How Should We Fund Micro finance

8/12/2019 How Should We Fund Micro finance

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How Should Microfinance InstitutionsBest Fund Themselves?

Felipe Portocarrero Maischlvaro Tarazona Soria

Glenn ! "estle#

Inter-American Development Bank

"ashin$ton% !&!

Sustainable Development DepartamentBest Practices Series


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Inter-American Development Bank

Felipe Herrera ibrary

Portocarrero M!% Felipe 'Portocarrero Maisch(!

How should microfinance institutions )est fund themselves? * Felipe Portocarrero Maisch% +lvaro

Tarazona Soria% Glenn ! "estle#!

p!cm! 'Sustaina)le evelopment epartment Best practices series , MSM-./0(Includes )i)lio$raphical references!

.! Microfinance1Finance! 2! Small )usiness1Finance! .! Tarazona Soria% +lvaro! II! "estle#%Glenn ! III! Inter-+merican evelopment Ban3! Sustaina)le evelopment ept! Micro% Small andMedium 4nterprise ivision! I5! Title! 5! Series!

//2!672 P//1dc22HG.68!/ !P// 2009

Felipe Portocarrero Maisch is a consultant and researcher in the field of microfinance! lvaro TarazonaSoria is a consultant in microfinance! Glenn ! "estle# is senior advisor for microenterprise in the Micro%Small and Medium 4nterprise ivision of the Sustaina)le evelopment epartment! The authors wish tothan3 Socorro +cu:a '&M+& +re;uipa(% Pedro +rriola and Gerardo Mendieta 'Banco illo(% ulio Her)as 'Bancosol(% aime@uesada '&=+& Se:or de


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Foreword

The microfinance industr# is well on its wa# to maturit#! Knl# a few #ears a$o% the focus was on how to$rant and recover loans and reach sustaina)ilit#! "hile these continue to )e important concerns% toda#other issues have also come to the fore% such as the financin$ of microfinance institutions 'MFIs(! In theirstart-up phase% man# MFIs depended on )orrowin$s from donors and $overnments! &urrentl#% however%

deposits are their main source of funds% easil# surpassin$ other fundin$ options!

In eaminin$ this and related phenomena% the current stud# $athers to$ether a lar$e data)ase on the fund-in$ side of


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+))reviations

+FP +dministrator of Private Pension Funds+TM +utomated Teller Machine&+F +ndean evelopment &orporation&4T4 Meican treasur#)ill

&F& &ommercial Financin$ &ompan# 'a t#pe of re$ulated financial institution in&olom)ia(

&G+P &onsultative Group to +ssist the Poor

&I4S&onsorcio de Investi$aciNn 4conNmica # Social O&onsortium for 4conomic andSocial =esearch 'Peru(

&M+& Municipal Savin$s Q


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&ontents

!"ecutive Summary i

#$ Current %rends in &FI Funding #Kverview .

Introduction .MFI Fundin$ in


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CHA2AC%!2IS%ICS +F %H! F+42

%9P!S +F F45DI56 7CHAP%!2 '8

This chapter eplores in $reater detail the fourt#pes of fundin$ used )# MFIs!

Deposits

MFI depositors are ver# hetero$eneous! It is im-portant to se$ment these clients and developspecific strate$ies for each $roup with respect tothe t#pe of service the# are offered% adaptationof eistin$ products to the re;uirements of each$roup% creation of new products and $rowth o)->ectives! It is important to se$ment clients )#deposit size and also )# such criteria as a$e and$ender! It is useful for MFIs to anal#ze theirown client data)ases in $reater depth in order tomore effectivel# orient mar3etin$ and cross-

sellin$ efforts! Most MFIs have not done this#et% in some cases )ecause of limited data)ases%)ut in most cases )ecause the# have not reco$-nized the importance of this wor3!

Ban3s and other MFIs usuall# constitute theprincipal competition for microfinance institu-tions in attractin$ savin$s! The main stren$ths ofMFIs in capturin$ deposits are their relativel#hi$h interest rates% personalized and efficientservice% an ima$e of financial solidit#% the factthat no commissions or account maintenance

fees are normall# char$ed% low minimumamounts for openin$ accounts% and the localroots of re$ionall#-)ased MFIs! MFI wea3nessesin mo)ilizin$ deposits include the lac3 of na-tional networ3s similar to those of )an3s% whichfacilitate pa#ments and transfers, their relativel#low net worth, the lac3 of automated teller ma-chines '+TMs(, and the limited ran$e of servicesoffered!

+ttractin$ deposits creates additional operationalris3s and si$nificantl# affects the mar3et ris3s

that MFIs face li;uidit# ris3% term mismatchris3% interest rate ris3 and echan$e rate ris3!eposit mo)ilization has important impacts onMFIs in $eneratin$ and miti$atin$ each of theseris3s!

