory capacity exists in the transparency in pricing and are banned from country, regulation and supervision hamper the imposing fi nes for early loan repayments. development of mobile banking and innovations. ● A credit bureau was inaugurated in June 2013, The country has not devised a formal dispute- but it is too early to assess its effi ciency. resolution mechanism. ● MFIs are required to set up systems for managing risk and internal control, while MDOs are Key changes and impacts since last year: legally required to establish reserve funds to cover ●The new 2013 wording of the Law on potential losses on loans (MLOs and MLFs may also Microfi nance Organisations provides for sound set up such funds). client protection. It requires maximum transparency in pricing from microfi nance institutions (MFIs). ● Some politicians have seized on fringe sentiments against micro-credits for their political
43 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
■ Turkey ● MFIs are not allowed to accept deposits. The total size of their portfolio remains negligible, Key characteristics of the microfi nance business drawing little attention from the regulators. The environment: legal environment is perceived as not permitting ● Provision of microfi nance in Turkey is limited the entrance of new microfi nance players. compared to potential demand. It is broadly ● MFIs have high standards of reporting and unregulated and marginal to the fi nancial sector. ethical behaviour towards clients. There are no regulations in place or procedures laid down for accounting, transparency or client Key changes and impacts since last year: protection in microfi nance specifi cally. ● TGMP remains the larger of the two small MFIs. ● The banking sector is strong, well regulated and It continues to seek ways of expanding and technologically savvy. Some banks provide small diversifying its services. There are plans to credits to micro-enterprises as part of their regular transform the TGMP into a bank called Damlabank. activities, in line with general banking legislation Maya is now adopting a methodology more closely and supervision; others see microfi nance as a in line with the Grameen approach. matter of corporate social responsibility. ● Turkey’s offer to host the 2016 Global ● There are only two dedicated microfi nance Microfi nance Summit may precipitate the institutions (MFIs): Maya Microfi nance Enterprise introduction of a new regulatory framework for and Turkish Grameen Microcredit Programme microfi nance. Although this is not currently on the (TGMP). Both were established a decade ago by public agenda, promoting microfi nance would be in non-governmental organisations (NGOs) in rather line with the government’s social-policy approach. unique circumstances. ● The interest of a number of banks in providing microfi nance, and in using traditional microfi nance methodology for assessing creditworthiness, seems to be increasing. However, funding may be tighter from now on, as Turkey is one of the emerging markets most affected by signals of tighter US monetary policy in May-July 2013.
44 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
scaling up the usage of INFOCRED, a microfi nance Latin America and credit bureau. RADIM is now providing training the Caribbean services to MFIs out of the network, as of this year. ● The BCRA has increased its supervisory capacity for commercial banks. ■ Argentina ● Government ministries supporting social welfare are offering increasing wholesale funding for Key characteristics of the microfinance business microfi nance. environment: ● There is only a limited framework for microfi nance regulation, and most institutions ■ Bolivia engaged in microfi nance are not prudentially regulated. Key characteristics of the microfi nance business ● Institutions operating in microfi nance are not environment: allowed to capture deposits of any type, apart from ● Bolivia maintains a strong and favourable small credit co-operatives and commercial banks, microfi nance regulatory environment, although of which few have even limited engagements in major changes are expected, following the microfi nance. implementation of the Financial Services Law (see ● Non-regulated entities operating in below). Since its creation, the Autoridad de microfi nance are not required to publish effective Supervisión del Sistema Financiero (ASFI, the interest rates, and practices across the industry are Financial System Supervisory Authority) has very uneven.Those institutions that are required to pursued a market-based approach towards the disclose rates are not properly monitored and, microfi nance industry, based on considerable therefore, enforcement is weak. technical expertise and professionalism. This is ● Most institutions involved in microfi nance are notwithstanding the high turnover of mid-level small, not commercially sustainable, and rely on staff and the widening reach of the Ministry of philanthropic or government wholesale funding, Economy and Public Finance, under which the ASFI the latter of which requires them to on-lend to is organised. customers at 6% per annum. ● The regulatory framework has permitted commercial banks, Fondos Financieros Privados Key changes and impacts since last year: (FFPs, private fi nancial institutions) and regulated ● The Banco Central de la República Argentina co-operatives to undertake large microfi nance (BCRA, the Central Bank) has recognised the operations. NGOs engaged in microfi nance importance of the microfi nance industry by issuing (offi cially termed Instituciones Financieras de regulation related to collateral constraints on Desarrollo; IFDs, Development Finance micro-borrowers and to make mandatory the Institutions) fall under the ASFI’s supervisory offering of simplifi ed savings accounts. remit, although the process of fully integrating Encouraging banks to downscale their operations them into the regulatory framework has lagged, to reach unserved markets is part of the Central pending the adoption of the new Financial Services Bank’s fi nancial-inclusion strategy. Law. ● The BCRA issued a circular requiring all ● Local experts have widely noted that regulated commercial banks to offer a basic deposit account, microfi nance institutions (MFIs) voluntarily follow which signals the potential for more inclusive International Accounting Standards (IAS). Legal fi nancial products in the future. requirements are weaker for unregulated ● The Red Argentina de Instituciones de institutions, although there is considerable self- Microcrédito (RADIM, the micro-credit network) is regulation among non-governmental organisations
45 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
(NGOs) through the Asociación de Instituciones ■ Brazil Financieras de Desarrollo (FINRURAL, their industry association), which puts the country Key characteristics of the microfi nance business ahead of these initiatives within the region. environment: ● The government continues to promote micro- Key changes and impacts since last year: credit to serve social purposes. Public institutions ● The long-anticipated Financial Services Law was are being mobilised to extend microfi nance loans promulgated in early August 2013. The new at below market rates, whereby second-tier funds legislation refl ects a greater institution-, rather go mainly to four public-sector banks, which cap than activity-specifi c focus, and features micro-credit interest rates and also on-lend to prominent state intervention in the industry. other microfi nance institutions (MFIs), with fi nal Provisions include interest-rate caps and quotas on rates to consumers similarly capped. Some of these loans to the productive sectors and for housing; banks have proved more adept than others in interest-rate fl oors for deposits; special adapting lending practices and methodologies to requirements for services to rural areas and other the microfi nance industry. potentially market-distorting measures. ● Correspondent banking is highly developed, but ● Private MFI providers have expressed mobile banking remains weak. Although regulation reservations of opinion about the proposed for simplifi ed accounts exists, the offer of this measures vis-à-vis their individual operations, fi nancial product is practically non-existent. whereas a more positive outlook is held by NGOs. ● The regulatory framework is prudent, although Private MFIs will likely face challenges with informants complain of excessive documentation shrinking margins, higher costs and a controlled requirements. Migration from non-regulated to operating environment. regulated status has remained diffi cult. The ● There remains concern that the process of diversity and complexity of legal status, both bringing all NGOs and co-operatives under formal regulated and non-regulated, makes for a supervision may dilute overall governance fragmented microfi nance industry. standards. As governance norms and other terms ● Institutions have to inform clients about of regulation for Instituciones Financieras de interest rates and fees in a transparent manner, Desarrollo (IFDs, Development Finance with good compliance and fairly good norms of Institutions) have not been clearly established by self-regulation by non-regulated MFIs. Yet the the ASFI, a two-tiered system could emerge, where system still remains complex from the borrower’s laxer standards are in place for IFDs and closed co- perspective, even as the government and operatives than for Fondos Financieros Privados institutions have emphasised the importance of (FFPs, private fi nancial institutions), which, under fi nancial education. the draft legislation, will be converted to small and medium-sized enterprise (SME) banks. Key changes and impacts since last year: ● A major tax change has hit the microfi nance ● It has become more diffi cult to open and industry in the form of Supreme Decree No 1288 of operate non-regulated MFIs, such as Organizações July 2012, which adds a 12.5% tax on earnings of da Sociedade Civil de Interesse (OSCIPs, public- regulated fi nancial institutions (FIs) when return- interest organisations) and traditional non- on-equity (ROE) exceeds 13%. The adoption of this governmental organisations (NGOs) in the view of tax has limited the profi tability of regulated MFIs, informants. The latter group must continue to resulting in annualised return on equity (ROE) of demonstrate that they operate in the public 16.78% at the end of May 2013, down from 19.83% interest in order to set market interest rates, and ayear earlier. both types of institution face diffi culties in maintaining market share and in accessing second-
46 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
tier funding, as they compete with subsidised directly affecting the microfi nance industry. public institutions charging well below market Proposed legislation would lower maximum rates. allowable interest rates, albeit with some ● There is a variety of moderately well-functioning mitigating provisions for the microfi nance dispute-resolution mechanisms for consumer industry. Erasure of default information ordered by protection. These include a mandatory ombudsman a law passed in February 2012 may encourage non- at regulated institutions, state-level consumer- repayment, even if its purpose was to eliminate protection offi ces not specifi c to microfi nance, erroneous or unfair information in DICOM. increased formal adherence to Smart Campaign ● A proposed new law would bring Credit Co- voluntary norms among MFIs and their networks, operatives, currently under supervision by the and small-claims courts. Department of Co-operatives, under SBIF ● The long-expected positive registry for credit supervision. information services is slated to begin functioning ● There is a slow and steady increase in consumer on August 1st 2013, owing to implementing protection and transparency, both from the regulations approved in October. However, its government and the private sector. status—as a voluntary institution subject to the ● A national fi nancial-inclusion council is under individual consumer’s consent to information- preparation, led by the Minister of Finance, and is sharing—was clouded as of July 2013 by legal expected to contribute to a more conducive challenges. environment for microfi nance.
