Access to Finance

Since its establishment in 2002, FIRST has funded approximately $6 million of technical assistance in the area of what may be described generally as “access to finance”. Most of this work ($4 million) was for product development, innovation and strategy building for housing finance, small and medium-size enterprise (SME) finance, and microfinance development strategy. The rest of the technical assistance was for regulation and supervision of non-bank financial institutions (NBFI), development financial institutions (DFI), microfinance institutions. Learn More...

The poor and microfinance

Access to finance is an area of great interest to most donors and multi-lateral development banks because its focus is largely on poverty reduction; the link between technical assistance in this area and poverty reduction tends to be very direct and measurable. Providing the means for poor people to save, to transfer and receive money cost efficiently (often from diaspora relatives), to obtain small loans to help develop a business, to improve market outlets, to empower women, to insure against risks including health, to facilitate property purchase, are all among the targets for “access to finance”. Many of the institutions supporting access to finance for the poor are micro-finance organizations: they can be involved solely with credit (micro-credit), or solely with savings (e.g. Savings Cooperatives in Africa), a combination of both (so the services start to evolve, albeit on a small scale, towards main-stream banking) or single product, such as micro-insurance (usually focused on health insurance). Micro-finance institutions are often organized as NGOs but may become commercial operations and reach a substantial size, e.g. the Grameen Bank in Bangladesh. Some mainstream commercial banks also operate a microfinance “window”. There may be specialist techniques involved in improving access to finance in rural areas where it may not be practical or cost-efficient to establish bank branch networks. Sometimes this may involve adding financial services to networks that do exist –the post office network in some countries such as those in South Asia. Sometimes this may involve using technology such as mobile ‘phones to enable people to manage banking accounts remotely but with security.

Small business

The development of micro and small businesses- MSMEs and SMEs- is usually one of the engines for economic growth which in turn affects employment and therefore poverty reduction. It is common for mainstream commercial banks to provide insufficient finance for MSMEs and SMEs for reasons of incentive, transaction cost, and capacity to analyze and handle the credit risks. MSMEs may be served better by micro-credit organizations where they exist. SMEs often fall between the two stools of micro-credit (too large) and mainstream commercial banks (too small). Where banks do provide credit to SMEs the credits are often only for short maturities and require substantial collateral; either many SME owners are unable to post the collateral or the maturity of the loans is too short to match their cash-flow, especially if they are investing in growth. In most early stage developing countries, other forms of finance, such as venture capital or second tier capital markets, are also lacking. Some multi-lateral development banks (MLDBs) such as the IFC and EBRD have therefore developed programs to deal with access to finance for MSMEs and SMEs. One of the mechanisms is to provide medium-term SME credit lines to a country’s commercial banks that are dedicated for SME use and combined with technical assistance to the banks in credit risk analysis of SME borrowers. Similarly such MLDBs support other financial institutions such as leasing companies with credit lines dedicated for use by Micro enterprises (MSMEs) and SMEs.

Some countries have established Development Banks to fund their SME sectors, although there are many cases where such banks have not been effective in managing their resources; generating unacceptably high levels of non-performing loans that has threatened their solvency. Reasons for this vary from inadequate management, lack of suitable funding and or political interference.

Housing finance

This sector potentially serves all segments of the population but often main-stream commercial banks lack sufficient long-term funding to engage in long-term mortgage lending and often ignore the poor. The profitability of building and developing residential units for the poor is often unattractive to developers and the perceived credit risk and transaction costs too high for mainstream banks. Access to finance for the urban poor- including those employed and those in the informal sector - is often difficult to impossible without other solutions. Solutions may vary widely from country to country but often involve a combination of direct government support (some level of subsidy), indirect government support to lenders (for example through liquidity facilities, longer-term funding, and or guarantees) and some contributions from the potential, albeit poor, borrowers. The India Housing Finance project referred to in this section is interesting because it used entirely market-based solutions to deliver affordable housing finance to low income employed persons.

Regulation and supervision of NBFIs

The regulation of financial institutions involved in access to finance varies according to the nature of the financial institutions involved. Mainstream commercial banks, even when engaged in financial services targeting the poor or MSMEs and SMEs, are regulated in almost all cases by their respective Central Banks.

Other institutions may be regulated by special purpose regulators- for example micro-finance regulator or insurance regulators. In some of the lesser developed countries there are many financial institutions serving the poor that are not well regulated at all. Often this is because the sectors have grown haphazardly or even because they have constituted a very small exposure for the financial sector as a whole. Developing the appropriate level of regulations and the regulatory skills to implement them is and has been a challenge. Too much regulation may stifle small institutions, such as many micro-finance organizations, but too little may pose risks to often poor clients. The variety of institutions may also pose a challenge: micro-credit, savings cooperatives, friendly societies, leasing companies, micro-insurance, money-transfer firms, bureaux de change, medical aid funds, private pension funds, credit unions, and burial funds among others.