+ttractin$ deposits creates new challen$es forMFI mar3etin$ activities since MFIs must com-pete in the mar3et with all of the esta)lished in-termediaries! + mar3etin$ department or unit isneeded to plan advertisin$ campai$ns% anal#zeclients and client satisfaction levels% and planand direct the use of communications media!

Borro3ing

+n anal#sis of Micro=ates data)ase on theamount and composition of )orrowin$ )# 2/re$ulated MFIs in seven o# interest rates and maturities that would )edifficult to o)tain from domestic or internationalcommercial lenders! Borrowin$ from these for-mer sources allows MFIs to reduce li;uidit# andterm mismatch ris3s! +t the same time% the in-terest rates char$ed )# these sources are clearl#positive in real terms and are trendin$ up towardcommercial rates! This avoids the creation ofserious distortions in the financial s#stem and atthe same time prepares MFIs to increasin$l#access commercial financin$!

Borrowin$ also affects the ris3s faced )# MFIsin several wa#s! First% when MFIs have creditlines that have not )een full# utilized% li;uidit#mana$ement is $reatl# facilitated since thesefunds can )e mo)ilized ;uic3l# to deal withshort-term difficulties! Second% echan$e rateris3 is normall# increased% $iven that a su)stan-tial part of MFI )orrowin$ is in forei$n currenc#

'F&(% while most MFI loans are in local currenc#'


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ors( and most MFI loans are at fied rates! Fi-nall#% )orrowin$ ma# increase concentrationris3% )# leadin$ MFIs to depend on a smallnum)er of creditors!

Bond Issue

Kf the


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total cost of savin$s accounts is . percent% ver-sus .2!2 percent for time deposits! The operatin$costs for savin$s accounts are much hi$her thanthose for time deposits% avera$in$ ..!7 and 2!7percent per annum% respectivel#% of the avera$eaccount )alances! The interest rates paid on thedeposits constitute the difference )etween total

costs and operatin$ costs% and e;ual /!9percentfor savin$s accounts and !8 percent for timedeposits! These costs demonstrate that for timedeposits% the ma>or cost component is the inter-est rate paid and not operatin$ costs% while thereverse is true for savin$s accounts! In view ofthe hi$h financial costs of time deposits% it isimportant to set their interest rates carefull#hi$h enou$h to attract the needed funds% )ut oth-erwise at the lowest possi)le rates! Man# MFIsstill do not $ive this tas3 the priorit# it deservesdespite pa#in$ out su)stantial sums in time de-

posit interest! Their still-wide financial mar$insallow them to a)sor) without $reat difficult# thehi$h interest rates that the# currentl# pa# onTs!

Given the lower total cost of mo)ilizin$ timedeposits compared to savin$s accounts% MFIsshould $enerall# $ive priorit# to the former! Tshave other advanta$es as well the# are easier tomana$e and are more sta)le and predicta)le inthe short and medium term 'until the Tsma- ture(! Ts ma# well permit a )etter

matchin$)etween assets and lia)ilities durin$this same time period ')ut not necessaril# inthe lon$er term% after the current Ts mature(!

The $reat operatin$ cost advanta$e of Ts ismainl# due to the lar$er )alances maintained inthese accounts% which are on avera$e nearl# 20times the size of savin$s accounts 'SL 6%/9compared to SL /(! Surprisin$l#% the cost

advanta$e of Ts is not primaril# due to the factthat savin$s accounts have more transactions peracount than do time deposits '.!9 per month forsavin$s accounts vs! 0!/ per month for timedeposits(! This last assertion can )e deducedfrom the fact that at all MFIs monthl# operatin$costs per account are hi$her for Ts than forS+s% avera$in$ three times hi$her overall 'SL.2!70 per month for Ts vs! SL /!0 permonth for S+s(! It appears that this hi$her per-account cost for Ts is mainl# the result of theservice that lar$er clients receive from )ranchmana$ers and other relativel# hi$h-ran3in$ per-sonnel! 4ven thou$h savin$s accounts $eneratemore monthl# transactions per account% the# arelar$el# attended to )# tellers and otherpersonnelwith much lower salar# levels! For this reason%the costs per account are much lower for S+sthan Ts!

ata from the .0 studies on the cost of mo)iliz-in$ deposits show mied results on the eistence'or non-eistence( of economies of scale! The .0MFIs are ran3ed accordin$ to their total num)erof accounts 'S+s Ts(% from .%9.9 at Fi-namArica to .00%.7 at &M+& +re;uipa! Theconcept of economies of scale is that the lar$erMFIs 'those with more accounts( can spreadtheir overhead costs over a $reater num)er ofaccounts!