■ Chile ■ Colombia
Key characteristics of the microfinance business Key characteristics of the microfi nance business environment: environment: ● Chile’s microfi nance market is relatively small, ● Most of the large microfi nance institutions in line with its relatively low levels of poverty. It is (MFIs) have converted into a bank or are in the dominated by large private banks and one large process of becoming regulated under the state bank, Banco del Estado. Smaller non- Superintendencia Financiera (SF, the fi nancial governmental organisations (NGOs) service more supervisor). There are still a few big players (such rural areas, where large banks have limited reach. as Fundación Mundo Mujer) that are not yet ● The microfi nance information lacks formal regulated by the SF and that hold a signifi cant part regulation (for example, simplifi ed accounts are of the segment portfolio. The government, Banco not covered in the fi nancial regulation). There is de la República de Colombia (BRC, the central little expertise within the Superintendencia de bank) and multilateral organisations have been Bancos e Instituciones Financieras (SBIF, the working with Asomicrofi nanzas (the association of Supervisor of Banks and Financial Institutions) to MFIs) and directly with MFIs to understand the regulate it. idiosyncrasies of this market. ● There are interest-rate caps, which are of ● The interest-rate cap is calculated quarterly growing concern to some actors in the under a methodology that accounts for microfi nance industry. microfi nance and commercial loans. This yields an ● Non-regulated micro-credit providers can easily artifi cially low rate. However, regulators and be established, but may not accept deposits. policymakers have increased the rate each quarter, such that it does not constitute a constraint on Key changes and impacts since last year: most institutions offering microfi nance products. ● There are growing concerns about interventions Additional fees, such as micro, small and medium
47 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
enterprises (MSMEs) fees (for example, Comisión ■ Costa Rica MIPYME) are mandatory, but are not included in the calculation of the micro-credit interest rate. Key characteristics of the microfi nance business ● Colombia passed a comprehensive set of laws in environment: 2009 around client protection that included rules ● The microfi nance environment in Costa Rica about pricing transparency and dispute resolution. remains underdeveloped and faces strong MFIs are required to disclose interest rates and competition from state-owned banks (most fees, but there does not yet appear to be notably, the Banco Nacional de Costa Rica), which standardisation in reporting to allow for price participates extensively in micro-credit, but also comparisons. The SF has a Financial Consumer acts as a second-tier lender. However, Advocate Department that handles client-dispute requirements to operate in the market (or to resolution. upscale) are low. ● Since 2011 there has been discussion about ● There is no specialised vehicle for microfi nance, passing a new law that will demand traditional and the majority of microfi nance institutions banks to facilitate the access to micro-credit for (MFIs) are constituted as non-regulated non- unbanked populations. The proposed methodology governmental organisations (NGOs). These tend to is to require banks to have a percentage of their be small and undercapitalised and have few portfolio allocated to micro-credit and that at least incentives to formalise or expand, given the limited 50% of that portfolio should focus on the poorest market opportunities that exist. segments of the population. This law has not yet ● Regulated fi nancial institutions (FIs) in Costa been approved, but it was presented again in Rica generally uphold high accounting and March 2013 for new discussions during this governance standards, and adherence to IFRS is legislative period. mandatory. Accounting quality and transparency in non-regulated institutions is mixed, however, with Key changes and impacts since last year: the highest standards arising from those who are ● As the market continues to mature, competition part of microfi nance networks. among MFIs for the best clients is intensifying. As ● Transparency in pricing varies, but is generally they begin to offer more and bigger credits, adequate, as is the level of consumer protection especially to customers with good credit profi les, and credit bureau information. over-indebtedness and loan delinquencies are concerns. Key changes and impacts since last year: ● Asomicrofi nanzas was launched in 2011. ● A proposed law seeks to expand the options for Currently, there are 33 institutional members that micro and small fi rms in offering loan guarantees represent most of the market: banks, co-operatives, (including, for example, intangible assets such as fi nance companies and non-governmental receivables), and which could therefore improve organisations (NGOs). Asomicrofi nanzas is building access to credit. platforms to collect, manage and disseminate ● A reform of the Development Banking Law is also information about the market. under negotiation and could increase the scope for ● Dispute-resolution statistics published by the second-tier lending from public banks, but could SF’s Financial Consumer Advocate Department show also increase competition with other MFIs. that the number of days it takes to receive a fi nal ● The BancoNacional de Costa Rica and Banco de resolution is increasing. As of March 2012, 18% of Costa Rica have been strong early adopters of mobile claims were outstanding for more than 180 days. As and Internet banking and establishers of points-of- of March 2013, that fi gure had increased to 42% of service (POS), a trend that is likely to continue in the outstanding claims. next two to three years with the implementation of these technologies by some MFIs.
48 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
● The country’s challenging fi scal outlook poses subsidised and non-regulated and regulated MFIs an indirect risk to the microfi nance industry if it are fi nding it hard to compete. There are also remains unresolved, as a result of potential concerns of an overshoot in non-payment and a reduction in resources (such as second-tier setback in the general fi nancial education if these lending), as well as a lack of consumer demand for programmes do not provide the proper follow-up to credit due to macroeconomic uncertainties less the loans. than a year before the general election. ● Non-regulated MFIs have experienced high growth rates in the last few years. This segment is reaching a tipping point, where some entities are ■ Dominican Republic large, offer a variety of products and are competing with regulated MFIs for clients. Key characteristics of the microfi nance business ● New taxes on all interest-bearing accounts will environment: serve to deter savings and increase operational ● The microfi nance industry lacks a comprehensive costs of MFIs, but a phasing out of a 1% tax on all regulatory framework. The industry comprises 25 bank assets will benefi t regulated MFIs. regulated and non-regulated institutions. Three of ● As the market continues to grow, client these are regulated credit and savings banks, two education, a fundamental aspect of client are regulated savings and loans associations protection, is growing in importance. Banco (S&Ls), and the rest are unregulated co-operatives ADOPEM, a leading MFI, has developed innovative and non-governmental organisations (NGOs). programmes to teach people how to assess and ● Forming either regulated or non-regulated MFIs select the products that are most appropriate for is a transparent and straightforward process; them. however, there is no legislation that specifi cally ● In 2013, the Superintendency of Banks passed establishes a transformation process, forcing NGOs the Reglamento de Subagente Bancario (banking to create new entities if they want to become subagent regulation) for banking agents, which regulated. Recent tax hikes have increased the tax allows regulated fi nancial institutions (FIs) to take for NGOs, and an upgrading trend is seen as provide banking services via authorized agents NGOs are forming regulated MFIs in order to and/or commercial establishments such as hotels, become eligible for deposit taking. pharmacies, telecommunications offi ces, small ● Co-operatives are players in microfi nance. Both shops and supermarkets, in the absence of a NGOs and co-operatives, which are non-regulated branch or point-of-service (POS). institutions, practice some sort of self-regulation and adhere to transparency standards. ● Confl ict resolution is not well established among ■ Ecuador MFIs. ● Credit-history information is considered to be Key characteristics of the microfi nance business accurate, although timeliness is moderate. There is environment: a 42-day information gap that poses challenges to ● Ecuador’s microfi nance industry has gone risk assessment in micro-loans. Non-regulated through a period of substantial change since the MFIs are not required to report to the credit current administration implemented the Ley de la bureaus. Economia Popular y Solidaria (LEPS). The LEPS is now in force and the new Superintendencia de la Key changes and impacts since last year: Economia Popular y Solidaria is operational. A ● The administration that took power in 2012 has substantial number of co-operatives have scaled government programmes that directly registered with the new superintendency, as engage in microfi nance. Interest rates are required by the Law, and will be subject to stricter
49 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
regulatory requirements. This important ■ El Salvador institutional change outlines the importance of the co-operative segment in the fi nancial sector, in Key characteristics of the microfi nance business particular in the microfi nance industry. environment: ● Interviewees see the reforms as broadly ● Although there is no formal, legal defi nition of positive, as they attempt to bring more formal micro-credit, this has not been a major obstacle to regulation to a large and diverse industry, the the industry’s development to date. The majority of which was previously unsupervised. microfi nance industry continues to comprise a wide However, the reforms are still in a period of variety of institutions, including banks, co- implementation. There is however uncertainty operatives, credit unions (CUs), non-regulated about the regulations that will apply to current and fi nance companies and non-governmental newly regulated institutions. organisations (NGOs). Microfi nance clients have ● The current administration has over the past access to different products and companies without year shown a clear preference towards small much concern for monopolistic practices. The lenders,as opposed to large banks,in the “popular industry accounts for around 15% of total lending. and social economy”. As such, co-operatives have ● Accounting practices at regulated institutions been exempted from a number of recent, that provide microfi nance are fair and there have burdensome tax reforms on banking-sector profi ts. been improvements among non-regulated entities. This is expected to benefi t small lenders. All types of institutions must meet international standards and hire recognised internal and Key changes and impacts since last year: external audit fi rms, facing signifi cant sanctions if ● A substantial number of operators have now these requirements are not met. been brought under the supervision of the new ● Credit-bureau coverage of micro-lending Superintendency. However a high number of small, transactions is a relative strength and continues to unregulated lenders are thought to continue to improve, although non-regulated MFIs have operate. It is unclear, given that the limited access to credit information. Client- Superintendency is new, as to whether it has the protection standards vary widely and are often capacity to enforce regulations on the entire weak. industry, particularly in remote rural areas. ● The policy framework for fi nancial transactions ● The LEPS sets out conditions for a minimum through agents is poor, but it is gradually number of members and a minimum capital base improving. There has been some progress in for setting up co-operatives. It also demands that regulating and fomenting services such as managers meet certain requirements in terms of remittances transfers, but, in other areas, such as qualifi cations and sets out new requirements for mobile-phone transactions, progress has been reporting and prudential requirements. These much slower. requirements are considered high barriers for new entrants to the market and will also be burdensome Key changes and impacts since last year: on smaller operators. ● The industry is facing important short and ● The authorities implemented reforms to medium-term challenges, in particular after the Ecuador’s well developed credit bureau system, adoption in late 2012 of a Usury Bill. The Bill, replacing the existing system of monitoring by which came into effect in August 2013, sets strict private fi rms with a state-run body. This has interest-rate limits for all fi nancial institutions prompted concerns over the future quality of (FIs), including regulated and non-regulated information and a loss of expertise, as Equifax, the microfi nance institutions (MFIs). These restrictions main credit bureau, has already lost signifi cant could make certain MFIs unprofi table or make technical capacity. lending standards much stricter, hurting the
50 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
poorest customers the most. It could weaken the private bureaus and allow for the sharing of entire microfi nance framework and harden the information by and with non-regulated institutions attitudes of microfi nance clients, eventually is a pending priority challenge facing the potentially even leading political tensions to rise. Superintendencia de Bancos (the Banking ● A more positive development has been the Superintendency). strengthening of the consumer-protection framework, including a new reform that has Key changes and impacts since last year: abolished all commissions related to credit ● A legal framework awaiting approval in Congress extensions. Although this could add to the as of June 2013 would create two new forms of fi nancial woes of certain institutions, it guarantees regulated and supervised MFIs as sociedades greater transparency in the system, especially anónimas (commercial entities), one of them since non-regulated MFIs had very few deposit-taking and the other allowed to issue dissemination requirements previously. However, bonds, if certain minimum-capital and other risk- the impact of these measures is yet to be seen. management and provisioning requirements are ● Microfi nance supervision capacity exists, but its met and approval is granted. This would create a scope and effectiveness are limited, as there is need much-awaited upgrading pathway for some larger to give greater regulatory guidance on microfi nance non-governmental organisations (NGOs). for all categories of regulated institution.The ● On terms that are less well specifi ed in the changes introduced by the recently approved Usury pending Law and left to implementing regulations, Bill will require increased capacity from existing non-regulated institutions would be required to institutions to take new tasks (such as verifying the register (and pay a fee) with the Ministry of the timely and accurate dissemination of interest Economy, which would take on some supervisory rates), where they have limited expertise. responsibilities and also take on an as yet not well specifi ed role in providing technical assistance, promoting transparency in partnership with ratings ■ Guatemala agencies, and channelling more second-tier funding. Key characteristics of the microfi nance business ● Both the banking superintendency and Ministry environment: of Economy have been receiving training, in part ● Microfi nance remains weakly regulated, with an through funding from multilateral institutions, to overly broad defi nition of micro-credit and the take on new regulatory responsibilities, and absence of specialised rules and methods in such progress in developing greater expertise, which areas as risk evaluation, provisioning and portfolio has merited a score upgrade. classifi cation. ● Despite weak or absent regulations, institutions ■ Haiti enjoy broad freedom to set interest rates and are relatively free of distorting state interference in Key characteristics of the microfi nance business market competition in microfi nance. environment: ● Client-protection norms remain weak in terms of ● The three largest microfi nance institutions transparency of pricing, as well as the presence of (MFIs) have national networks that cover all of the effective dispute-resolution mechanisms, although major urban centres in the country. While the adherence to Smart Campaign norms is growing volume of activity is concentrated in Port-au- among MFIs and MFI networks. Prince, this is due to its role as the economic ● The system of credit information remains patchy capital. As the country has recovered from the and incomplete, and developing a legal framework 2010 earthquake and some humanitarian projects/ that would integrate the public registry with non-governmental organisations (NGOs) have
