PSD Blog - World Bank Group

Small Business Finance - What Works, What Doesn't?

May 5 and 6 saw an interesting research conference here in DC on Small Business Finance, looking at which banking practices and government interventions help foster small businesses' access to external finance. Twelve interesting papers and a stimulating panel discussion addressed an array of issues, ranging from banks' lending techniques over competition, government policies to informal and trade credit. Many papers and speakers questioned conventional wisdom on what we know and what policies are helpful.

Credit crunch: Wall Street only, not Queens

Just a few months after opening for business, Grameen Bank America has loaned somewhere between $500 and $3000 to about 175 borrowers.  About a month ago, The New York Times published an article asking weather Muhummad Yunus's  scheme would work in the United States as well as it worked in countries like Bangladesh. The paper may have answered its own question on its City Room blog. The answer seems to be yes, thanks to low income immigrants. To reach the immigrant market, Grameen America just opened its new headquarters to Jackson Heights, a neighborhood flourishing with new immigrants.

Small Business Finance - What Works, What Doesn't?

May 5 and 6 will see an interesting conference on small business finance here in Washington DC, covering topics from lending techniques, innovations, the impact of market structure, government interventions and alternatives to bank finance.

Sustainable banking awards: who's winning what?

The Financial Times and IFC announced shortlists of potential winners for the 2008 Sustainable Banking Awards. The awards recognize financial institutions that have led the way in integating their policies with social, environmental, and corporate governance objectives. Below is a sample the categories and the shortlisted candidates, the full list is available here.

Sustainable Bank of the Year

• Banco Real, Brazil
• Citi, US
• HSBC, UK
• Rabobank, Netherlands
• Standard Chartered, UK

Sustainable Deal of the Year

• BlueOrchard Finance, Switzerland/Morgan Stanley, US (microfinance loans)
• Calyon, France (solar thermal power plants)
• Citi, US (financing for rural housing)
• Glitnir Bank, Iceland (geothermal power generation)
• Merrill Lynch, US (carbon finance to reduce deforestation)

Banking at the Bottom of the Pyramid

• ASA, Bangladesh
• Banco Bradesco, Brazil
• ICICI Group, India
• Opportunity International, UK
• Wizzit, South Africa

Online microfinance: Kiva vs. MicroPlace

The Microfinance Gateway has just released a good and quick comparison between two major players in microfinance: Kiva and MicroPlace. The Microfinance Gateway piece is a good synopsis of the work these two organizations are doing; it talks about the differences between the two as well as their roots and how to invest in microfinance projects through them. 

Ethanol production and access to finance

What does the U.S. Energy Policy Act of 2005 and its mandatory doubling of renewable fuel additives by 2012 have to do with access to finance? A recent paper uses the sudden increase in demand for U.S. corn, the primary input for ethanol production, as an external shock to see how access to finance affected corn producers in the U.S. It shows that productivity increased after 2005 in corn production as opposed to soybean production and more in counties with better access to finance. Now, just imagine the effect in developing countries!

More mobile banking, this time in the US. So what?

Word today that Western Union, the global money transfer service, is increasing its profile in the United States when it comes to selling new ways to send and receive money. This is just the latest in a series of steps Western Union has taken to get more involved in mobile services, which have grown exponentially in places like the Philippines and Kenya but have been less quick to catch on in markets where banking services are well-developed, such as the United States. The service will initially seek to reach Latino immigrants who are among the 40 million people in the US who lack access to basic banking services. How will it work? The Wall Street Journal explains:

To use the service, people go to one of RadioShack's more than 4,000 stores and sign up for a Trumpet prepaid phone, which is required under the program. Customers can then load up to $200 onto their phones for cash transfer via Western Union's network either within the U.S. or internationally.

The subprime mess - what's the cost?

Accurate estimates of the fall-out are certainly a moving target , but a recent paper estimates the financial and economic cost of the crisis, predicting total loan losses of $400 billion and a 1.3 percent lower GDP growth this year. This paper also contains a nice explanation of how the subprime crisis infected other financial markets and the channels through which it affects overall lending standards and economic activity.