+ comparison of the two smallest MFIs with thetwo lar$est provides evidence in support ofeconomies of scale! In the case of savin$s depos-its% the two smallest MFIs have an avera$emonthl# unit cost 'operatin$ cost per account( ofSL !% compared to SL /!20 for the twolar$est MFIs! "ith respect to time deposits% theavera$e monthl# unit cost for the two smallestMFIs is SL ./!60% vs! SL 7!70 for the two

2anking o( Funding Sources by %otal Cost 7(rom least to most e"pensive8

arge &FIs Small and &edium-Si:e &FIs.! Bonds .! Borrowin$2! eposits and)orrowin$ 2! eposits/! &apital U shares /! &apital U shares

Note: B# definition% the lar$e MFIs have more than SL 0 million in deposits% the small MFIs have less thanSL million% and the medium-size MFIs have )etween SL and 0 million! It is assumed that the small and mostmedium-size MFIs would not issue )onds since the# would not meet the minimum volumes needed to underta3ean issue and the capital mar3ets would have little or no appetite for theirpaper!


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lar$est MFIs! &learl#% there is evidence ofeconomies of scale% $iven the si$nificant dropsin unit costs when comparin$ the smallest andlar$est MFIs!

The other si MFIs provide evidence a$ainsteconomies of scale! These si medium-size

MFIs have the lowest avera$e unit cost for sav-in$s deposits 'SL 2!20 per month( and thehi$hest avera$e unit cost for time deposits 'SL.7!6 per month(% instead of havin$ intermediateunit cost values in )oth cases! However% it ma#)e difficult to detect economies of scale in datasuch as these% ecept )etween etreme casessuch as the smallest and the lar$est MFIs! This isdue to difficulties in assi$nin$ a num)er of im-portant operatin$ costs to each product and todifferences in mana$ement efficienc# amon$MFIs!

Microsavin$s% which consist of savin$s accountswith )alances of less than SL .00% account for67 percent of the total num)er of savin$sac- counts at small MFIs% and 69 percent atlar$e ones! These small accounts provideonl# 2!percent and / percent of total savin$sdeposits% respectivel#! The# also $enerate /0and percent of total account transactions%respectivel#! +s a result% annual operatin$ costseceed 200percent of the amount deposited inmicrosavin$s accounts% leadin$ us to concludethat microsavin$s $enerate etremel# hi$hoperatin$ costs for MFIs of all sizes! Thismeans that clients with small )alances are )ein$su)s idized )# the rest!

In dealin$ with microsavin$s% MFIs have at leastthe followin$ three options

Subsidies for small savers! This option is themost commonl# used )# ustif# su)-sidies for small savers )# pointin$ out thatservin$ these savers is part of the MFIs so-

cial mission% and that even small deposits of-fer economies of scope and other si$nif icant)enefits! However% MFIs hardl# ever esti-mate the cost of this su)sid# or eplore thepossi)ilities for rationalizin$ it! It ispossi)lethat in the medium term $rowin$ competi-tive pressures in the microfinance mar3et-

place will lead to a chan$e in this orienta-tion!

Adoption of a more selective policy toward

serving microdepositors, throu$h a series ofmeasures! These measures ma# inc ludees- ta)lishin$ hi$her minimum deposit sizes%

pa#in$ interest on account )alances onl#a)ove a certain level% char$in$ commissionsfor each transaction% and imposin$ monthl#account fees!

Massifying the microdepositor client base,

in order to reach a critical mass that can )eserved more economicall# throu$h techno-lo$ical and or$anizational innovations 'in-cludin$ +TMs(% as well as )# offerin$ aran$e of financial products to small savers1to )oth facilitate transactions and full# re-

cover the costs $enerated!

%H! B!S% &I; +F F45DI56

S+42C!S 7CHAP%!2 8

In the first chapter% it was esta)lished that de-posit mo)ilization is )# far the ma>or source offundin$ for MFIs in


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the lon$er terms of much of the )orrowed funds%the# help solve pro)lems of term mismatch andfacilitate medium-term financial plannin$! Knl#in situations of ecess li;uidit# are deposits and)orrowin$ su)stitutes instead of complements!

4ven at small MFIs% the fact that )orrowin$ can

)e done at lower cost than deposit mo)ilizationshould not lead these institutions to prioritize)orrowin$ and de-emphasize deposit mo)iliza-tion! That is )ecause in choosin$ )etween thesetwo fundin$ sources% it is important to consider anum)er of other factors

The amount an MFI can )orrow from eachlender is t#picall# restricted )# loan limitsthese lenders place on the amount of creditthe# are willin$ to etend to an# sin$le )or-rower% includin$ to MFIs!

