Customer-centered Key roles for entrepreneurs and local community groups

1. CONCEPTof an all-inclusive (universally accessible) system to improve access to retail finance in Russia in 2008 - 2012 Customer-centered Key roles for entrepreneurs and local community groups Measures designed to build capacity and provide technology solutions Concurrent two-way development: banks downscaling to reach new markets “from top down” vs. non-banks building their capacity “from bottom up.” Their regulation should be the same in overlapping areas The Concept can be implemented once the government adopts enabling policies for retail finance infrastructure, microfinance and branchless banking The proposed measures are not exhaustive, but they have priority Goals of the Concept: promote a diverse and accessible financial system in Russia; increase access to finance from 55% to 85% of the public and business operators by 2012, to contribute to Russia's Development by 2020 Strategy and to help increase Russia's middle class to 75% of the population Objectives of the Concept: analyze access to finance and its implications for macroeconomic indicators; identify key barriers; offer effective solutions, including policy initiatives; project outcomes and contingencies

2. Access to financial services in Russia:– linked to living standards, private entrepreneurship, social inequalities, rural development and the country's comprehensive social and economic development Time deposits with banks around 20-25% of the public Consumer credits around 30% of the public Mortgage loans less than 3% of the public Transactions with securities no more than 10% of the public Purchase of shares in Mutual Investment Funds approx. 4% of the public Microlending no more than 15% of the demand

3. Social and economic reasons to improve access to financial services and to promote microfinance • As of early 2008, 40% of the Russian population lacked access to banks and finance: these included people living outside big cities, low income communities, and microentrepreneurs. • Aggregate demand for credit (loans) up to 300,000 rubles per borrower is around 250 bln. rubles, while aggregate supply does not exceed 35 bln. rubles (14% of the demand) • In addition, a demand for start-up capital among low income people is at least 500 bln. rubles • Infrastructural causes of the shortage: 1) regional variations in the development of finance infrastructure; 2) unequal distribution of banks' infrastructure inside each region; • Financial service delivery technologies do not match the needs of the target group CONCLUSION: two types of measures are needed to address the problems: institutional (to build the capacity of financial institutions) and technological (to introduce technology for better access)

4. The Concept • A financial system widely accessible to the public • Programs and plans of financial market development • New remittance and lending technologies • Legal regulation of relationships in the sphere of “branchless” delivery of financial services to the public and SME • Regulatory initiatives The Concept offers a comprehensive solution: building a diversified model of retail finance delivery (various types of institutions and technologies targeting different groups of customers). Emphasized role of the regulation, differentiated risk control and avoidance or regulatory arbitrariness inside various financial subsystems

5. Key Strategies for building an all-inclusive financial system • Broaden and diversify banks’ branch networks by making it easier and cheaper to set up POS, including “mobile bank offices” • Promote MFI while preserving a balanced diversity among them. The extent of microfinance regulation should be diversified and directly linked to the required degree of customer protection • Facilitate the use of promising technology for branchless banking. The model involves: broader use of network-based agents, such as the Russian Post, as well as MFI; mobile phone–based and internet banking • Provide an option of simple transformation from a non-bank microfinance institution into a regulated credit institution to ensure continued growth of the providers’ functional capacity and transaction volumes • Implement targeted programs to improve financial literacy of the general public and SME operators

6. The Concept: Key Measures • Institutional Capacity Building Measures: broaden the range of financial intermediaries • Broaden banks’ branch networks • NDCO • Credit Cooperatives and Cooperative Banks • New types of microfinance institutions (MFI) • Credit brokers, incl. mortgage credit brokers • Collection agencies and other “loan infrastructure” • Technology Based Measures: • Make service delivery cheaper, lower barriers to market entry (microfinance technology) • Refinance the intermediaries (CB – commercial banks – MFI) • Use technology for branchless (remote) service delivery • Improve financial literacy of the public • Government-operated SME and microbusiness support programs

7. Key Policy Initiatives • Improve market transparency, protect the investors: Draft Law on MFI • Ensure sustainability of the credit cooperative system: Draft Laws on Credit Cooperatives, on amending the Law on Credit Consumer Cooperatives of Citizens, appoint a government agency to oversee CCCC • Streamline requirements for NDCO executives, and otherwise facilitate transformation of unregulated “non-credit” MFI into regulated credit institutions • Facilitate mircolending by banks • Better branchless banking regulation: amend the banking legislation, the AML/CTF law, and adopt provisions for e-money • Develop an infrastructure for microfinance: staff training and re-training, MFI rating and benchmarking, specialized MFI audit, attract investment in microfinance, etc. • Involve the general public and SME operators in financial literacy programs tailored to their needs

8. Global Microfinance • Combined MFI total loan portfolio is estimated at USD 70 million • The total number of microfinance consumers has grown more than 5-fold, bringing the number of microborrowers to 120 million over the past six years • Average loan sizes vary between a few dollars to a few thousand US dollars • Banks, credit cooperatives and specialized MFI each make one third of all loans • Professor Muhammad Yunus was awarded the 2006 Nobel Peace Prize for his contribution to microfinance • In the EU countries, microfinance is supported as part of promoting innovation and investment, and also as part of social programs to facilitate employment, eradicate poverty, etc. There are specialized microfinance programs • Governments of developing counties also use microfinance to address social and economic problems: the Mexican experience, etc.

9. Additional Enabling Measures for the Russian Microfinance Market • Establish guarantee funds • Develop a support infrastructure for microfinance, such as training institutions, rating and audit services, and investment in the microfinance industry • Partially subsidize the costs of training, rating assessments and audits for MFI, contribute to MFI loan portfolios to encourage lending to high-risk start-ups • Cofinance regional efforts to encourage microfinance as a mechanism of SME development.

10. The Concept: Expected Outcomes • A diverse, innovation-driven finance and credit system, sustainable and resistant to external and internal risks and crises • Substantially improved access to finance for the public and SME, from 55% to 85% by 2012 • Contribute to broader objectives, such as bringing the middle class to 75% of the population by 2020, overall SME development, poverty reduction, rural development and the country's comprehensive social and economic growth

11. Numerical Targets for the Microfinance Sector Development by 2012 • At least 5,000 credit consumer cooperatives serving at least 10 million customers • The number of regional and municipal MF programs and SME support funds matching the number of regions and municipalities: 80 and 300, respectively • At least one specialized non-bank lending institution, such as NDCO or another type, per region, i.e. at least 80 non-bank microfinance institutions or their branches • Credit policies of most banks include microlending, SME support and cooperation with non-bank MFIs