Does tax registration increase profits?

A large number of firms in developing countries operate in the informal sector. It is often argued that informality lowers profits and growth, but is this true? A recent paper on Bolivia finds that formality leads indeed to higher profit - on average. However, distinguishing between firms of different sizes shows that it is only mid-sized firms that stand to benefit from formality, whereas both smaller and larger firms suffer.

To export or not to export?

A recent paper looks at possible reasons why farmers in parts of the developing world insist in growing crops for local markets when crops for export markets are considered to be more profitable. The authors suggest that this could be explained by:

"[M]issing information about the profitability of these crops, lack of access to the necessary capital to make the switch possible, lack of infrastructure necessary to bring the crops to export outlets, high risk of the export markets, lack of human capital necessary to adopt successfully a new agricultural technology, and misperception by researchers and policymakers about the true profit opportunities and risk of crops grown for export markets."

The paper also takes a look at the work of DrumNet, a social enterprise in Africa, to analyze whether a package of services could help farmers switch to export crops and market them. The researchers found a slightly positive impact from DrumNet’s package of services, but nothing overwhelming.

More on the microfinance dialogue

James Surowiecki's wrote a piece in March 17 issue of the The New Yorker on how the hype around microfinance is fogging the way to development. "What poor countries need most[...]is not more microbusinesses. They need more small-to-medium-sized enterprises," writes Surowiecki. He explained further that focusing on SMEs, rather than on microbusinesses, could generate higher rates of employment. Jacqueline Novogratz from the Acumen Fund, wrote a piece in response where she gives some practitioner's insights:

"In my own experience corroborated James' findings that only a small percentage of borrowers went onto create larger businesses that employed significant numbers of people. But we've learned how to deliver at least one product to the poor, and we have an unprecedented opportunity not only to build larger businesses that employ people but also to deliver other critical products — health care, clean water, housing and alternative energy — to the poor in ways they can access and afford."

Credit Guarantee Schemes - all over the globe - and here in DC

From this week's Partial Credit Guarantee Conference, we learned that credit guarantees have become the direct intervention mechanism of choice of SME credit activists. Almost all of the OECD countries have them, as well as many developing countries. Multilateral and bilateral donors support them throughout the developing world.

While government is heavily involved in funding and management of these schemes, loan assessment and recovery are mostly undertaken by the private sector, mostly by the lenders - and perhaps for the better, as schemes where the government is in charge of choosing borrowers and recovering loans have typically higher loan losses.

Partial Credit Guarantees - is there an additionality effect?

The ultimate success criterion for credit guarantees (as for other government interventions) is whether they increase access and/or reduce costs for constrained enterprises. Methodologically, that is a difficult question, as proper identification of the causality is a challenge.

Several papers at the World Bank's Partial Credit Guarantee Schemes conference are addressing the issues. One paper finds that participants in mutual guarantee schemes in Italy pay lower interest rates than non-participants, but are also less likely to default. Peer evaluation and monitoring seems to play a role, similar as in the microfinance group lending schemes.

Partial Credit Guarantees Conference

The World Bank will host a conference on Partial Credit Guarantee Schemes this week (March 13-14, 2008) in Washington DC. Credit guarantee schemes play an important role in the distribution of credit risk, can improve access to finance and stimulate private sector development.

All the conference papers are now available. Presentations and discussions as well as the two panels promise to turn this into an interesting and informative event. Co-organizer and blogger Thorsten Beck will keep you updated.

Tsunami insurance for the poor

A new health insurance plan will enable the poor in India to buy health insurance for less than 10 cents a month, and it will cover natural disasters including Tsunamis.

The new program is a partnership between and aid group, CARE International, and a private insurer, Allianz. It is expected that over 200,000 customers will buy insurance within a year. According to Allianz, the communities have been involved in designing the new policies, which will cover death, medical treatment for injuries in accidents, help with funeral and hospital expenses, as well as paying wages during illness.