51 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
closed operations, the economy has been affected ● Social and political unrest resulting from by reductions in demand for services and liquidity. broader economic and political problems in the This trend is having an important impact on micro, country have led to fi res (arson) in Port-au-Prince small and medium-sized enterprises (MSMEs) and around market areas. Micro-businesses are their ability to repay loans. beginning to be negatively affected by these fi res ● Two of the largest MFIs (SOGESOL and MCN) are and the downward trend in the socio-political non-bank subsidiaries of the largest banks in the environment. country and can leverage some of the banks’ infrastructure (for example, reporting, risk analysis, client-protection initiatives) for their ■ Honduras microfi nance operations. Credit unions (CUs) and NGOs are integral microfi nance providers. Le Levier Key characteristics of the microfi nance business is the largest network of CUs in the country. environment: ● There is no legislative framework for ● The regulatory framework for microfi nance is microfi nance. Historically, the government’s relatively well developed and includes a defi nition capacity to regulate in Haiti has been weak and of the activity and one type of specialised characterised by poor implementation and institution known as Organismos Privados de uncertainty. Desarrollo Financiero(OPDFs, private fi nancial- ● The lack of a credit bureau still acts as a large development organisations), the fi rst of which was obstacle to raising the overall standard of the established in 2005. However, specialised capacity market in Haiti. There is discussion that the for microfi nance regulation and supervision Banque de la Republiqued’Haiti (the central bank) remains limited. is developing a system. The lack of a national- ● There is a broad range of institutional types in identifi cation system is another obstacle in the microfi nance industry, both among regulated developing a credible credit bureau. and non-regulated institutions, although there is high concentration of portfolios among four large Key changes and impacts since last year: microfi nance institutions (MFIs). However, the ● The central bank has drafted legislation for appeal of OPDFs to MFIs has shifted to fi nance- microfi nance that has the potential to bring more company status, as 2012 regulations have professionalism into the industry. The smaller MFIs established technical reserves and withholding tax. are concerned that, once the law passes it gives ● While transparency standards have improved for them one year to comply with new requirements, a range of better-managed MFIs, both regulated which include capital ratios and reporting. Bank- and non-regulated, interest-rate-disclosure operated MFIs are less concerned with the standards (tightened considerably for regulated introduction of new requirements. However, there institutions from August 2013, under new is no real timeline for the passage of the new law, regulations) do not apply to non-regulated as the draft has not yet been formally presented. institutions, many of which still obscure interest ● The reduced capacity of the state to oversee rates, fees and other costs to consumers. fi nancial activity facilitates NGOs’ mobilising of ● Migration to IFRS by regulated institutions was deposits. delayed yet again, and currently will not take place ● The mobile-banking platform introduced by until 2014. TchoTcho Mobile was dormant for much of the year, ● To date, there has been very limited and re-launched in June 2013 to allow for more development of agent and mobile banking. fl exibility in operations. The new platform is not limited to partnering with one bank and it allows Key changes and impacts since last year: for international transfers (that is, remittances). ● Political shocks related to growing urban and
52 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
rural violence and political instability threaten the ● The BoJ is continuing to push for tighter operations and health of the microfi nance industry regulation of Jamaica’s CU. However, CUs remain in a year of economic volatility and crucial resistant to the reforms, as they would impose a presidential and congressional elections in cap on unsecured credit and minimum-capital November, and have led to a downward score requirements for start-up CUs. This would set major adjustment. barriers to new entrants to the market. ● New regulations have greatly strengthened the ● The BoJ is actively promoting micro-lending as a dispute resolution and reporting system for means of stimulating the weak economy. This is regulated fi nancial institutions (FIs). being done through the disbursement of additional ● Efforts to bring some credit co-operatives under funds through the Development Bank of Jamaica, voluntary regulation continue via multilateral which has benefi tted ten MFIs to date. technical assistance to 25 co-operatives and publication of a specialised offi cial accounting manual for those co-operatives that choose to ■ Mexico become supervised by the ComisiónNacional de Bancos y Seguros(CNBS, the fi nancial regulator). Key characteristics of the microfi nance business However, as of July 2013, none had offi cially come environment: under CNBS regulation and supervision. ● There is no general microfi nance framework. The main regulator, the Comisión Nacional Bancaria de Valores (CNBV) has defi ned microfi nance as a broad ■ Jamaica range of services targeted at the lower-income population, rather than an industry in itself. Key characteristics of the microfi nance business However, the CNBV has made efforts to consolidate environment: microfi nance activity into a limited number of legal ● The industry remains underdeveloped and is entities, thereby reducing the complexity of the composed of a small number of non-regulated non- market as seen in previous years. governmental organisations (NGOs), along with ● The Sociedades Financieras Populares (SOFIPOS, credit unions (CUs), which have only recently come for-profi t fi nancial partnerships) are the main under regulatory scrutiny, and a few private regulated vehicles for microfi nance, along with companies and banks that offer micro-credit. Sociedades Cooperativas de Ahorro y Crédito ● The weak state of the Jamaican economy has (SOCAPS, non-profi t savings and loan co- sparked a proliferation of small lenders. However, operatives), the latter having an auxiliary system the line remains blurred between micro-lending for of regulation. Both SOFIPOS and SOCAPS are productive purposes and pay-day lenders. There allowed to take deposits. Banks are signifi cant are a large number of unregulated CUs and setting players in the industry, with some having more up a new CU is currently a relatively straightforward than 2m borrowers in 2012. Unregulated process. However, proposals under discussion for microfi nance institutions (MFIs) generally take the closer supervision by the Bank of Jamaica (BoJ, the form of Sociedades Financieras de Objecto Múltiple central bank) would make this harder. (SOFOME-ENR), as well as those co-operatives that have yet to upgrade to SOCAP status. Key changes and impacts since last year: ● Transparency varies greatly, depending on the ● Two private credit bureaus (PCBs: CRIF NM Credit type of MFI, its size, and whether it is regulated or Assure Ltd and Creditinfo Jamaica Ltd) have been supervised. Accounting standards are generally granted licences by the Ministry of Finance and have high for regulated institutions (only listed fi rms are started to collect information on borrowers’ credit allowed to adopt IFRS), while non-regulated MFIs histories. However, so far, only one MFI is registered. are forced to adopt minimum standards of
53 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
transparency and governance if they are part of a ■ Nicaragua network. Transparency in pricing is also high for regulated institutions, but non-regulated MFIs Key characteristics of the microfi nance business tend to avoid publishing effective interest rates. environment: ● There is a fi nancial-sector consumer protection ● There is great potential for microfi nance in agency known as CONDUSEF, which also has modest Nicaragua. The lack of interest from the main banks supervisory powers, owing to a recent law. in fi nancing small and medium-sized commercial Disclosure of fees is mandated for both regulated ventures or agricultural producers (owing to the and non-regulated institutions by CONDUSEF. higher operating costs involved) has created a CONDUSEF also offers dispute-resolution services, large unmet demand for credit facilities, such as conciliation, but this may be extended to particularly in rural regions. Following a period of include arbitrage. There are also two credit signifi cant political and economic volatility, the bureaus, which together cover nearly 100% of the industry has stabilised and has started to recover. adult population. It now serves over 260,000 clients. ● There is a wide variety of microfi nance providers Key changes and impacts since last year: in Nicaragua, most of which are not regulated by ● Given the unlikelihood that many unregulated the traditional fi nancial regulator. However, most co-operatives would have met the deadline for of the non-regulated microfi nance institutions conversion into SOCAPs, originally set for (MFIs) fall under the supervision of the Comisión December 31st 2012, the CNBV has set a two-year Nacional de Microfi nanzas (CONAMI), a regulator extension, to March 31st 2014, with the negative specially designed to improve the operating consequence of hundreds of unregulated standards of this type of MFI and therefore institutions remaining in operation. strengthening supervisory capacity towards ● Over-indebtedness remains a problem in some previously unsupervised microfi nance non- regions of the country and particularly in the governmental organisations,NGOs. Also, a 2011 south. Overall, the microfi nance market appears to Law focuses on improving interest-rate be heading towards greater consolidation, with transparency, allowing MFIs to set interest rates numerous mergers and acquisitions (M&A) taking freely, but barring them from imposing other types place in recent years. Fees and rates remain higher of charges on borrowers, as well as setting a than in other Latin American countries, partly as a maximum limit on what institutions can charge for result of high levels of concentration (four fi rms payments in arrears. dominate) and also because competition is less ● Financial transactions through agents are in focused on price than on access to services (such as their initial stages, but the authorities are less onerous requirements and larger loans). gradually putting in place norms to regulate and ● A major banking-sector reform has been passed develop new methods to expand the reach of by the Chamber of Deputies (the lower house) and microfi nance. There is particular interest among is likely to be signed into law during the second some telecommunications providers and MFIs to half of the year. The reform makes signifi cant offer mobile-banking products, as well as other inroads in boosting fi nancial inclusion, services, such as micro-insurance and micro- strengthening the role of the government in the pensions. development-banking segment, and giving the CNBV and (especially) CONDUSEF greater Key changes and impacts since last year: regulatory powers in areas such as sanctioning and ● The implementation of the 2011 Microfi nance dispute resolution. Law has gathered pace over the past year, with CONAMI opening for business in October 2012. CONAMI has begun to issue a wide set of norms
54 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
ranging from administrative requirements to institutions in microfi nance. Its coverage of the external and internal auditing. Over the next year, adult population is above the regional average. CONAMI is expected to complete the regulatory ● Client protection remains an area of uneven process, issuing norms in key areas such as client progress, although efforts at voluntary self- protection, pricing transparency, risk management regulation through the sectoral network and and the standardisation of fi nancial information. adoption by some institutions of best-practice ● There has been a very positive interaction international norms continue to grow. between CONAMI, other government agencies, MFIs and external experts to smooth out the Key changes and impacts since last year: transition process to the new regulatory ● The Superintendencia de Bancos Panamá (the framework. This has helped most MFIs meet the banking superintendency) has issued new new obligations set by the 2011 Microfi nance Law regulations regarding electronic and mobile (including new capital requirements) without banking and non-banking correspondents, as well causing any signifi cant risk to the industry. as having authorised a new simplifi ed banking Moreover, CONAMI has worked with local and account for selected customers over the past two external actors to publish industry-specifi c norms and a half years or so, as part of a new focus on following international best practices. fi nancial inclusion. However, innovation by ● Political risks have diminished considerably and institutions has not kept pace and some informants the government continues to appear committed to criticise deposit-taking regulations, as well as new the recovery of the microfi nance industry. This has risk-management guidelines as overly conservative helped restore confi dence among MFIs (which can and stringent. now focus on expanding their services and client ● The large co-operative segment remains in bases) and with international lenders, who are regulatory limbo and at least three large co- extending new loan facilities. Nonetheless, some operatives are under offi cial intervention by the challenges still remain, including dependency on Instituto Panameño Autónomo Cooperativo external funding, institutional risks, given the (IPACOOP, the co-operatives supervisory body); country’s weak judicial system and ineffi cient earlier efforts to bring co-operatives under bureaucracy, and questions about CONAMI’s superintendency prudential regulation were funding. resisted, but discussions are underway by which IPACOOP might receive technical assistance to undertake prudential supervision of at least larger ■ Panama co-operatives.
