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.

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.

New directions in the compass of development

Emerging markets are becoming important sources of foreign direct investment (FDI), with south-south – investments flowing among emerging markets – playing a bigger role.

According to recent MIGA report, the reasons for the increase in south-south FDI include, rising demand for energy in emerging markets, increase in south-south trade, proximity and cultural affinity, cost competitiveness, and outward FDI support.

The graph below shows global FDI outflows for developed and emerging markets, with a steady growth of both types of FDI since 2003.

   

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".

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.

Privatization in 2006 - the year of Chinese IPOs

Our privatization database – listing transactions of at least $1 million from 2000 to 2006 - has been updated again.  In 2006, 48 developing countries carried out 249 privatizations for a total value of $105 billion – a figure comparable to the record year 1997.

The graph below depicts the value of privatization transactions in developing countries between 1990 and 2006. The figure excludes the two IPOs of the Industrial and Commercial Bank of China and the Bank of China, which combined accounted for $35 billion - one-third of all proceeds in 2006:

Russia and Turkey followed China into the second and third place, while Poland bucked the general trend toward privatization that year.

Our interactive map has the full picture.

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.

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.

Not so green after all

Ceres, a coalition of investors, environmental groups and other public interest organizations, believes that the financial services industry – with nearly $6 trillion in market capitalization – should play a role in combating climate change.

Most recently, Ceres released a first comprehensive assessment of how the world's 40 largest banks fulfill their commitments to the reduction of greenhouse gas emissions.

The study found that, despite an overall widespread positive trend, only 12 banks made climate change a governance priority; only 6 said they were calculating carbon risk in their portfolio and "no bank has set a policy to avoid investments in carbon-intensive projects such as coal-fired power plants."

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?

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.

Location, location, location

This financial services provider has five times as many locations as McDonald's, Starbucks, Burger King and Wal-Mart combined, and its researchers outpace the Census Bureau in tracking migrant locations.

Hat tip to Marginal Revolution.

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.

Emerging markets' top challengers

In a new study the Boston Consulting Group warns established industry leaders against the competition from emerging markets. Since 2004 the 100 New Global Challengers grew their revenues three times faster than the S&P 500 and now, says David Michael, the report's co-author, they will become potential acquirers:

Never before have so many potential competitors and customers arisen so quickly on a global scale. Moreover, the challengers have completely different approaches to competition, taking advantage of their bases in emerging markets. Many established industry leaders are frankly unprepared for these new types of competitors

The challengers brought over $1.2 trillion in total revenues in 2006. The report predicts that their combined revenues will reach $3.3 trillion by 2010 and $11.8 trillion by 2015.

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.

Windstorm bonds breeze through markets

Following a successful placement of flood and earthquake cat bonds in April, a new tranche, this time covering windstorm risks in seven European countries, is launched. By transferring the risks from insurance companies to willing market investors, these bonds provide an additional instrument for risk management.

The parametric index trigger in those bonds is linked to objective measurements of wind speed at various locations rather than an estimate of losses, which helps speed up disbursement and lower costs of damage assessment.

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.

Déjà vu from the East?

ICBC's $5.5 billion deal with South Africa's Standard Bank is China's biggest investment to date in any foreign market.  It adds to over nine-hundred Chinese companies already present on the continent. From the International Herald Tribune:

The fact that a top Chinese banker brackets Africa with Asia is one more sign that the Asians themselves see what is happening in Africa as a repeat of what happened to them 20 and 30 years ago.

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

According to recent reports more than 70 percent of people in Latin America lack access to such basic financial services as a checking or savings account. The percentage of households without a checking account in industrial countries is typically below 20 percent: 12 percent in the U.K., 9 percent in the U.S., and less than 2 percent in Scandinavian countries.

The subject of a new book by Michael Barr, Anjali Kumar and Robert Litan is exactly how to measure access. What units should be used to determine access individuals, households, or firms? What difference does it make whether the supplier of financial services is legally recognized or not?

Launch of World Bank competitor postponed

Business News Americas, a subscription-based news service, reports that the launch of Banco del Sur – a new development bank for South America – will be delayed for another month.

The inauguration, which had been rescheduled for tomorrow from the original June 2007 date, will now take place on December 5.

Some folks at the Inter-American Development Bank, its closest rival, think Banco del Sur might go… south.

Better times for Africa in 2008

The IMF's World Economic Outlook forecasts a 6.8 percent growth for the continent in 2008. Up from 6.1 percent in 2007, it's a performance not seen in the region since the 1970s. Notably, not all growth was attributed to rising commodity prices:

The combination of more open economies in a benign external environment, together with improved and more consistent policy reforms to strengthen the business environment and official actions to reduce debt burdens has allowed African countries to attract rising private capital inflows as well as benefit from "some step-up" in aid inflows and remittances.

Microfinance - buy it on eBay, part II

MicroPlace, the fully-owned subsidiary of the internet-giant eBay, is finally open for business.

Described as "Kiva.org with a touch of Prosper.com," the microlending site offers lenders interest rates between 1 and 4 percent.

Rob Katz has a good post comparing the two.

World Bank at annual meetings

At the boards of governors of the World Bank and the IMF meet between October 20th and 22nd in Washington to discuss the work of both institutions, it is a good time to reflect on the evolution of the World Bank Group.

Ray Suarez, from the Public Radio International, looks at the lessons learned from the past 60 years and the bank's work today. The 50-minute program features Francois Bourguignon, the bank's chief economist, and William Easterly, its chief critic. And speaking of the direction for the future, don't miss the article describing Robert Zoellick's efforts to extend financial risk management services to poor countries.