"Microinsurance provides a comprehensive measure of social security in an area which desperately needs this sort of protection against accidents and shocks that can push poor communities right to the limit," said Wolfgang Jamman, national director of CARE Germany.

But don't be so quick in calling this charity work. With an estimated market of 250 million policy holders in India, there sure is a buck or two to be made.

From growing cassava to funding a university

Beatrice Ayuru introduces herself as a teacher and businesswoman. She is from northern Uganda, a war-ravaged area with much poverty and few schools.

A few years ago, with no business training and no money, Beatrice decided that she would build her own school. "No girl should endure what I had to go through myself," says Beatrice. "Education is the best way to help reduce poverty in my region […] and giving girl children education empowers them. In my village, women are over-dependent on men."

Beatrice started with a small garden of cassava. That earned her a little money which she used to buy wheelbarrows that she subsequently rented out. With that income, she managed to open a canteen. Soon, she had enough savings to start a school. Getting the land was a struggle.

Microfinance's "two cents" on its own future

Microfinance professionals, who responded to a new survey by the Center for the Study of Financial Innovation, identified poor management skills as the main risk the industry faces. Poor corporate governance is also seen as a great risk, but more so by investors and analysts than by practitioners.

According to the report "microfinance institutions tend to be dominated by 'visionaries' who are strong on charisma but less so on management skills and strategic flexibility."

More than 300 respondents from 74 countries contributed to the survey. It focused on institutions with more than $5m in assets which are profitable and capable of commercial growth.

Do you have any insights to share? Feel free to leave your own "two cents".

Microfinance: so good it's fit for children's bedtime story

A recently published children's book titled, One Hen: How One Small Loan Made a Big Difference, tells the tale of a young Ghanaian boy, who with the help of a small loan is able to dramatically improve his living conditions with his widowed mother. Kojo, the protagonist boy, buys one hen after receiving a loan from his mother and then sells eggs to his community. After saving and soundly investing he is able to expand his operations and eventually can afford to attend college.

Kojo’s story is based on the life of Kwabena Darko, who created in 1994 Sinapi Aba Trust, which engages in microfinancing in Ghana. The only hope is that if Cinderella doesn't spark development ideas, perhaps Kojo will. 

Gemloc Program selects PIMCO and Markit

In a new development, the World Bank Group chose PIMCO and Markit for Gemloc Program to increase investment in emerging markets.

The World Bank Group launched the Gemloc Program last October to help emerging market countries attract more investment and develop their local currency bond markets.

Winning at the bottom of the pyramid

Long before Bill Gates gave his "creative capitalism" speech at Davos, the Financial Times and the IFC had been spreading the word through the annual FT/IFC Sustainable Banking Awards.

Although it is tough to compete with Gates when it comes to getting media attention, this year's awards will include a new category: "Banking at the bottom of the pyramid," which will acknowledge financial institutions that create innovative products to serve the poor.

The deadline for submissions is February 29. Details on their Web site.

CGAP: Policy needs a balanced approach to mobile banking and other technologies

A new CGAP/DFID paper addresses the policy implications of branchless banking. Regulating Transformational Branchless Banking: Mobile Phones and Other Technology to Increase Access to Finance is based on assessments of policy and regulation in seven key countries, including interviews with more than 500 people from governments, the private sector, and international organizations in Brazil, India, Kenya, Pakistan, the Philippines, Russia and South Africa.

While much of the current buzz is around mobile phones, other branchless banking applications are gaining traction as well. Brazil's increase in access to finance has been accomplished largely through the more than 95,000 banking "correspondents"—local merchants and post offices that act as agents for banks, equipped with card-swipe and barcode-reading point-of-sale (POS) terminals. In Russia, a broad network of bank ATMs, POS terminals, and online e-money providers offer transaction services outside of traditional branch offices.

Want to know more? Read the full report and access country-by-country information.

Partial credit guarantee scheme

Though credit guarantee schemes can improve access to finance and distribute credit risk, questions remain about their impact on credit constraints, small bank lending, entrepreneurship, SME finance, and on non-guaranteed lending.