Key characteristics of the microfi nance business ■ Paraguay environment: ● General fi nancial-sector regulation and Key characteristics of the microfi nance business supervision are considered high-quality. Except for environment: the regulation that exists to obtain a licence for ● The regulatory environment is conducive to operating microfi nance banks, regulation specifi c micro-credit provision by banks and fi nance to microfi nance is still lacking. Supervision of companies. The usury cap on interest rates is institutions operating in microfi nance is dispersed permissively high to permit profi tability (although across separate entities forbanks/specialised non-regulated institutions often operate outside banks, fi nance companies and co-operatives. it). State-subsidised fi rst-tier competition in ● The long-established sole credit bureau is micro-lending exists through several institutions, generally considered to be of good quality, and is but its impact is limited. widely used and reported to by the range of ● Specialised regulatory and supervisory capacity
55 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
for microfi nance on the part of the Banco Central has declined considerably since the crisis del Paraguay (BCP, the Central Bank) is modest, surrounding the 2012 lightning impeachment. New but has been growing in recent years. An offi ce of elections were held recently, with a well regarded fi nancial inclusion has been established. incoming government with a stable majority ● Paraguay has a moderately effective credit coming to offi ce in August; the fi nancial authorities information system (CIS). A public credit registry is remained autonomous and competent in their restricted to and for regulated institutions, while management and regulation of the economy and an established private bureau is available to and microfi nance through the crisis; and existing utilised by nearly all institutions in the industry, institutions seemed to weather the storm. with mostly negative information. Both have fairly good population coverage by regional standards, although access to information through the courts ■ Peru about debtors undergoing judicial proceedings has been blocked by a June court decision currently Key characteristics of the microfi nance business under appeal. environment: ● The principal regulator of microfi nance in Peru, Key changes and impacts since last year: the Superintendencia de Banca, Seguros y AFP ● Accounting transparency has improved (SBS, the Superintendency of Banking, Insurance, signifi cantly. This is refl ected in notable and Pension Funds), has implemented regulation improvements in Mix Market disclosed ratings for in order to create a fair and competitive the country’s seven listed microfi nance institutions marketplace. The lack of an interest-rate cap, (MFIs) since last year, as well as some reasonable capital requirements and the improvements in the self-regulation of co- availability of various legal structures create low operatives under the Instituto Nacional de barriers to entry. Cooperativismo (INCOOP, the national co- ● Adequate supervision and the existence of solid operatives institute). credit bureaus in the country have helped develop ● While the BCP requires monthly publication of a competitive market. In the last year, fi ve new interest rates by regulated institutions, in reality microfi nance institutions (MFIs) have requested the effective rates, including commissions and formation under a simplifi ed regulated structure other fees, are not always clearly disclosed. and four MFIs have transformed from one structure ● Efforts are currently underway to develop a to another. simplifi ed banking account, as well as a legal ● High levels of transparency around effective framework for mobile banking. Regulations interest rates, fi nancial statements and client facilitating this type of branchless banking have disputes complement this legislative and remained mired in confl icts over the roles of regulatory framework. The SBS monitors all this telecommunications operators and fi nancial information and makes it publicly available on the institutions (FIs). Internet and in newspapers. Individual MFIs must ● Reportedly, the Central Bank is setting up a publish their pricing and client-dispute statistics consumer-protection offi ce, which would be on their websites. important, as existing offi ces in the government ● Client-protection initiatives have evolved are general-purpose and not equipped for fi nancial beyond the implementation of best practices; a and microfi nance matters. Self-regulation is focus is on educating clients to understand advancing slowly, as eight MFIs have adhered to fi nancial concepts and know their rights. In order Smart Campaign norms and one is currently to address low levels of fi nancial literacy, the SBS undergoing an evaluation of compliance. and the Ministry of Education in Peru have ● The perception of political and regulatory risk developed curricula to teach this type of skill in
56 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
schools, which marks these institutions as pioneers largest NGOs, which are already reporting to in this area. private bureaus.
Key changes and impacts since last year: ● In January 2013, the Congress passed Law ■ Trinidad and Tobago 29985, which defi nes the basic characteristics of electronic money as an instrument for fi nancial Key characteristics of the microfi nance business inclusion. The Law creates a class of companies, environment: known as Electronic Money Issuing Companies. ● Trinidad lacks a legal framework or expertise These companies can issue and collect electronic inregulating microfi nance. The Financial money, but they will not offer full fi nancial Institutions Act regulates regular banking and products and services. As issuers of money, they non-bank fi nancial institution (NBFI) activities, will be prudentially supervised by the SBS. Law including lending, which require licensing by the 29985 also sets client-protection policies for Central Bank of Trinidad and Tobago. Hard data are consumers of electronic money. The impact of this lacking, but there seems to be scant downscaling new Law is yet to be fully realised. by banks into microfi nance. Microfi nance ● Competition continues to bring interest rates operations of non-governmental organisations down and put pressure on profi tability. MFI clients (NGOs) and credit unions (CUs) are not prudentially with good credit scores often receive competing regulated, and both regulated and non-regulated offers from several institutions. Over-indebtedness MFIs are free to set their own interest rates. is a risk, and delinquency rates in the microfi nance ● Subsidised government fi rst-tier programmes in industry have remained higher than the historic support of micro-entrepreneurs exist, but it is not average, even as the country recovered from the clear whether they distort the market, given the 2008-09 fi nancial crisis. Non-performing loans shallow penetration of microfi nance in the country. (NPLs) as a percent of the portfolio are higher than ● Accounting standards are strong and use of IFRS they were before the crisis, and the SBS is watching mandatory at regulated fi nancial institutions (FIs), the situation. but standards are weaker in practice at non- ● There are some recent concerns regarding supervised MFIs. A voluntary system of fi nancial deterioration of asset quality, which is more a services ombudsmen exists in the regulated refl ection of geographic and customer overlaps by segment, but with limited impact on dispute market participants. Cajas municipales de ahorro y resolution in terms of microfi nance. Non-regulated crédito (CMACs, municipal savings and credit institutions lack such internal mechanisms. banks) in particular, tend to be more active in Key changes and impacts since last year: urban and peri-urban spaces, whereas rural ● Despite the absence of a strong push from markets continue to be largely underserved. regulators for an agent model of fi nancial ● In order to promote non-governmental inclusion, involving non-bank correspondents or organisations’ (NGOs) reporting of creditors’ electronic transactions, mobile banking has begun information to the SBS credit bureau, the SBS has to appear at several commercial banks.It now been working with the Consorcio de Organizaciones constitutes a small share of transactions. Privadas de Promoción al Desarrollo de la Pequeña ● It is not clear if the momentum for tightening y Microempresa (COPEME, the private consortium supervision of credit unions (CUs, which have for the promotion of small and micro-enterprises) signifi cant microfi nance activities) that was to conduct training workshops for NGOs. These generated amid inquiries in recent years into the activities aim to train NGO representatives to 2008 collapse of a major local conglomerate and submit information to the SBS credit bureau in a large CU will eventually lead to passage under the timelier manner. The process has started with the new government of a 2012 draft Bill in parliament;
57 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
the Bill would bring CU under prudential legislation aims to expand access to fi nancial supervision by the Central Bank. services, especially for citizens with low income ● Additional resources and staff would also be levels or in remote geographic locations. Leading necessary for the Central Bank if such a reform MFIs follow International Accounting Standards were to pass, given that it is stretched thin by its (IAS), report to the Central Bank and, at the end of new responsibilities for overseeing the insurance 2012, they held around 70% of the microfi nance industry, as well as banks and non-bank fi nancial portfolio. Non-regulated institutions (non- institutions (NBFIs). governmental organisations, NGOs) are not subject ● In 2012 Microfi n Caribbean Holdings, the to fi nancial-system regulations; however they must regional Caribbean microfi nance subsidiary of meet Uruguay’s accounting standards. conglomerate DFL Holdings, shut its operations in ● As of March 2013, the microfi nance loan Trinidad amid mounting losses in the unit and a portfolio held by InstitucionesFinancieras (IFs, larger restructuring of the corporate parent. The fi nancial institutions) reached US$807.8m move leaves only a single active Trinidadian MFI Uruguayan pesos (around US$39m). This listed in MIX Market as of July 2013. represents 24% growth from 2012. The number of clients was 23,700. Growth is expected to slow in 2013. ■ Uruguay ● In the past year, the government reclassifi ed lending categories in order to allow differentiated Key characteristics of the microfi nance business interest rates for micro-lending to micro- environment: businesses. These rate caps are higher than other ● Government social programmes aid the poor and micro-lending caps, but remain artifi cially low for microfi nance institutions (MFIs) complement these the market. programmes by offering fi nancial products to ● The Observatorio de Microfi nanzas (an MFI recipients. Historically, microfi nance operators bureau), which was founded in August 2010, have been part of the system of social welfare and continues to work to bring transparency and did not seek to be self-sustainable or profi table. knowledge to the industry. It is instrumental in ● There is no legislative framework that data collection, analysis and communication of specifi cally addresses microfi nance. Financial- trends and fi ndings. services regulation is strong, but microfi nance oversight is limited. Interest-rate caps exist and are calculated using rates that include commercial ■ Venezuela lending and are consequently artifi cially low. The low interest-rate cap acts as a deterrent to doing Key characteristics of the microfi nance business business in microfi nance, as it challenges existing environment: MFIs to break even. ● There is a Law to promote the microfi nance ● Client-protection laws are strong and the industry, but it does not include supervision and government is working to develop fi nancial-literacy risk-management provisions that distinguish programmes. There is room for reform, especially between microfi nance, consumption and small- with respect to the interest-rate cap. business lending. There is no regulation for non- bank fi nancial institutions (NBFIs) that offer Key changes and impacts since last year: microfi nance products. Banks and other FIs that ● In June 2013 the Banco Central del Uruguay offer microfi nance products are regulated by the (the Central Bank) passed new laws about fi nancial general Law on Banking of 2010. correspondents and simple bank accounts. The ● Venezuela’s microfi nance industry remains
58 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
relatively small and no new organisations have Key changes and impacts since last year: been created during the past year. A diffi cult ● Infl ation has rapidly increased in 2013, limiting business environment and government the sustainability of microfi nance products, intervention—through which the independence of especially for non-bank fi nancial institutions Superintendencia de las Instituciones (NBFIs). Bancarias(Sudeban, the banking superintendency) ● The environment for microfi nance continues to has been compromised—limit the creation of non- be challenging. Although dialogue between the regulated microfi nance institutions (MFIs). The Ley private fi nancial sector offering micro-credit and Orgánica del Sistema Nacional Financiero does not Sudeban has managed to attract the attention of offer a differentiated regulatory framework to the regulator to the industry, no concrete actions promote the creation of regulated MFIs. have been taken by the government. Market ● Public banks and FIs that offer microfi nance competition continues to be distorted by the products distort competition. The microfi nance government’s interest-rate restrictions, directed- products of the public institutions are aimed at the lending requirements and the presence of new organisations of the socialist model, such as subsidised public micro-lenders. the communitarian councils or the social property ● Sudeban issued a regulation to increase client companies offering below market rates and fl exible protection, requiring banks to address clients’ requirements for lending. demands in a specifi c amount of time. In practice, ● Although Venezuela provides a well-developed this has reduced the number of disputes that must general consumer-protection legal framework, be resolved by third parties. there are several practical obstacles to dealing ● Commercial and development banks offering effectively with client disputes. A very weak micro-loans have developed programmes to institutional framework means that judicial increase the fi nancial literacy of their clients and to processes are slow, bureaucratic and costly. offer legal and business support to micro- ● With a near-complete absence of credit bureaus, enterprises. However, the diffi culties of setting up microfi nance providers have very limited access to a business in Venezuela and the administrative cost credit information, unless they can gather it of completing the paperwork needed to formalise individually. This has increasingly extended economic activity has limited the creation and responsetimes for loan applications. The public growth of new formal businesses through micro- credit bureau (PCB), which is administrated by loans. Sudeban, collects limited information through a costly process, little of which is relevant to microfi nance.