Islamic finance for big and small

Reuters reports on a burgeoning interest from bankers to provide Islamic microfinance to the millions without adequate access to money. Out of 1.2 billion Muslims around the world, over 400 million are poor.

The well-to-do have also something to celebrate – a new platform for Islamic hedge funds. Though Shariah law prohibits charging interest, trading debt, short-selling or speculation – the bread and butter of a typical hedge fund - Shariah Capital together with Barclays Capital created an alternative which uses equity long-short and market-neutral strategies acceptable to observant Muslims.

Primer on remittances

Global recorded remittances to developing countries reached $204 billion in 2006. This amount, which has been growing at almost 30 percent a year, is twice the size of total development aid.

Remittances hold a big promise for development but a lack of transparency and a high volume of unrecorded money flows, pose security risks and keep the costs high.

The Financial Market Integrity unit of the bank created the Bilateral Remittance Corridor Analysis (BRCA) to better monitor and analyze the size, nature and incentives behind the transfers. For more information see BRCA's draft research guidelines - a user-friendly starter kit to understanding remittance flows.

Profitable microfinance and its spillovers

What has very low default rates, relatively high administrative costs and high interest rates? The answer is: microfinance loans.

Despite the unfavorable expense ratios relative to commercial banks – the cost of lending one dollar is below four cents for a traditional bank compared with at least 10, and in some cases over 20 cents, for microlenders - microfinance institutions (MFIs) are beginning to attract serious money.

Though not without its critics, the recent success stories strengthened the credibility of microfinance as an "investment grade" asset class in commercial capital markets. Capital from a growing number of private equity, hedge funds and big banks, including ICICI, ABN Amro and Citibank, has been helping supplement limited funding from donors and foundations.

More investment has already expanded the industry. Maria Otero, the president of ACCION International – an investor and lender to MFIs said that "it took 20 years to win [the] first million clients, but only three years to obtain [a] second million."

IMF joins blogosphere

Always wondered what goes on in the World Bank's sister organization? Today the IMF launches its very own Public Financial Management Blog (PFM Blog). It is run by the staff from the Fiscal Affairs Department, responsible for the Fund's work on income distribution and poverty.

Despite the name, the topics are unlikely to include accrual accounting and medium-term expenditure frameworks but rather news, resources and ideas relating to financial stability.

ATM: the latest in money laundering

Smurfing is a money laundering method where individuals make multiple, under $10,000, bank deposits and withdrawals in cash hoping to avoid the detection by authorities. According to the IMF, every year between 2 to 5 percent of the world's GDP or $962 billion to $2.4 trillion is laundered.

In 1986 the U.S. Congress outlawed this practice. Also known as microstructuring, the routine is hard to distinguish from ordinary ATM transactions.

The Wall Street Journal [subscription required] reports on the latest scheme involving $2 million a month "smurfed" to Columbia. "To evade suspicion by banks, [the suspects] always made small deposits. In Colombia, getting at that money was as easy as pushing buttons on an ATM."

Measuring bank regulation and supervision

After the release of the third round of the Bank Regulation and Supervision Database in July, on October 26 a workshop will take place where academics, bank supervisors, and market participants can discuss the strengths and shortcomings of this data, and the resulting policy implications.

Credit growth in emerging Europe: a cause for stability concern?

Asked about the location of the next financial crisis, many economists and analysts point to emerging Europe, i.e. the countries east of Germany that have experienced rapid credit growth and increasing macroeconomic imbalances.

A recent paper suggests that risks are more likely to arise from macroeconomic imbalances rather than from bank fragility. But supervisors, do not relax and better be ready!

The U.S. subprime mortgage market - do we need more restrictions?

It is certainly too early to assess the extent of the mortgage crisis in the U.S., but perhaps we can turn to history to see which policies have worked to protect subprime borrowers from loan sharks.

A recent paper compares states and counties with different anti-predatory lending laws. While a more generous definition of what constitutes a sub-prime borrower seems to help, more restrictions on lending terms appear to have an opposite effect. Bottom line, the devil is in the details. Food for thought for today's policy makers.

World Bank's Internal Evaluation Report is out now

Since the mid-1990s, 86 middle-income countries (MICs), defined as having GDP per capital ranging from $1000 to $6000, have borrowed the total of $163 billion and their average real incomes grew by 4 percent a year. Given their new wealth should the bank continue lending to them or focus exclusively on low-income countries?

The Internal Evaluation Group's new report evaluates the effectiveness of bank's programs to MICs from 1995 to 2006 and recommends the way forward. The two key recommendations are: continue lending but depart from business as usual.

See also what The Economist wrote about the group of countries that despite the impressive growth are still home to over one-third of the world's poor.

FDI in 2011

The Economist Intelligence Unit together with the Columbia Program on International Investment released the World Investment Prospects to 2011 which forecasts FDI flows for 82 countries over the next five years. Eight out of top twenty recipient countries will be in emerging-markets.

The report focuses on political risk, and Jeffrey Sachs analyzes ways to address growing risks in the energy sector.

The graph shows predicted inflows to Asia + China:

Easy vs. effective aid part II

Should we get rid of TRIPs? Arvind Subramanian clarifies his view after Dani Rodrik and Nancy Birdsdall respond to his last post.

Everyone's doing it - stock market in Kenya

What promises the excitement of gambling without the adverse social consequences? For a growing number of Kenyans it's the