On March 13, 2008 at the World Bank, speakers will present the latest empirical evidence from developed and developing countries on the subject.

The two-day conference held in Washington, D.C. is free and open to public on a first come, first serve basis. To register please send an email to Colleen Mascenik at cmascenik@worldbank.org.

Financial liberalization can make your economy more resilient if...

A new paper compares changes in financing by international banks to domestic banks after the 1998 Russian debt crisis. The author finds that financing increased to banks with international equity holders when compared with their purely domestic counterparts.

Financial liberalization can make you more resilient to global credit shocks, but only if you invite foreigners rather than just borrow their money.

Climate policy map

Econsense created an interactive database for all-things climate. Much like our Do-Your-Own-Analysis, it allows to compare and contrast data across countries, in this case, on topics such as greenhouse gas emissions, fuel tax, emissions trading and biofuel production.

When do enterprises prefer informal credit?

Could enterprises voluntarily choose to tap informal credit markets to avoid the additional scrutiny or even harassment that engaging with formal financial institutions might invite?

A recent paper, using firm-survey data for 29 countries, suggests so. Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase.

Foreign bank entry and outreach

What is the impact of foreign bank entry on banking sector outreach? A recent paper on the Mexican experience shows contrasting patterns: the number of municipalities with bank presence increased, but the number of loan and deposit accounts decreased.

While only rich and urban areas benefited from more bank presence, the decline in loan and deposit accounts was more pronounced in rural and poorer areas.

Reaction to pre-crisis inefficiencies? A deliberate strategy of foreign banks to focus on the upper end of the market? Or a response to demand or regulatory changes?

Microfinance regulation according to Yunus

The Nobel Peace Prize laureate and the father of Grameen Bank, Mohammad Yunus, on microlending regulation:

The existing regulations are designed with commercial banking in mind, but microfinance requires a dedicated regulator and a relevant set of rules. Commercial banking is like a super tanker whereas microfinance is like a dinghy boat with which you can reach small corners. If you design a dinghy boat with the architecture of a supertanker, it is sure to fail

Few takers for bank accounts at $700 apiece

It takes over $700 to open a checking account in Cameroon - more than the country's per capita GDP. In 10 percent of countries surveyed in a World Bank report, a person must have an equivalent of at least 50 percent of per capita GDP to open an account.

The result: only 20 percent of families in Africa have bank accounts. The graphic below shows the share of the population that can't afford checking account fees:

But more stable and predictable monetary policies, privatization of many state-owned banks and improvements in regulation are encouraging more banks, such as Barclays or Standard Bank of South Africa, to compete for new customers.

Microinsurance

Less than 2 percent of Indonesians are insured. 120 million, nearly half of the population, survive on less than $2 per day.

A short, promotional video shows how some poor Indonesians are warming up to the idea of insurance priced at $0.40.

World's largest untapped consumer segment

With a monthly income varing from $63 and $700, many of them use "branded shampoos and detergents regularly, and they sometimes indulge in a bar of chocolate or bottle of perfume.  A good number own televisions, refrigerators, and DVD players." 

Known as the "next billion," these consumers - who spend over $1 trillion a year - can't "afford to make mistakes" and will "carefully compare [products] functional, technical, and emotional benefits."

BCG has five tips for companies on how to reach this group:

Microloans get bad credit

According to David Satterthwaite, the editor of MicroCapital Monitor, in South Asia alone microlenders have reached so far only about 2 percent of potential customers. As needs and opportunities for access to finance continue to grow, so does the debate on the social and commercial aspects of microlending.

Most recently on the "con" side BusinessWeek has published a special on the problems that some poor borrowers in Mexico encounter.

The FT and Nextbillion have the other side of the story.

IPOs anyone?

What role, if any, have public equity markets for small, young firms in emerging markets? A recent study shows that firms going public, after the liberalization of the Indian IPO market in 1992, are smaller, younger and are less likely to be affiliated with a business group than other private firms.