59 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
Middle East and ■ Lebanon North Africa Key characteristics of the microfi nance business environment: ● The dominance of the two main political/ ■ Egypt sectarian factions within the microfi nance industry continues. Emkaan is operated through the funds Key characteristics of the microfi nance business of the Hariri Group, and has nearly 5,500 active environment: borrowers. Al Qard Al Hassan is funded by ● The Central Bank of Egypt (CBE) and the Ministry Hezbollah, and services around 69,000 clients. of Social Solidarity are the two central authorities ● Supervision of the microfi nance industry is weak tasked with regulating microfi nance in Egypt. and ineffective. The Ministry of Interior, which However, both lack the capability and capacity to oversees non-governmental organisation- provide adequate regulation of the industry and microfi nance institutions (NGO-MFIs), does not there is no specifi c regulatory framework for have the capacity or capability to regulate the microfi nance. fi nancial operations of MFIs. Banque du Liban (the ● Four banks and over 400 non-governmental central bank), which regulates fi nancial organisation-microfi nance institutions (NGO-MFIs) institutions (FIs), does not deem regulation of provide microfi nance services around the country. microfi nance a priority and does not monitor the NGO-MFIs make up the vast majority of the micro- activities of MFIs closely. credit industry. ● In total, there are an estimated 20 MFIs, of ● The microfi nance industry does not currently which the vast majority are NGOs and located in meet the expectations or the needs of the poor. urban areas. There remains substantial room for There is considerable room for regulatory reform growth of the microfi nance industry in Lebanon, and industry growth. particularly in rural areas.
Key changes and impacts since last year: Key changes and impacts since last year: ● The industry continues to be impeded by the ● Ibdaa, funded by the Arab Gulf Programme for lack of political stability. The removal of Mohamed Development (AGFUND), began operations in July Morsi as president a is likely to result in a delay and 2012 as a new FI, bringing the total number of FIs transformation to the new draft NGO Law that was in Lebanon providing microfi nance to three. due to be voted on by the Shura Council this year. ● The lack of political stability, as well as the ● The industry suffers from weak dispute- absence of capacity and interest in the Ministry of resolution mechanisms, neither the law nor the Interior and the central bank, has resulted in the Consumer Protection Association (CPA) offer continued delay of much-needed reforms in the effective solutions. Consequently, in practice microfi nance industry. informal dispute-resolution mechanisms are the ● The war in Syria and the arrival of large numbers method predominantly used. However, eight of the of refugees into Lebanon is placing strain on the mainstream NGO-MFIs subscribe to the Smart ability of borrowers to pay back their loans and the Campaign, which obliges them to have mechanisms ability of MFIs to operate in areas close to the for the redress of grievances. Lebanese-Syrian border. ● The private credit bureau (PCB), I-Score, is now ● Infrastructure can present an obstacle, property fully operational, covering 600,000 clients from six prices and rents throughout the country remain MFIs and work is ongoing to expand this coverage high, Internet and mobile communications are beyond Cairo. expensive and mobile banking continues to be unavailable for microfi nance.
60 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
■ Morocco ■ Yemen
Key characteristics of the microfi nance business Key characteristics of the microfi nance business environment: environment: ● The industry is dominated by a few large ● With just 7% of Yemenis possessing a bank microfi nance institutions (MFIs). Market account, long-latent demand among the Yemeni concentration has increased over the last two years population for fi nancial services would seem to and is likely to increase further as small MFIs seek make the country an ideal market for microfi nance. to form alliances. ● Although still small, the industry has grown ● Micro-credit is the only fi nancial service extremely rapidly, from just 3,282 active borrowers currently offered by MFIs. in 2002 to 66,419 in 2010. However, the country’s ● The considerable growth in non-performing political crisis in 2011 saw the industry retrench, loans (NPLs) that occurred in 2008 has been with the number of borrowers dropping to 63,664 brought under control and mitigated most recently by end-September. The industry has since bounced by the new credit bureau. back, however, with the number of borrowers ● The major MFIs (representing over 90% of the reaching 82,206 by end-2012. market) comply with good governance and ● The microfi nance industry is composed of both accounting practices and are fairly transparent. microfi nance institution-non-governmental organisations (MFI-NGOs), which are overseen by Key changes and impacts since last year: the Yemen Microfi nance Network (YMN) and the ● Law n° 41-12 was adopted in December 2012 by Social Fund for Development (SFD), and two the council of government to amend and complete microfi nance banks (MFBs) licensed by the central the Microfi nance Associations Law no. 18-97, as Bank of Yemen. The YMN, which includes all the part of the national strategy. The adoption of the MFI-NGOs and licensed MFIs in the country, has Law formalised a framework for consolidating taken over most of the training and capacity- micro-credit association through acquisitions or building responsibilities of the SFD. mergers. The Law is aimed at encouraging smaller ● The country’s Microfi nance Law was passed in micro-credit associations (MCAs) to consolidate to 2009, and it is widely deemed to provide a clear set achieve critical mass. of rules for microfi nance operations. However, ● Small MFIs have successfully gathered into a there are no clear regulations demanding that professional network. It will improve reporting to companies must present their rates, either in the Bank al Maghrib (BAM, the central bank) and to the Microfi nance Law or the earlier Commercial Banks private credit bureau (PCB). The latter, run by Law. Dispute-resolution avenues are also Experian, is successfully operating and preventing underdeveloped, with many Yemenis reverting to a multiple borrowing. local Shura council, comprising elders of the tribe, ● The microfi nance industry has successfully to resolve disputes. recovered from the revolt in southern Morocco ● The SFD has set up a credit bureau for non- against microfi nance and stability has been fully licensed MFIs. However, not all the country’s NGOs restored. provide regular updates to the SFD’s bureau, ● The private sector, government and despite a requirement to do so. A credit bureau is international institutions are co-ordinating to in place at the Central Bank, but it is not especially strengthen the infrastructure for microfi nance to suitable for microfi nance. promote common platforms and new products for MFIs. Key changes and impacts since last year: ● The microfi nance industry has recovered strongly since the chaos that engulfed the country
61 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
in 2011. However, activity in a number of areas, notably Abyan, will take some time to revive, given the prior scale of the disruption. ● Al Kuraimi has launched the fi rst microfi nance mobile-phone service allowing the transfer of money, and Al Amal is expected to roll-out its own version shortly. However, the Central Bank has yet to update its regulatory regime to incorporate this innovation. ● A Youth Savings Initiative has been set up, involving Al Kuraimi and Al Amal, alongside a number of international donors, designed to increase fi nancial access for those aged 18-30.
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such as mobile money are underdeveloped in Sub-Saharan Africa comparison to those in many other countries in Africa. ■ Cameroon Key changes and impacts since last year: Key characteristics of the microfi nance business ● After widespread confusion among MFIs, environment: Category-1 MFIs (such as co-operatives) are not ● The industryis fairly concentrated, with a subject to taxes on profi ts, despite measures from microfi nance institution (MFI) co-operative the Ministry of Finance introducing such a move. network, CamCCUL, serving more than half of the ● After spending several years installing Sesame, clients currently served by the industry. New its new information system, which will market entrants, such as EB-Accion, may help to automatically manage the control and supervision increase market dynamism. Over the past decade, of microfi nance activities, COBAC issued a letter the industry has delivered signifi cant growth making it compulsory for MFIs to report through (particularly in mobilising savings, where this system on a quarterly basis. This could deter Cameroon has performed considerably better than non-regulated MFIs from becoming regulated MFIs, other countries in the region), although overall as it will signifi cantly increase the reporting market penetration and outreach remain very low, requirement for MFIs. Although it is unlikely to especially in lending to micro, small and medium- pose a problem for larger, professionally managed sized enterprises (MSMEs). MFIs, lack of electricity and weak access to the ● The offi cial Microfi nance Law, which was drafted Internet in many areas will hinder smaller MFIs’ in 2002, is considered ill-adapted. Most MFIs fail to ability to adhere to this rule. The measure it yet to comply for that reason and for lack of capacity. be enforced, however (as of mid-2013). Moreover, MFI supervision remains weak owing to a ● The government has launched a CFA21bn lack of capacity at the regional authority and MFIs’ (around US$43bn) national strategy for non-compliance with reporting requirements. microfi nance with the aim of boosting capacities in ● There is a high number of unlicensed MFIs that the industry and reducing risks. Most of the funds operate illegally and jeopardise the credibility of will go towards training and providing assistance MFIs, as well as that of the Commission Bancaire de to MFIs. This is likely to improve accounting l’Afrique Centrale (COBAC, the Central Africa methods and boost capacities in the long run and Banking Commission). Efforts to crack down on underlines the government’s eagerness to illegal non-regulated MFIs are ongoing and this strengthen the microfi nance industry. remains a major objective of the authorities, but ● The Ministry of Finance updated its list of capacity constraints mean progress will be slow. approved MFIs (452) in an effort to increase ● The absence of a credit bureau or any process for awareness among the public and deter them from exchanging information on those with poor soliciting non-regulated MFIs, which continue to payment records is a major risk. There are no face threats of closure by the authorities. concrete plans for creating a credit bureau in the near future, despite pressure from international fi nancial institutions (FIs). ■ Democratic Republic ● Very weak transparency in pricing and the of Congo absence of any recourse mechanism makes client protection a serious concern. Key characteristics of the microfi nance business ● The regional authorities are in the process of environment: developing a more extensive regulatory framework ● The microfi nance market in DRC was originally for electronic-money transactions, and services dominated by co-operatives and mutual credit