+ si$nificant amount of )orrowin$ concen-trates fundin$ ris3s and ma# ma3e the MFIoverl# reliant on $overnments and donors%which are the main sources of )orrowedfunds for the microfinance industr#! +s a re-sult% li;uidit# mana$ement and the a)ilit# todo medium-term plannin$ would t#picall#)e adversel# impacted!

eposits $reatl# diversif# an MFIs fundin$sources and thus offer much $reater sta)ilit#

to its overall lia)ilities!

Increasin$ the volume of deposits mo)ilizedcan help reduce their avera$e operatin$ costssince it is possi)le to spread fied costs overa $reater volume of funds and $enerateeconomies of scale!

Finall#% attractin$ deposits has other si$nificant advanta$es% includin$ 'i( 3nowin$ theclientele )etter )# eaminin$ their deposit

histor#% there)# reducin$ the cost of ana-l#zn$ loan applications 'economies ofscope(% 'ii( achievin$ $reater inte$ration intothe local and re$ional economies% whichhelps to )uild lo#alt# amon$ the MFIs cli-ents% 'iii( supportin$ $reater prudence inMFI $overnance and mana$ement sinceMFI eecutives are held accounta)le )# lo-cal depositors who continuall# monitor theMFIs performance% and 'iv( facilitatin$ thedevelopment and*or cross-sellin$ of otherfinancial products1such as loans% mone#transfers% de)it and credit cards and micro-insurance1thus $eneratin$ revenues thatma# )e used to offset the operatin$ costs ofdeposits% while also providin$ the client with)etter service!

For these reasons% then% the relationship )etween

)orrowin$ and deposits is more one of comple-mentarit# than of su)stitution! In the mediumterm% it is desira)le for the most importantsource of fundin$ to )e deposits% supplemented)# )orrowin$ in order to len$then the avera$ematurit# of the MFIs lia)ilities and reduce av-era$e fundin$ costs! Su)se;uentl#% these twosources could )e supplemented )# access to thelocal capital mar3ets% with the MFI issuin$

)onds!

The best mix of funding sources depends on the

MFIs maturit# level 'how solidl# sustaina)lethe MFI is and how developed its deposit-ta3in$and loan operations are( and the characteristicsof the countr# where the MFI is located! Theselatter characteristics mainl# include the coun-tr#s macroeconomic and political sta)ilit#% aswell as the level of development of its financialand capital mar3ets! &om)inin$ )oth criteria% weconsider five scenarios% which are summarizedin the ta)le)elow!

Characteristics o( the &FI

Characteristics o( the !conomic

and Political !nvironment

&aturing &FIs &ature &FIs

Stable in the medium term Scenario . Scenario 7 eventuall# devel-opin$ into Scenario in thelon$ term

4nstable Scenario 2 Scenario /


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In Scenario % the MFI operates within a sta)lemacroeconomic and political environment%which it epects to last over the medium term! Ithas achieved at least some level of sustaina)il-it#% thou$h it is not amon$ the industr# leaders!"hile the MFI is well alon$ in developin$ itslendin$ operations% its efforts at deposit mo)ili-

zation are much more incipient! Some of the4PM4s in Peru are $ood eamples of MFIsin scenario .!

The )est fundin$ strate$# in this case is tomaimize the diversification of fundin$ sources%supplementin$ the MFIs loans from second-tierfacilities with )orrowin$ from donors and otherdomestic and forei$n lenders% provided that thecosts are reasona)le! MFIs that o)tain authoriza-tion to mo)ilize deposits should underta3e thistas3 pro$ressivel#! In the initial phase% the#

should $ive hi$hest priorit# to time deposits )e-cause of their lower operatin$ costs and limitedre;uirements for information technolo$# infra-structure and operatin$ s#stems! Issuin$ )ondswould t#picall# )e advisa)le onl# in the mediumterm% after the MFI has matured and its financialvia)ilit# has )een full# esta)lished! The MFIshould pro$ressivel# increase its levera$e andepand its capital )ase throu$h a consistent pol-ic# of reinvestin$ a lar$e portion of profits andaddin$ new shareholders throu$h private place-ments% especiall# if these shareholders can pro-

vide technical assistance and facilitate access tofundin$!

In Scenario ! % the maturin$ MFI operateswithin an unsta)le macroeconomic*politicalenviron- ment! In this scenario% it is advisa)le forthe MFI to reduce the terms of its loans% limit itscurrenc# and term mismatches% reduce itslevera$e and see3 eternall#- )orrowed funds %which are not so affected )# domesticli;uidit# constraints! MFIs that o)tainauthorization to mo)ilize deposits should

underta3e this tas3 with even more caution thanthe MFIs in scenario .! The remainin$ aspectsof the MFIs fundin$ strate$# are simila r tothose discussed in scenario .!

