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Microfinance and Urban Development

Microfinance and Urban Development. Presentation to the Urban Cluster Mike Goldberg October, 2004. Microfinance in Urban Settings: Why?. Linked to access to credit for productive opportunities (working capital si, fixed asset lending no!)

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Microfinance and Urban Development

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  1. Microfinance and Urban Development Presentation to the Urban Cluster Mike Goldberg October, 2004

  2. Microfinance in Urban Settings: Why? • Linked to access to credit for productive opportunities (working capital si, fixed asset lending no!) • Linked to land purchase and registration; urban infrastructure hookups • Linked to business formalization (maybe, but…) • Linked to employment generation (yes, but…) • Linked to business start-ups (no, but…) • Linked to social capital (but causation in reverse) • Linked to Competitiveness (maybe, but…)

  3. Financial Systems Approach: 5 Levels • Government (financial sector regulation, supervision, legal framework – taxation, equity concentration, savings mobilization) • Commercial banks, finance companies • Specialized microfinance non-governmental organizations • Community groups (sector-specific associations, community leaders) • Microbusiness operators

  4. Methodologies • Individual (character, collateral “lite”) – works best with larger micros with greater asset base, diversified clients with larger loans (US$250 – 700) • Solidarity groups (character-based joint liability mechanism, groups of 4 to 7) – works well in urban street markets with very small loans (starting at $50) • Community banks (character-based joint liability mechanism, groups of 20 to 40) – works best when social capital and organization is high. • Credit unions and S&L cooperatives (members hold shares, savings options, requires legal registration) – heavily dependent on member discipline; rarely effective when (I) more than 50 members, (ii) external financing 10%+ • Competition between methodologies in a market very useful

  5. Elements of Success in Urban Markets • Microfinance operational “basics” • Supportive or neutral legal framework • Private sector investment replaces donors, govt. • Commercial orientation of Board of Directors, management • Diversified source of commercially priced funds (not living on donations) • Mimic the local financial culture • Build on what’s there?? Or start from scratch??

  6. Performance Indicators in microfinance • Client level – user surveys to measure satisfaction, retention rates, on-time repayment performance • Financial institution level – trend toward financial sustainability (CGAP definition); AROE, AROA • Market level – increased coverage (first time users), increased depth of services, lower transaction costs, lower interest rates

  7. Leading institutions in urban markets • Specialized NGOs • Commercial banks • Finance companies (SOFOL in Mexico; Confia and Findesa in Nicaragua) • Combinations (MFIs with commercial bank investors, lenders) • The informal sector! (moneylenders, pawn brokers, check cashers, Western Union…) • Family and friends • Supplier credit

  8. What goes wrong? • Elections!!! • Economic downturns? Not really… • Financial mismanagement (inadequate reserves, poor MIS, lack of strategic approach, inadequate audits, human resource issues/corruption) • Donor dependence • Counter-productive changes in legal framework • Lack of clear supervision strategy

  9. Future directions • More commercial bank participation? • Specialized finance companies on the rise • Diversified service menu (moving beyond working capital) • Consumer credit meets productive uses • Microbusiness – infocenters and beyond • Bigger role for Superintendents of Banks and other financial institutions (against their will?) • Cooperatives on the rebound in several countries • Harnessing “cadenas productivas”

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