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union savings organisations (COOPECS), which ● The new government has decided to bank all were allowed to lend money to members. The civil servants. Their salary, previously paid in cash formal sector grew rapidly in 2007-12, but has by superiors, will now be electronically transferred since slowed. to the individual bank account of each civil servant, ● Registration and licensing of commercial banks which may also eventually boost electronic and and microfi nance institutions (MFIs), including mobile forms of payment in DRC. those offering microfi nance products, require ● A new Law establishes that accounting practices approval from the president’s offi ce, and can take in the DRC should follow international norms, and up to 18 months. New microfi nance regulations are strengthens the provisions for both board due to change this in 2014, delegating authority to supervision and external audit of accounting the Banque Centrale du Congo (BCC, the Central practices, making money laundering and terrorist Bank). fi nancing illegal, in line with current banking laws. ● The DRC’s large size and challenging geography, It also instructs MFIs on client protection on price particularly its relatively limited transport transparency and dispute resolution. networks, contribute to a lack of effective ● MFIs can serve as intermediaries or agents for supervision in more remote locations. In rural payments through authorised entities, such as areas, the informal, non-regulated segment telecommunications companies and banks. Mobile- dominates. banking services are currently provided by ● Currently, there are no functioning credit telecoms companies, such as Airtel and Vodacom. bureaus, although a national one is being However, the existing telecoms infrastructure is a developed. A lack of qualifi ed people for major impediment to the widespread use of new employment in the industry and a penury of technologies such as mobile banking. Mobile- adequate training courses impedes raising phone operators in the country and the BCC are standards and overall industry growth. nevertheless keen to allow, develop and offer ● The low level of coverage and proportions of mobile-banking services. depositors with unsophisticated demand mean that savings products are fairly restricted in scope, mostly to interest-bearing demand-deposit ■ Ghana accounts. Key characteristics of the microfi nance business Key changes and impacts since last year: environment: ● New microfi nance regulations were fi nally ● There is very strong demand for microfi nance promulgated in early 2013 and will come into force services in a rapidly expanding economy, from both one year after the date of promulgation. These individuals and small companies, to further regulations strengthen the supervisory and stimulate growth and alleviate poverty. Efforts to regulatory capacity of the BCC. They also give the strengthen confi dence in the microfi nance industry Central Bank powers of sanction to fi ne and wind are taking place, through the Transparent Pricing down MFIs that fail to meet standards or breach the Initiative, a new Microfi nance Law, and increasing terms of their licences. use of credit referencing and improved supervision. ● There was a ministerial reshuffl e in 2012, where ● A well-established set of government policies the new prime minister was put in charge of the to promote the industry exists, with Apex Ministry of Finance. The governor of the Central Institutions (representative network) providing Bank has also been changed. It is hoped that the support on an industry basis. Young people new appointment for the BCC will improve dominate activities in the economy, both within fi nancial-sector oversight, including of the and outside the microfi nance industry. This brings microfi nance industry. energy as well as challenges in managing
64 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
sustainable growth of the industry. ● While agent banking has not lived up to the ● There is a diverse offering of over 500 infl ated expectations, many banks and non-bank microfi nance providers across the country. While fi nancial institutions (NBFIs) are beginning to the product portfolios remain generally narrow in utilise the Mobile Network Operatos (MNOs) and scope, principally simple lending and savings bank-led models which are now being offered. products, the organisations providing them range Banks’ minimal participation and investment in the widely in size and legal structure. MNO-led agent-banking partnerships is attributed to a reluctance to invest resources that would Key changes and impacts since last year: benefi t direct competitors in “many bank-many ● The implementation of the new microfi nance MNO” systems, which are the only ones allowed by legislation in 2011 has led to over 500 licence regulations. applications from MFIs, of which around 171 had been given by June 2013. This has created a substantial administrative process, which has ■ Kenya proved to be a challenge for authorities to manage within the existing resources and capabilities. It Key characteristics of the microfi nance business has also created some tensions between market environment: operators and regulators. ● Deposit-mobilising institutions are strongly ● The Microfi nance Pricing Transparency regulated, with strict supervision from the Central Programme (MPTP), the FINSCOPE study, the Bank of Kenya. Banks, deposit-taking microfi nance Financial Sector Action Plan and parliamentary institutions (DTMs), and deposit-mobilising discussion of a new Law to govern the co-operative savings and credit co-operatives (SACCOs) have segment of microfi nance, have all generated policy fi rm reporting requirements to their respective recommendations to take the microfi nance supervisory bodies. While this does capture the industryto the next stage of development. The majority of clients, it leaves credit-only implementation plan is the next step. institutions, which include the majority of ● The MPTP has highlighted credit pricing. microfi nance institutions (MFIs) and SACCOs, According to its review of fi nancial reporting in widely unregulated. December 2011, the Ghanaian market displayed a ● The transition of an MFI to become deposit- strong adherence to best-practice fi nancial taking has complicated requirements—reporting, reporting standards, with 80 MFIs, including all information and communication technologies (ICT) market leaders, reporting their 2012 fi nancial and infrastructure, and more—and not many fi nancial operational performance data to MIX market. institutions (FIs) have gone through this transition ● The 2011 Microfi nance Law mandates a process, as associated costs remain a barrier. supervisory and regulatory role to the Bank of Instead, more greenfi eld organisations are forming Ghana (BoG, the central bank), although a as deposit-mobilisers, thereby avoiding the strengthening supervisory role for Apex necessity of later complicated and burdensome Institutions remains under discussion by experts. adjustments. In July 2013, the BoG announced its intention to ● While the transformation of an MFI to a DTM raise the minimum required paid-in capital for does have higher capital, liquidity and reporting microfi nance companies from GHS100,000 (around requirements, they are less burdensome than those US$46,000) to GHS 500,000, in order to stem the for commercial banks and certainly in line with the tide of unscrupulous companies being launched. higher risks and required consumer protection The BoG raised the minimum required paid-in necessary for taking deposits. capital for savings and loans companies (S&Ls) to ● There is a burgeoning tech and start-up scene in GHS7m (US$3,2m) in December 2012. Kenya, and the ecosystem that is emerging to
65 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
cultivate it. There are now a large number of really taking off in the country, as the amendment incubators, accelerators and investors based in to the Banking Act (2009) has had a signifi cant Kenya, including iHub, NaiLab, 88MPH, GrowthHub impact on fi nancial operations in 2011. (all shared workspaces/accelerator programmes) ● There were cases of inter-communal violence in and investors like Grameen Pioneer Fund, Accion 2012 and extending into 2013 that were restricted Venture Lab and Invested Development. to some parts of the country, mostly pastoral communities that adversely affected micro- Key changes and impacts since last year: enterprises and microfi nance provision. ● The Consumer Protection Act was passed in December 2012. Credit-information sharing though credit bureaus progressed to full fi le (positive and ■ Madagascar negative) information sharing for banks. Additionally, after a January-June 2013 trial Key characteristics of the microfi nance business period, regulated deposit-taking MFIs are from 1st environment: July 2013 also required to submit their credit ● The microfi nance industryis split between the information to the credit bureaus every month. long-established informal co-operative and mutual ● Deposit-mobilising SACCOs were required to industry and the more recently established apply for a licence by June 2011 to be able to professional microfi nance institutions (MFIs). continue offering deposit services. However, at ● The regulatory regime in Madagascar is the that time only 44 of the 219 SACCOs operating as outcome of a multi-year programme supported by “Front-Offi ce Saving Activities” (FOSAs, which the World Bank Group. MFIs are governed by Loi refers to deposit-taking activities) had received a No. 2005-016 of September 29th 2005. The licence. The number licensed reached 127 by June supervision of MFIs falls to the BanqueCentrale de 2013, and is expected to grow further as the Madagascar (the Central Bank), through the Societies Regulatory Authority (SASRA) reviews Commission de Supervision Bancaire et Financière additional applications. (CSBF). The 2005-016 Microfi nance Law designates ● In November 2011, the Central Bank of Kenya a legal hierarchy of MFIs across three tiers, each raised its interest rate signifi cantly in response to divided between mutualist and non-mutualist an unprecedented weakening of the Kenyan categories, with increasing levels of regulation and shilling and spiralling infl ation. This move resulted supervision concomitant with the level of fi nancial in banks raising their interest rates to levels of 23% risk (that is, tier-1 institutions receive minimal and above. Rates have reduced to between 15% oversight and supervision, tier-3 the most). The and 20% after peaceful general elections held in legislative framework in Madagascar establishes March 2013. three tiers and fi ve categories of MFI. ● Pricing transparency remains weak across ● The 2007-013 decree sets the capital Kenyan MFIs, without any requirements in place. requirements for all fi nancial institutions (FIs). The Association of Microfi nance Institution of ● There is a national strategy for microfi nance and Kenya (AMFI) is pushing for its members to hold a highly structured legal framework and national themselves to a higher standard, and has included promotion unit, which makes it conducive to pricing transparency in a number of social- establish and upscale MFIs. performance training sessions conducted since 2011. Key changes and impacts since last year: ● Mobile banking continues to develop at an ● The continuing political crisis means that very extraordinary rate in Kenya, with M-Pesa alone little has changed with respect to the regulatory reaching over one-third of the population through environment, but it has led to an extended nearly 40,000 agents. Agent banking as a model is economic downturn, increasing the demand for
66 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
loans, while also undermining the credit ● There are several laws governing the regulation worthiness of borrowers. MFIs have had to become and supervision of microfi nance in Mozambique, increasingly vigilant in monitoring the overall which defi ne microfi nance and give primary riskiness of their portfolios. responsibility for regulation and supervision of the ● In 2011, the implementation of the regulatory microfi nance industry to the Banco de Moçambique framework (which requires the formalisation of all (BDM, the central bank). The central bank is also MFIs via licensing) has come into force, so that, in responsible for the supervision of non-banking practice, all unregulated institutions are now fi nancial institutions (NBFIs). The Directório barred from offering micro-loans. Nacional de Promoção do Desenvolvimento Rural ● The capacity of CSBF has been strengthened (DNPDR, the National Directorate for Promotion of owing to the undertaking of specifi c training Rural Development) has also played an important programmes, but it is still under-staffed, which is role in the establishment and development of an important limiting factor that obstructs its microfi nance activity in Mozambique. effi ciency. However, there remain concerns ● Many of the MFIs are foreign-owned. Combined regarding the CSBF’s independence in the light of with the donor money that is pouring into the dismissal of the CSBF director-general, microfi nance in Mozambique, most of the push replaced by the appointment of a close relative of forward (for branch openings, transparency, and the president’s wife, as the Acting Governor and the like) seems to be coming from outside CEO of the Central Bank. Mozambique. Untested agent and mobile-banking ● Population of the two new credit-bureau regulations, along with the government’s databases began in 2011: one for commercial formation of a nation switch company (Sociedade banks, the other for MFIs (CRM). Interbancária de Serviços, SIMO), have prevented the widespread expansion of fi nancial services being provided over alternative channels. ■ Mozambique Key changes and impacts since last year: Key characteristics of the microfi nance business ● The BDM currently maintains the only loan environment: registry and its coverage is incomplete. However, a ● Microfi nance in Mozambique is primarily focused Law on the creation of private credit bureaus has in the southernmost province of Maputo, which is been drafted and is due to be submitted to the also the most heavily populated region, and, to a Council of Ministers in the course of 2013. lesser extent, in urban centres across the entire ● The 2012 introduction of a third mobile-phone country. Because so much of the population, operator, Movitel, with explicit focus on rural particularly in the rural areas, is unbanked, there areas, and the 2013 launch of new mobile-banking has been a multi-year push by commercial banks services by another operator, Vodacom, will and microfi nance institutions (MFIs) to expand in contribute to expanding fi nancial services in the more rural provinces. remote areas. ● The high cost of doing business in rural areas ● Although political tensions stemming from has typically been a barrier for most MFIs because consequences of bad economic performance have of the low population density and lack of already had some effect in some sectors (i.e infrastructure. In order to incentivise a rural push, disruption of transport routes), these have not had there are many government subsidies accessible much of an effect on demand for microfi nance for rurally operating MFIs. However, these services. subsidies have distorted the microfi nance market.