In Scenario "% the MFI is clearl# sustaina)le andhas efficient lendin$ and deposit-ta3in$ opera-tions! However% it operates in an unsta)le mac-

roeconomic*political environment over the me-dium term! The MFIs fundin$ strate$# shouldinclude the followin$points

"hile deposits 'includin$ institutional de-posits( should )e used as the MFIs )asicfundin$ source% the# should not represent

more than 9-6 percent of total lia)ilities!The use of deposits should )e limited )e-cause the unsta)le environment ma# resultin 'i( important fluctuations over time in theavaila)ilit# of deposits 'increasin$ li;uidit#and other ris3s for the MFI( and 'ii( deposits)ein$ a less relia)le source of fundin$$rowth% $iven the ne$ative impact of insta-)ilit# on the $rowth of deposits!

Borrowin$ operations should )e stren$th-ened and diversified as much as possi)le in

order to improve term matchin$ and preparefor potential li;uidit# pro)lems created )#the withdrawal of deposits!

T#picall# % it would not )e advisa)le to issue)onds in the local mar3et due to the hi$h in-terest rates and limited terms that accom-pan# macroeconomic insta)ilit#!

The institutions levera$e should )e reduced)ecause of the much $reater ris3s inherent inan unsta)le econom#! It would also )e ap-

propriate to stren$then the MFIs capital ac-counts throu$h a consistent polic# of rein-vestin$ profits and )# addin$ new share-holders throu$h private placements! Forei$nshareholders ma# )e especiall# advanta-$eous since the# can ma3e additional capitalcontri)utions without the constraints im-posed )# unsta)le local conditions!

In Scenario #% the MFI shows clear sustaina)il-it# and operates in a sta)le macroeconomic andpolitical environment that is epected to last

throu$h the medium term! The followin$ pointsshould $uide its fundin$ strate$#

The MFI should adopt deposits as its )asicsource of fundin$! eposits ma# come torepresent as much as 0 percent or more ofthe MFIs lia)ilities if the financial and op-


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eratin$ costs associated with deposit mo)ili-zation can )e reduced sufficientl#! +t thesame time% the MFI should see3 to diversif#its depositor )ase% limitin$ the share of totaldeposits provided )# institutional clients1such as mutual funds% pension funds and in-surance companies1in order to control the

ris3s associated with lar$e withdrawals!

The MFI should also increase and diversif#its )orrowin$s and consider issuin$ )onds inorder to have availa)le sufficient li;uidit#reserves% improve term matchin$% and )ea)le to launch new products that re;uire fi-nancin$ over the medium term! The MFIshould choose )etween )orrowin$ and)ondissue considerin$ the advanta$es of eachsource in terms of costs% terms and diversif i-cation! Some eperts )elieve that )onds

should not represent more than . percent ofa deposit- mo)ilizin$ MFIs total lia)ilities!This limit would prevent the MFI from anoverdependence on small and shallow capi-tal mar3ets% which could epose it to eces-sive refinancin$ ris3!

The MFI should )oost its levera$e to ta3eadvanta$e of the opportunities availa)le inthis environment! To support its $rowth% theMFI should also increase its capital throu$han active reinvestment polic#% incorporation

of new shareholders throu$h private place-ments of new shares and% su)se;uentl# per-haps% throu$h pu)lic offerin$s of shares!

Scenario $ ta3es scenario 7 to a much hi$herlevel of development! Here% the MFI )ecomesver# successful and diversified and has a su)-stantial mar3et share% all in the contet of $reatmacroeconomic sta)ilit#! The MFIs fundin$)ase is hi$hl# diversified% with several 3inds ofdeposits 'includin$ chec3in$ accounts(! In man#cases% total deposits eceed loans! Such institu-

tions develop )road relationships with the capi-tal mar3ets% )oth placin$ and purchasin$ securi-ties of various t#pes )ased on theirinvestment and fundin$ needs! +n eample ofthis scenario is the Spanish savin$s )an3s inrecent decades!

B!S% P2AC%IC!S

7CHAP%!2 ,8

This section provides )est practice recommenda-tions for MFIs in the use of the different fundin$instruments! Guidance is also offered on actionsMFIs can ta3e to deal with economic crises and

on how donors and $overnments can help MFIsto )est develop the fundin$ side of their)alancesheet!