These same firms, however, also suffered after the market collapse in 1997.  Profitability and sales growth fell and bankruptcy rates went up, most likely due to a lack of continued financing. These results might not hold for other developing countries with small and illiquid stock markets, but they will certainly foster debate.

New planet in the World Bank universe

Our most requested databases: the Doing Business, Enterprise Surveys, Financial Indicators, Private Investment in Infrastructure Projects and the Privatization Database, can all now be browsed from a one convenient location - the Business Planet.

The filters allow for exploration by topic, region or a country.

Privatization in Africa

Privatizing your largest bank to foreigners certainly invites scrutiny if not criticism especially in Sub-Saharan Africa. A recent study asseses the sale of government-owned Uganda Commercial Bank to the South African Stanbic and suggests that the privatization has been relatively successful.

The portfolio of the privatized bank, which was cleaned prior to sale, remains fairly strong and profitability and credit growth are now on par with other Ugandan banks. Though market segmentation still is a concern, since Stanbic faces little or no direct competition in many remote areas, early results suggest that access to credit has improved for some hard-to-serve groups.

Microfinance congress in New York

Starting May 14, 2008, New York will host a three-day event for microfinance practitioners and those interesting in entering the field. Both IFC and CGAP representatives will be there.

What can governments do to foster branchless banking?

More and more research shows the positive impact that mobile technology has on economic development. The Economist has a short piece of advice for governments on how to maximize this mobile momentum:

[…] do away with state monopolies, issue new licenses to allow rival operators to enter the market and slash taxes on handsets

The recommendation is timely. Western Union, which handled nearly 17 percent of world's remittances in 2006, announced last month it would make it possible to wire money via cell phones.

JPMorgan joins the pack

No, this has nothing to do with the subprime mortgage debacle. The global financial services firm decided to follow in the steps of other giants such as Morgan Stanley, HSBC and Deutsche Bank and to enter the micro-finance field.

The new division called Social Sector Finance hopes to achieve "a double bottom line of social benefit and financial returns," says Christina Leijonhufvud, who's leading the unit.

According to Microfinance Information Exchange the end of 2006 marked over $23 billion in micro-loans outstanding to more than more than 52 million people.

High interest rates still better than no access

Charge 80% per year on a loan in the U.S. and you're called a usurer. Charge 80% per year on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

Dean Karlan, president of Innovations for Poverty Action, and Jonathan Zinman from Dartmouth College set out to find out if consumers can be made better off even when borrowing at "excessive" rates from regulated financial institutions:

[We] tested this proposition. We worked with a successful finance company in South Africa to randomly choose some just-below-the-normal-approval-bar applicants to receive a four-month installment loan. The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy.

Rickshaw bank - a vehicle for access to finance

Today's Wall Street Journal has a story of Pradip Kumar Sarmah, an entrepreneur, who created a credit program that helps some of India's eight million rickshaw drivers own their vehicles.

Finance for all? Policies and pitfalls in expanding access

Fresh from the press, this Policy Research Report takes stock of our current knowledge of access to financial services. It analyzes indicators and determinants of access to finance and discusses the role of government. Be ready to see some of your priors confirmed and others questioned.

In many developing countries, 50 to 80 percent of the population has limited access to finance (the graphic below shows the fraction of households with a banking account).

Finance is not only pro-growth, but also pro-poor. Greater access to credit, through indirect effects in product and labor markets, also benefits the poor who are able to obtain better quality savings and payments services.

New Islamic bonds index open

HSBC together with the Dubai International Financial Exchange (DIFX) launched a group of indices that track Islamic bonds. "There are concerns about the perceived lack of liquidity and transparency in this market. These indexes will cover that missing link," said James Milligan, HSBC's head of fixed income trading in the Middle East.

The new indices, housed in Dubai, cover almost $14 billion of listed sukuks and are a competitor to London, Malaysia and Bahrain – all hoping to become a leader in Islamic finance.

See also GEMLOC, the brand new World Bank – IFC initiative for local currency bond market development.

Measuring access to finance