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■ Nigeria charges, but this effort has still failed to address the regularisation of interest rates across the Key characteristics of the microfi nance business board. environment: ● MFBs in Lagos state have been calling for a ● There are 869 microfi nance banks (MFBs) special court to try loan-default cases, to which the registered in Nigeria as ofApril 2013. A large CBN agreed in 2011, but is yet to be instituted. The portion of the population is still unbanked, CBN has passed two Bills to the second reading particularly in rural areas, and the Central Bank of that have direct ties to improving dispute Nigeria (CBN) is advocating policies that allow resolution: the Financial Ombudsman Bill, which penetration of fi nancial services in rural regions, would help to resolve fi nancial disputes more which includes allowing for state-run MFBs and the quickly, and the Alternative Dispute Resolution establishment of the Microfi nance Fund. (ADR) Bill, which would promote and regulate ADR ● The CBN is responsible for the regulation and in Nigeria. These have not yet been enacted into supervision of the fi nancial services sector asper law. the Central Bank of Nigeria Act of 1991. The Other ● All MFBs are required to comply with IFRS by Financial Institutions Supervision Department 2014, and, in preparation, the National Association (OFISD), within the supervisory arm of the CBN, has of Microfi nance Banks (NAMB) has begun governed the microfi nance industry since 2010 and identifying consultants that can help to build aims to strengthen its supervisory capacity. accounting capacity within MFB staff. MFBs that ● Provisions for regulating microfi nance have failed to comply with IFRS have not been institutions (MFIs) fall under general banking laws, penalised by the CBN. and the Microfi nance Policy, Regulatory and ● The CBN has since extended the cashless- Supervisory Framework for Nigeria, reviewed by the banking policy to Abia, Anambra, Kano, Ogun and CBN in December 2012, guides the development of the River states, making the total number of states the industry. This framework allows for the going cashless seven. This is an attempt to increase licensing of MFBs through the CBN. The reviewed fi nancial inclusion. This move is aimed at regulatory and supervisory guidelines for increasing usage of automated teller machines Microfi nance Banks in Nigeria recognises three (ATMs), points-of-service (POS), card products, the tiers of institutions: Unit MFBs, State MFBs, and Internet, agency banking and mobile money National MFBs. services. To this end, the CBN has issued guidelines ● Nigeria is still in the top three countries in Sub- governing POS transactions, as well as instituted Saharan Africa in terms of the greatest number of charges on cashing large cheques. Mobile banking greenfi eld MFBs, as reported by CGAP in 2013. remains in its infancy for MFBs. However, large state and even multi-state MFBs have still found it diffi cult to transform into national MFBs, although the path towards ■ Rwanda transformation was delineated in 2010. Key characteristics of the microfi nance business Key changes and impacts since last year: environment: ● The CBN has revised the Regulatory and ● Specifi c microfi nance legislation has been in Supervisory guidelines for MFBs. This new approach effect in Rwanda since 2009. The Banque Nationale is aimed at streamlining the MFB operations and du Rwanda (BNR, the central bank) is responsible also offers increased supervision and monitoring for the regulation and supervision of all fi nancial for non-governmental organisations (NGOs) and institutions (FIs) and microfi nance institutions fi nancial co-operatives’ deposit-taking activities. (MFIs), which are sub-divided into four categories: The CBN has also reviewed the guide to bank category-1 institutions are informal and not
68 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
subject to formal regulatory requirements, aimed at enhancing their institutional capacity and although they are required to register with the management information system (MIS), as well as local authority; category-2 institutions, Savings increasing the automation of operations. and Credit Co-operatives (SACCOs), where the total ● The government has drafted a Bill that will deposits are less than RwF20m (US$34,000), are create a mandatory deposit-insurance system, limited to one branch of operation and are required which will entail a fund that is used to pay to report their activities to the BNR; category-3 depositors in case of failure by a bank or any institutions, limited companies and highly deposit-taking FI. capitalised SACCOs with total deposits greater than ● In part owing to the improved performance of RwF20m, and category-4 institutions, which do not the Credit Reference Bureau, non-performing loans accept deposits from the public, are also required (NPLs) in the microfi nance industry were to report to the BNR. equivalent to 8.3% of outstanding loans in June ● MFIs are free to set interest rates, although the 2012, down from 12% at end-2011. BNR requires interest-rate structures to be market- based and allows institutions to recover their operating expenses to ensure the sustainability of ■ Senegal the industry, and, particularly, independence from donor and government subsidies. Key characteristics of the microfi nance business ● The regulatory and policy environment for environment: microfi nance is now very strong. However, policy ● The microfi nance industry remains highly improvements have outpaced capacity building in concentrated, with the majority of lending assets the industry and MFIs will require time to catch up. held by three major networks. Supervisory This is particularly the case for standards of authorities’ main focus is to manage risk in major accountancy and governance, where the networks, while abolishing non-regulated and regulations are very clear, although several MFIs weak MFIs. This new policy is likely to lead to still struggle to understand and achieve the higher concentration and improved supervision. required standards. ● Senegal has a set of sound laws regulating ● The government of Rwanda, known for being microfi nance institutions (MFIs), but there is a lack very proactive, is supportive of microfi nance and of supervisory capacity. Although the Banque has prioritised extending access to fi nancial Centrale des Etats de l’Afrique de l’Ouest (BCEAO, services for the rural community. the regional central bank), supervises the larger MFIs, the national authorities’ supervisory capacity Key changes and impacts since last year: remains limited (despite signifi cant efforts in ● The microfi nance industry continues to expand recent years) and small MFIs fail to comply with quickly. Total deposits increased to RwF56.5bn new regulations. (around US$87m) in June 2012 and the total gross ● Client-protection rules and regulations, both in loans rose to RwF51.7bn. Moreover, formal terms of transparency in pricing and recourse fi nancial access doubled from 21% in 2008 to 42% mechanisms, exist, but MFIs fail to comply and in mid-2012, and the percentage of people that are authorities seem to tolerate non-compliance. fi nancially excluded fell from 52% to 28% over the ● Transaction costs are high, making it diffi cult to same period. This is partly a result of the success extend services on a large scale, especially to achieved by the Umurenge SACCO programme in remote and rural areas. Mobile banking presents an improving access to fi nance in rural areas. opportunity to reduce the costs of network ● The government plans to consolidate all SACCOs expansion. Microfi nance authorities are actively at district level by end-2013, and turn them into a involved in launching a mobile-banking platform national co-operative bank by end-2014. This is for MFIs.
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Key changes and impacts since last year: operative Societies Act of 2003 established the ● Supervisory authorities operated a signifi cant Registrar of Co-operatives as the regulator for number of licence withdrawals in 2011, as part of Savings and Credit Co-operatives (SACCOs), with their recent efforts to abolish non-regulated MFIs. the BoT maintaining overall oversight. ● Extensive training programmes took place to ● SACCOs, which do not generally fall under the improve understanding of new accounting and mandate of the BoT, fall under the mandate of the internal-auditing practices. This has laid the basis Co-operatives Act; they are the most common type for tighter supervision. of MFI. SACCOs are treated like co-operatives, but ● The BCEAO is making progress, albeit slowly, on this does not cater for the savings and the credit the credit-bureau project. Harmonisation of aspect of their operations. Unlike those legislation in all member countries remains a institutions that are regulated and make considerable challenge. intermediate deposits, there are few barriers to ● A presidential election happened last year, with SACCOs forming. unprecedented riots in Dakar in early 2012 following granting of legal permission to Key changes and impacts since last year: Abdoulaye Wade, the former president, to run for a ● Tanzania lacks dedicated consumer-protection third term. There were huge tensions between laws, although some of its banking regulations do political opponents, and there were fears at to have components governing audits and accounting possible unrest, but the election went very well and standards. The Tanzania MFI umbrella the country is peaceful as usual. With the new organisation, TAMFI, which now has 51 president, there have not been any changes in the participating members, has published a Code of microfi nance industry. Conduct that covers interest-rate and service-cost disclosure,which it is urging its members to abide by. ■ Tanzania ● There is a fully functional credit-reference bureau (Creditinfo Tanzania), which will provide Key characteristics of the microfi nance business client credit-rating scores, offer proper risk environment: assessment and credit-risk portfolios for FIs and ● The microfi nance industry in Tanzania has serve as a base for the data bank go-live project in moved fairly slowly compared to its East African co-operation with the government. neighbours, Kenya and Uganda. The country’s ● There has been increased capacity and National Micro-fi nance Policy from 2000 supervision by the BoT in its efforts to decentralise established general guidelines for the promotion its operations. The BoT has opened branches in and development of microfi nance and its several states and appointed offi cials to supervise integration into the general fi nancial sector. the FI in the area. This will provide much-needed ● Microfi nance in Tanzania enjoys its own specifi c visibility especially for the FIs not under the direct legal framework. The government generally does supervision of the BoT. not intervene in the market via subsidies or ● The new Regulation on Agency Banking for restrictions on interest rates and provides no banking institutions will provide a guideline for all monitoring systems for other fi nancial institutions FIs seeking to enter the agency-banking space. (FIs) not under its direct supervision, and has a ● In an effort to increase client protection, policy that nuances between institutional types. Consumers International (CI) and the Tanzania ● The Bank of Tanzania (BoT, the central bank) Consumers Advocacy Society have collaborated on regulates and supervises commercial banks and FIs a fi nancial-literacy project throughout Tanzania. that are deposit-taking. However, credit-only MFIs ● There was political unrest early this year in the are not regulated or supervised by the BoT. The Co- north of Tanzania, which led many MFIs to halt
70 © The Economist Intelligence Unit Limited 2013 Global microscope on the microfinance business environment 2013
operations, but the political atmosphere is back to 2012, but the segmentremains unregulated. The normal and some FIs, such as Access Bank, are BoU and the Uganda Communications Commission opening branches in the north of the country. has formed a joint working group and is in the process of drafting interim guidelines for the mobile-money transfer business. The fi nance ■ Uganda minister proposed a 10% tax on cash transfers by mobile phones in his 2013/14 budget speech, and Key characteristics of the microfi nance business many providers increased their fees as a result. environment: ● A special audit by the auditor-general in 2012 ● Uganda’s regulatory environment for revealed that over TSh2.5bn (around US$970,000) microfi nance is well established, with defi ning allocated to SACCOswas mismanaged by managers legislation dating to 2003 and a respected enforcer and board members. The lack of oversight of in the form of the Bank of Uganda (BoU, the SACCO, and other informal-sector sources of micro- central bank). Because of these regulations, most credit means that fraudulent activities are microfi nance institutions (MFIs) choose to remain widespread. in the informal sector and the bulk of the market is ● The reach of the credit reference bureau (CRB) made up of membership of Savings and Credit Co- was broadened in October 2012. It was permitted operatives (SACCOs), which, along with non- to share information between different providers of governmental organisation (NGO)-MFIs, remain credit including. The CompuScan exclusivity period unregulated. also ended at that time, and the BoU is preparing ● The Bank of Uganda regulates the microfi nance the market to transition from a monopoly CRB industry. All MFIs are free to set interest rates and provider to a competitive CRB market. minimum-capital requirements are reasonable for ● In September 2012, the BoU took over the each of the four tiers defi ned by the Microfi nance management of the National Bank of Commerce Deposit-taking Institutions. (NBC), a tier-1 institution, which had been in ● While most FIs use the private credit bureau, fi nancial distress for two years. The NBC fi led CompuScan, the high cost is still deterring MDIs, contempt-of-court proceedings against the BoU, which are operating on very small margins and arguing that its takeover was illegal because the worry about losing their lower-income clients to NBC was challenging the closure in the the informal sector. Constitutional Court. ● The two political shocks that had an impact on Key changes and impacts since last year: the country in 2011—high infl ation and a general ● The number of registered mobile-money election—were not repeated in 2012. customers increased from 2.9m in 2011 to 8.9m in
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Appendix: Methodology and sources