Deposits

In the area of deposit mo)ilization% MFIs should'i( $ive priorit# to attractin$ time deposits

)e- cause of their lower operatin$ and total costsand their contri)ution to the matchin$ of assetsand lia)ilities% 'ii( deal with the pro)lem of mi-crosavin$s% a pro)lem that is created )# servin$

a lar$e num)er of clients with low )alances% re-sultin$ in hi$h MFI operatin$ costs% and 'iii(anal#ze their own depositor data)ases and se$-ment the clientele! In the area of or$anizationand mana$ement% the MFI should develop de-tailed annual deposit-mo)ilization plans and re-view them periodicall#% should set interest ratesthat are differentiated )# re$ion and client se$-ment and should consider creatin$ incentive pa#schemes for personnel in the savin$s area! MFIsshould attempt to increase their share of the de-posit mar3et throu$h efficient and personalized

service% attractive and transparent rates andterms% convenient )ranch locations% efficientinformation s#stems with lin3s to the )ranches%and effective mar3etin$ campai$ns!

eposit mo)ilization has important repercus-sions for the ma>or mar3et ris3s faced )# MFIs%namel# li;uidit#% term mismatch% interest rateand echan$e rate ris3s! Best practices in man-a$in$ these ris3s include settin$ up an asset-lia)ilit# committee made up of the MFIsprinci-pal mana$ers% and creatin$ an annual mana$e-ment plan that includes a primar# cash flowanal#sis that is updated at least monthl#! TheMFI should also use $ap models% li;uidit# ratiosand stress tests to help control these mar3etris3s! It should have contin$enc# plans to dealwith situations of impaired li;uidit#% as well assufficient li;uidit# reserves! More sophisticated


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MFIs ma# use duration anal#sis instead of $apmodels to control interest rate ris3!

To minimize echan$e rate ris3% MFIs shouldma3e loans in local currenc# '


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the precedin$ para$raph% this evaluation shouldconsider such positive aspects as the capacit# ofnew shareholders to ma3e additional capital con-tri)utions in the future% their potential contri)u-tions to the $overnance and mana$ement of theMFI% the possi)ilit# that the# ma# improve theinstitutions credit ratin$ and reputation% and the

potential for new shareholders to facilitateac- cess to technical assistance resources andcredit lines! The MFI must also wei$h thepossi)le dis- advanta$es of incorporatin$ newshareholders% such as the fact that the investmenthorizons andprofit epectations of the newinvestors ma# differ from those of the eistin$shareholders% possi)le discrepancies )etweenthe two $roups in the definition of theinstitutions mission% and conflicts that ma# ariseamon$ shareholders due to these and otherfactors!

!conomic Crises

urin$ times of economic crisis% MFIs shouldincrease primar# and secondar# reserves% reducelevera$e ratios% update and reinforce contin-$enc# plans desi$ned to miti$ate li;uidit# ris3%stren$then the functionin$ of the asset-lia)ilit#committee% and reduce term and currenc# mis-matches in view of the econom#s $reater vola-tilit# durin$ crisis periods! The MFI should alsoreview its plans and pro>ections for deposit

$rowth% modif#in$ them to ta3e account of cur-rent economic realities and ad>ustin$ deposit

interest rates in line with the mar3et! Finall#% theMFI should adopt a more restrictive polic# onloans% with lower $rowth rates% shorter terms andhi$her interest rates!

2ole o( 6overnments and Donors

Governments and donors should foster condi-tions favora)le to the MFIs effectivel# develop-in$ their own fundin$ strate$ies and% more $en-erall#% should promote an environment suita)leto the development of the overall financial s#s-tem! 4perience also shows that it is inadvisa)leto favor MFIs with special treatment!

In order to support the MFIs in attractin$ sav-in$s% $overnments and donors should 'i( pro-vide technical assistance to the MFIs to helpthem )uild their capacit# to mo)ilize deposits%

'ii( encoura$e MFIs that mo)ilize deposits to use)orrowin$ onl# as a supplement to deposits% inorder to avoid ecessive dependence on pu)licand international lenders and the displacementof deposits as the primar# fundin$ source and asan important financial service to )e provided inits own ri$ht% 'iii( support the development of awell desi$ned deposit insurance fund once effec-tive prudential supervision has )een esta)lished%and 'iv( encoura$e the pro$ressive inte$ration ofthe MFIs into domestic and forei$n capital mar-3ets!


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.