Lumped together all of these types of institution may be described as “non-bank financial institutions” or NBFIs for short. Among the solutions developed to address these in countries where regulation is at an early stage, and especially where other pillars of the financial sector, such as insurance and capital markets, are under-developed, is to distinguish between those financial institutions that take deposits and those that do not. One of the main aims of regulation and supervision of NBFIs is to protect the public from loss by the mis-management or worse of financial institutions; this risk is greater where the public hold deposits or savings with the financial institutions. Accordingly, the regulation and supervision of deposit taking institutions is stronger. Another solution may involve the structure of the regulator; there may be efficiencies to be gained by pooling regulation of diverse NBFIs under one roof or structure as well as gains in consistency and avoidance of regulatory arbitrage. This type of solution might take the form of adding to the regulatory coverage of an existing regulator such as the Central Bank (this model is in use for example in Armenia and Malawi) or by establishing a single unified financial sector regulator for all parts of the financial sector other than banks, such as  in Mongolia or Bulgaria, or a unified regulator for the entire financial sector such as in the United Kingdom (the FSA, although in the wake of the 2007-2009 financial crisis this is now under review). Hide...

Summary of Lessons Learned

The provision of technical assistance under the banner of “access to finance” is a crowded space, which in most parts is amply covered by other donor or MLDB funded programs.  FIRST does not generally engage with microfinance institution building, rural finance access, SME access, and access to finance policy issues, precisely because these are usually and effectively supported by others.  

Non-bank regulation and supervision work is essentially a category on its own that mainly covers sectors such as insurance, pensions, capital markets and some other financial institutions that have yet to come under a regulatory regime; all of FIRST projects in this area, except for one, have been in Sub-Saharan Africa and involved developing structures and associated regulations and capacity building for effective supervision, often for the first time, of NBFI institutions.

The microfinance technical assistance (TA) for regulation and supervision arose largely because of gaps in the TA fabric. One of FIRST’s charter rationales was and is to fill gaps in financial sector development. Similarly, the microfinance strategic and survey work conducted by FIRST targeted a process for bringing micro-finance institutions into a regulatory net once the activities in a particular country had been assessed and mapped. Strengthening regulation and supervision of microfinance sectors, especially at the interface between that sector and the rest of the more developed and formalized financial sector, is one of the gaps that occurs more frequently, and is therefore a legitimate area for FIRST support.

The housing finance projects, except for the Turkish secondary mortgage market project, have aimed at developing housing for the poorer population of a country; they deal with various schemes and structures to bring affordable housing to low income groups, even within middle income countries in some of the cases. Learn More...

The rural and SME access projects were also special “gap” filling cases. In the case of the projects in Poland (rural communes) and Peru (SME securitization) there were potential capital markets solutions. Djibouti had tried to attract assistance for determining a strategy to provide better access to finance for its SMEs without success from traditional donors and the same consideration arose with the Sudan farmers in the Gezira region (brought to FIRST by the World Bank).

Going forward therefore it is likely that  most “access to finance” projects, as in the past, will need a strong case to be made for FIRST support; this may include obvious but strong evidence that the project is not and can not be easily handled by other donors – the “gap” case. The “can not” case could be due to some unique features requiring very specialist expertise; housing finance for the poor is likely to be one of the most productive areas for FIRST support because effective schemes usually require heavy tailoring to the needs and structures of a particular country.

Lessons learned:

• Apart from possibilities in housing finance, there are really no obvious areas in “access to finance” that FIRST can pro-actively promote because most areas under this heading are amply covered by many donors, multi-lateral development banks and other NGOs. FIRST’s only option is to facilitate the filling of gaps when these opportunities are brought to it by other multi-lateral development banks and donors or directly by potential recipients of technical assistance (although even in these cases FIRST needs to be extra diligent that it is not simply a substitute for other programs).
• Working systematically through a series of linked projects with each one building on the prior one is a pragmatic technique for technical assistance that “sticks”. The only case in this area was that of Laos where three related projects exemplified this approach. FIRST has also tried in similar vein to build on its NBFI regulatory strengthening work in Africa by establishing a regional capacity building effort for SADC members: these projects are ongoing and the results are yet to be judged.
• In housing finance the three projects that supported the creation of new initiatives for affordable housing for the poor: Colombia, Peru and India, were all fairly lengthy and high cost. Long, high cost projects were not expected to be typical when FIRST was designed and so, should FIRST continue to be receptive or even promote such technical assistance? All three of these projects were in fact introduced by the World Bank. Given the highly successful outcomes of at least two of these three projects it seems there ought to be justification for backing similar projects in the future and even for active promotion of the sorts of solutions developed already. 
• Complex projects such as some of the housing finance or the microfinance strategy ones, work best if all major stakeholders can be brought together at an early stage through a working group. This enables communication to be more efficient and to help speed up consensus. Hide...

Selected Project Profiles and Reports

FIRST disseminates project outputs that are potentially of value to other countries concerned with regulatory and supervisory capacity building and product development in the area of banking. The project examples shared in this section are chosen because they may apply to other countries' development context and the outputs could provide helpful guidance.

Nine projects were chosen to illustrate the various themes running through the access to finance area, but in doing so we have included projects from each of the main areas: microfinance surveys and strategies; development fiinance institutions in Africa; regulation and supervision of NBFIs; housing finance, and; access to finance for SMEs.