Background however, there are few quantitative measures of the microfi nance environment that can serve as The Microscope is a measure of the regulatory and inputs. There are, however, increasingly more business environment for microfi nance at the indicators of outcomes in microfi nance, but these national level. Created in 2007 by The Economist are more properly treated as output measures. For Intelligence Unit in co-ordination with the that reason, the Microscope relies to a large extent Multilateral Investment Fund (MIF, a member of on more qualitative measures of the microfi nance the Inter-American Development Bank Group) and environment. This places a special obligation on CAF – development bank of Latin America-, the researchers to design an index that captures Microscope takes the form of an index that scores relevant aspects of the environment, and that does and ranks country performance against an so in a defensible and consistent manner. Despite objective standard. Consistent with the interests of insuffi cient and often incomplete data regarding the Inter-American Development Bank (IDB) and the microfi nance environment, much effort has CAF, the Microscope focused exclusively on been made to combine available secondary sources countries in the Latin America and Caribbean (LAC) and primary legal texts with insights and region in 2007 and 2008. Starting in 2009, the information from sector stakeholders in each Microscope was expanded to include selected national context. countries in the rest of the world thanks to the We fi rst developed the indicators and additional support of the International Finance methodologies used to evaluate the microfi nance Corporation (IFC). Now, in 2013, the inclusion of environment in 2007, in co-ordination with MIF 34 non-LAC countries is made possible thanks to and CAF. The real-world relevance of these the support of the Center for Financial Inclusion at indicators was evaluated through in-depth Accion (CFI) and Citi Microfi nance. interviews with country experts and microfi nance The Microscope is an exercise in performance practitioners from the LAC region. The indicators benchmarking of governments and business were further validated in 2007 and 2008 by their environments at the national level. Its goal is to high positive correlation with some microfi nance identify areas for improvement in microfi nance penetration fi gures. The original index initially regulation, as well as to evaluate conditions that included 15 countries in the LAC region and was may be conducive to, or inhibit the growth of, subsequently expanded to an additional 34 microfi nance operations. The Microscope is broadly countries around the globe, in co-operation with patterned after other indices that measure the the IFC. The 2011, 2012 and 2013 versions of the openness of the regulatory, legal and business index cover 55 countries. environment to private sector participation. The best known of these indices is the World Bank’s Doing Business programme. Unlike Doing Business,
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Sources portrait of the business environment for microfi nance than was previously possible. As a To score the indicators in this index, we gathered result of these expanded interview rosters, scores data from the following sources: have been re-evaluated for some countries, even in ● Personal interviews with regional and country cases where there were no actual changes in formal experts, as well as microfi nance practitioners laws and regulations. and regulators The report produced by the 2013 study ● An online global microfi nance survey for sector continues to draw on new data and secondary stakeholders sources so as to be able to provide the most up-to- ● Economist Intelligence Unit proprietary country date and in-depth analysis of the microfi nance rankings and reports, especially Country sector in developing countries around the world. Finance, Country Commerce and monthly A full list of sources and interviewees for 2013 will Country Reports be available upon publication of the Microscope in ● Scholarly studies October. Please refer to the full bibliography at ● Texts of laws, regulations and other legal www.eiu.com/microscope2013 documents ● Websites of governmental authorities and international organisations Scoring criteria ● Websites of industry associations ● Local and international news media reports Indicators in the Microscope index are qualitative in nature, and defi ned through a set of questions. For this year’s index, personal interviews were These questions seek to measure not only the laws again conducted with microfi nance practitioners, and standards governing the sector, but also their experts, policymakers and consultants worldwide, enforcement and implementation. The criteria are mostly in June to July 2013. Experts’ availability detailed, but ultimately subjective in nature. for interviews varied widely by region and, in some Consequently, scores are best understood by cases, by country. Overall, almost 180 experts were reading both the scoring criteria and the written interviewed. An online survey patterned on the justifi cations provided for each indicator. Microscope indicators was also administered to For the purposes of this research, MFIs are microfi nance practitioners, consultants, and defi ned narrowly, as those institutions that provide regulators worldwide. Three hundred and ninety “microcredit”—that is, loans to non-salaried two stakeholders responded to the survey. workers that are typically less than or equal to Information gathered from the interviews and the 250% of gross national income per head (GNI per survey was used to inform, challenge and confi rm head). Microcredit operations are carried out by country scores and evaluations, as well as to different types of institutions, some regulated by provide additional contacts for interviews. fi nancial authorities and some not. A continuing goal for this year’s Microscope was The indicators and associated scoring criteria for to increase the number and scope of practitioners Microscope 2013 are listed here. interviewed per country, to obtain the widest possible perspective on the microfi nance business Regulatory Framework and Practices environment. A large proportion of these interviews were drawn from in-country sources, (1) Regulation and supervision of microcredit especially local MFIs, national microfi nance portfolios: “Are regulations and supervision in the networks and regulators, and local offi ces of country conducive to microcredit provision by multilateral organisations. These additional banks and other established fi nancial institutions? consultations have allowed for a more nuanced For instance, are banks free to set market interest
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rates, can they avoid excessive documentation, and are institutional checks conducted when and and are they free from unfair competition from where relevant?” subsidised public programmes and institutions?” ● Scoring: 0=Very weak capacity to regulate or ● Scoring: 0=No such regulations exist or supervise microfi nance operations; 1=Limited regulations are prohibitive; 1=Regulations capacity to regulate and supervise; 2=Some create serious obstacles; 2=Regulations create capacity to regulate and supervise; at least two such obstacles for MFIs; 3=Substantial capacity to regulate and 3=Regulations create minor obstacles; supervise; 4=Excellent capacity to regulate and 4=Regulations present no signifi cant obstacles supervise
(2) Formation of regulated/supervised microcredit (5) Regulatory framework for deposit-taking: “Are institutions: “Are regulations conducive to the regulated MFIs permitted to take deposits? Are the formation of new MFIs, including greenfi eld MFIs, regulations reasonable and not overly upscaling NGOs, etc?” burdensome? Are deposits (any type; for example, ● Scoring: 0=No such regulations exist; time, sight and contractual savings) only taken by 1=Regulations exist, but multiple obstacles regulated entities? Are regulations, including make formation very diffi cult; 2=Regulations know-your-client regulations/anti-money- exist, although there are signifi cant obstacles; laundering regulations, present without being 3=Regulations exist with relatively few burdensome? Do they have minimum balance obstacles; 4=Regulations facilitate formation requirements or fees that limit micro-deposits?” This indicator assigns more points to countries that (3) Formation/operation of non-regulated do not inhibit more varied forms of deposit-taking. microcredit institutions: “Is the legal framework It also strikes a balance between the need for conducive to the formation and functioning of non- prudential regulation and the removal of regulated microcredit institutions? Do non- unnecessary obstacles to deposit-taking. regulated institutions take deposits?” ● Scoring: 0=Regulated institutions may not take ● Scoring: 0=Unregulated institutions are barred deposits; 1=Regulated institutions can take from offering micro-loans; 1=Unregulated deposits, but are limited in the types they may institutions face many obstacles to establishing accept and most regulations are burdensome; operations; 2=Unregulated institutions face 2=Regulated institutions may take a reasonably some obstacles; 3=Unregulated institutions face broad range of deposits and regulation is only only minor obstacles; 4=Unregulated moderately burdensome; 3=Regulated institutions face no signifi cant obstacles institutions can take a reasonably broad range of deposits and regulations are prudent, posing (4) Regulatory and supervisory capacity for only minor obstacles; 4=Regulated institutions microfi nance (including credit and other services): can take the widest range of deposits and “Do regulatory institutions possess an adequate regulations are prudent, posing no signifi cant capacity for the regulation and supervision of obstacles microfi nance? Is supervision truly risk-based and not focused arbitrarily on strictly traditional indicators (for example, collateral)? Does Supporting Institutional Framework regulatory capacity match or refl ect the pace of innovation in non-traditional forms of (6) Accounting transparency: “Are standards of microfi nance that are allowed and that exist in the accounting at MFIs in line with international norms country (such as insurance, mobile banking, and (US GAAP, IAS, and IFRS), and are institutions remittances)? Are data on the industry collected, required to undergo regular audits and to publish
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fi nancial statements? For regulated institutions, borrowers and lenders, but it can sometimes be this indicator looks at the existence of regulatory slow and ineffi cient; 4=A well-functioning requirements and compliance rates. For non- dispute-resolution mechanism exists and is regulated institutions, this looks at policies and available to most borrowers and lenders industry bodies that may encourage non-regulated entities to move towards these standards.” (9) Credit bureaus: “How effective and reliable are ● Scoring: 0=Generally established standards for credit bureaus for microfi nance? For instance, how accounting, auditing and publishing fi nancial extensive is the information on prospective statements do not exist; 1=National standards borrowers (including those wishing to borrow only exist, but these are thin and rarely effective; comparatively small amounts), and does 2=National standards exist, but are adhered to accessibility provide adequate protection for both only by some institutions; 3=Standards exist for borrowers and lenders (for example, privacy both regulated and non-regulated institutions, standards and preventing “fi shing expeditions” by although compliance remains an issue; lenders)? Do they cover transactions with both 4=Standards exist and are implemented by most regulated and non-regulated fi nancial institutions, institutions and do they provide “positive” as well as “negative” information about prospective (7) Client protection: Transparency in pricing: borrowers (that is, defaults and arrears)?” “Does the regulatory system protect microfi nance ● Scoring: 0=Credit bureaus do not exist; 1=Credit borrowers by requiring transparency on interest bureaus are weak and unreliable in most of rates? Do institutions, both regulated and non- these ways; 2=Credit bureaus are weak in some regulated, follow these practices?” of these ways; 3=Credit bureaus are weak in one ● Scoring: 0= Regulations do not require of these ways; 4=Credit bureaus provide transparency on interest rates; 1=Regulations comprehensive information on the whole range are technically in place, but they are not of transactions and also include positive followed or enforced; 2=Regulations are in information about borrowers (on-time payment place, but less than a majority of institutions history, etc) and adequate protections for comply; 3=Regulations are in place and the borrowers and lenders majority of institutions comply; 4=Regulations are robust and failure to comply is the exception (10) Policy and practice for fi nancial transactions through agents (for example, mobile phones, (8) Client Protection: Dispute resolution: “Does the points-of-service, etc): “Are regulations and regulatory and business environment provide for technology in places that allow innovations in timely dispute-resolution at reasonable cost in the microfi nance, such as mobile-phone transactions event of disagreements between microfi nance and POS options? Does the policy framework lenders and borrowers?” address risks? Are these agent mechanisms for ● Scoring: 0=There is no mechanism for dispute fi nancial transactions being implemented and used resolution; 1=A mechanism for dispute in practice?” resolution exists on paper, but few resources, if ● Scoring: 0=The environment is not conducive any, have been devoted to it; 2= A mechanism and there are no existing agent mechanisms in for dispute resolution exists, but it does not the country; 1=The environment is being work well in practice (for example, it is too improved, and activities are at a pilot stage; costly, time-consuming, unfair, or is only 2=The policy environment is conducive, and a available to a limited number of potential small share of transactions through agents do users); 3=A mechanism for dispute resolution occur; 3=The environment is conducive, and a exists, and provides reasonable recourse for moderate number of transactions occur through
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agents (although not all possible types); 4=The Regional representation environment is conducive, and many transactions occur through many different types This index builds on earlier studies of Latin America of agent and the Caribbean; as a result, countries from that region are numerically over-represented in the Adjustment factor: Stability global Microscope study (21 of 55 countries). Countries in other regions were selected on the (11) Political shocks to microfi nance: “Have there basis of the importance of their existing been political tensions or other signifi cant changes microfi nance sectors or the potential for future that would affect the operation of or fi nancial market development. The study therefore provides stability of microfi nance/microcredit?” differing levels of geographic coverage: 11 ● Scoring: 2= The country has been free of any countries were selected from Sub-Saharan Africa, political developments affecting microfi nance fi ve from South Asia, seven from East Asia, four operations; 1=Political events have affected from the Middle East and North Africa, and seven microfi nance operations in some, but not all, from Eastern Europe and Central Asia. These parts of the country; 0=Political events have differences in coverage impact regional shocked the entire institutional system in the conclusions and should be considered carefully country, such that all aspects of the when evaluating index results beyond individual microfi nance environment are affected country scores.
(12) Political Stability: “How important are the Weights internal and external threats to the stability of the serving government or the political system in Assigning weights to categories and indicators is a general?” fi nal and critical step in the construction of the ● Scoring: The Economist Intelligence Unit’s index. In previous versions of this index, the three Political stability rating is a category score in its principal categories were weighted based on a Risk Briefi ng. It is the average of fi ve individual consensus of the main research and funding scored indicators: Social unrest; Orderly organisations. The categories Regulatory transfers; Opposition stance; Excessive Framework and Institutional Development were each executive authority; and International tensions. weighted 40%, while Investment Climate was 0=Extreme instability, while 100=Very stable weighted 20%. In the 2011, 2012 and 2013 model, the Regulatory Framework and Practices and Supporting Institutional Framework categories are each weighted 50%.
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