.! &urrent Trends in MFI Fundin$

+

Microfinance institutions 'MFIs( face an arra#

of options in their fundin$ strate$ies! Shouldthe# rel# on deposits as their )asic source offundin$ and tr# to attain a fundin$ structuresimilar to that of )an3s? "hat should )e the roleof )orrowin$? Should these institutions issuestoc3 or )onds? To )e a)le to ma3e appropriatedecisions on these matters% MFIs should con-sider the financial and operatin$ costs of eachfundin$ source! The# should also ta3e accountof other factors that are important in developin$a medium-term fundin$ strate$# such as theris3s associated with each source% the influenceof the macroeconomic environment and theMFIs level of maturit#! The purpose of this pa-per is to eplore this set of pro)lems for MFIs inor fundin$ sources! &hapter 7 discussesthe )est fundin$ mi for MFIs and &hapter presents )est practices! Four annees provide adetailed $uide on how to issue )onds and stoc3in


18/139

&FI F45DI56

I5 A%I5 A&!2ICA

This stud# of MFI fundin$ eamines a sample ofthe leadin$ MFIs in ect to prudential re$ulation in

nine countries with ma>or microfinance mar3etsBo- livia% &olom)ia% 4cuador% 4l Salvador%Hondu- ras% Meico% Eicara$ua% Para$ua# andPeru! In addition% in selectin$ the 9. MFIs% onl#institutions with most of their operations inmicrof i- nance were included!. Thus% )an3sthat have onl# a small part of their overall loanportfolio in microcredit were ecluded since thefundin$ structure of such )an3s is t#pical of thatfound in commercial )an3s% rather than thatfound in MFIs! Kf the 9. MFIs anal#zed here%79 mo)i- lize deposits, onl# Perus .7

4PM4s and Meicos &ompartamos do notcapture savin$s! The complete MFI fundin$data)ase is found in +nne B!

The main st#lized facts of MFI fundin$ thatemer$e from these data are 'see Ta)les . and2(

%eposits are no longer the forgotten half of

microfinance&! eposits represented 9. per-

cent of lia)ilities in 2000 and 9 percent in200/% and thus constitute the dominant fund-

in$ source for MFIs! Total deposits in-creased from SL 20 million to SL .!27)illion durin$ the period% providin$ the ma->orit# of the funds re;uired to finance therapid $rowth of microcredit portfolios! Thedeposit*loan ratio fluctuated around 6 per-cent% indicatin$ that the total amount ofde-posits was almost e;ual to the size ofthe loan portfolio! For this reason we sa# thatdeposits are no lon$er the for$otten half ofmicrofinance!/ The net section and &hap-

.The ominican =epu)lic was not included in the

sample owin$ to a lac3 of data! &hile and Guatemalaalso have si$nificant microfinance mar3ets )ut nore$ulated MFIs specializin$ in microfinance!2

See 5o$el '.87( for a discussion of the Vfor$ottenhalf!W/

If the . MFIs that are not permitted to capture sav-in$s are ecluded% the deposit*loan ratio is increased

)# approimatel# seven percenta$e points% fluctuat-in$ around 82 percent durin$ the four-#ear period!

ters 2 and / provide a more detailed anal#sisof the characteristics of MFI deposits!

'orrowing is still important but less so than

in the past& The relative importance of )or-rowin$ has fallen from 2 percent of total li-a)ilities in 2000 to 26 percent in 200/!

However% the amount of )orrowin$ has ac-tuall# increased in a)solute terms% risin$from SL 27 million to SL .6 million!Thus% )orrowin$ is still the second most im-portant fundin$ source in terms of theamount of funds supplied to MFIs 'less thandeposits )ut $reater than e;uit#(!

'onds are still incipient& Bond issues repre-sent onl# a small share of overall MFI fund-in$% with .!6 percent of total MFI lia)ilitiesat the end of 200/! Knl# two MFIs have a

si$nificant amount of outstandin$ )ond is-sues &ompartamos 'Meico% 2 percent ofits total lia)ilities in 200/( and Mi)anco'Peru% ./ percent of its total lia)ilities in200/(! Bonds outstandin$ increased fromSL 0!8 million at the end of 2000 toSL/2! million at the end of200/!

()uity and the issuance of shares& +lthou$hprecise estimates are unavaila)le% MFIs in


19/139

The predominance of 'olivia and especially+eru in funding& These two countries leadthe field in attractin$ deposits! In 200/% the#captured 68 percent of the total depositsmo)ilized in the nine countries SL 97million out of the total of SL .!27 )illion!Peru mo)ilized 92 percent of the nine-

countr# total 'SL 662 million( and Boliviathe remainin$ .9 percent 'SL ./ million(!Peru and Bolivia were almost as dominant inother fundin$ areas! Kf the totals recordedfor the nine countries% Peru and Bolivia had99 percent of )orrowin$% 6/ percent of over-all lia)ilities and 6. percent of e;uit#!

Comparison 3ith the Banking System

Ta)le / compares the lia)ilit# structure of theMFIs in Bolivia and Peru with the lia)ilit# struc-

ture of the )an3in$ s#stems in these two coun-tries! The ta)le illustrates that% in $eneral% theMFI lia)ilit# structure in )oth countries is mov-in$ toward the pattern seen in )an3s! This trendis characterized )# a stron$ and $rowin$ depositshare and a declinin$ reliance on )orrowin$!These two trends are clearl# evident in )oth

countries and are even more mar3ed in Peru thanBolivia!

The structure of deposits is more diversified in)an3s than MFIs in the sense that )an3s canof- fer chec3in$ accounts in addition to savin$sac- counts and time deposits% whereas MFIs$ene r- all# can offer onl# savin$s accountsand time deposits! 4ven MFIs such as Bancosoland Mi-)anco% which are permitted to offerchec3in$ accounts% have done so to onl# aver# limited

%able #

&FI Funding %rends in atin Ame rica0 '111-

'11* 74S> millions0 at end o( year8

Deposits Borro3ings iabilities Capital

'111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11*

Bolivia .06! .29!6 .7!. .2!9 9! 60!2 66!0 2!2 .8/! 20!2 272!7 /0!0 /2!8 /2!2 /!2 7/!9Colombia !6 ./!6 .!6 .8!. .0!0 .0! 8!7 .2!9 2.!9 26!2 2!6 /2! 8!7 8!7 8!. !2

!cuador 77!9 69! .09!/ .2!. .0!8 20!7 /9!2 76! 9.!0 .0.!7 .0!9 .87!2 ! ..!0 .!8 2/!!l Salvador 0!0 .7! 22!8 /!/ 0!0 ./!9 .!2 /7!2 0!0 2!6 78! 6.!9 0!0 6! 8! ./!6Honduras 2!. 2!8 .! 2!0 0!8 .!6 .!8 .!8 !0 !0 7!2 7!8 .! /! /!6 7!&e"ico 0!0 0!0 0!9 0!8 0!0 .8!. //!/ 79!9 0!0 2/!. 7! 67!8 0!0 ..!2 22!/ /!0

5icaragua .7!. .!2 ..!/ .2! .!6 2!9 .9! /.!9 .6! .8! /0!. 79!/ 2!2 2!2 7! 6!8Paraguay 92!. 6!6 77!/ 80! 2!. .!8 0!/ 7!0 6!/ 60!7 /!. 0!7 .6! .!2 .0! .7!9Peru 26! 70!9 90!. 66.!8 .7! .8/!8 2/8!. 279! 78!8 927!8 87! .%08!0 .07!9 ./.!0 .6.!2 22/!

%otal ,'1$1 /#*$# )#.$/ #0''$/ ',$* *''$. *#$ ,#.$) ?)$? #0#1,$/ #0,?$ #0?))$# #//$1 '''$? '?1$' */.$*

Source: Superintendenc# of each countr#!

%able '

&FI Funding Structure in atin America0 '111-'11* 7percent0 at end o( year8

Deposits @iabilities Borro3ings @ iabilities Deposits @ oans iabilities @ !uity

'111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11* '111 '11# '11' '11*

Bolivia X 92X 97X 9/X /8X /7X /2X /0X 92X 96X 6.X 60X !9 9!7 9! 6!0Colombia 7X 0X 9.X X 79X /X //X /8X /8X 79X 8X 0X 2!9 /!2 /!2 /!9!cuador 6/X 69X 6.X 60X .8X 20X 27X 29X .2/X ..9X .0.X 0X 9!7 !2 ! 6!8

!l Salvador 0X 76X 7X 79X /X 78X 0X /X 7X /!8 !8 !2Honduras 7.X 9X /9X 72X .9X /7X 77X /6X /X 7/X 2/X 2X 2!9 .!7 .!. .!0&e"ico 0X .X .X 6X 9.X 92X 0X .X .X 2!. 2! 2!.

5icaragua 8.X 80X /6X 26X .0X .7X 9X 98X ..0X ..6X 7X 2X 6! 8! 9!2 !Paraguay 82X 82X 87X 8X /X /X .X 7X 0X /X .09X ..2X 7!/ 7!9 !0 9!2Peru 8X 9X 99X 6.X /.X 2X 28X 2/X 69X 8/X 80X 87X 7!9 7!8 !0 7!

%otal .# . .* ., ') ') *1 '/ /, /? /* /. $? ,$1 ,$' ,$1

Source: Superintendenc# of each countr#!


20/139

&icro(inance Institutions #@ Banking System '@

'111 '11# '11' '11* '111 '11# '11' '11*

Bonds 1$1 1$1 1$1 1$1 1$1 1$1 1$1 1$1

Deposits ,?$? .#$/ .*$. .*$# //$' /?$. /?$. ?#$#

&hec3in$ +ccounts .!0X 0!2X 0!2X 0!/X .7!9X .8!.X 20!9X 2/!9XSavin$s +ccounts 6!9X !8X .7!0X .6!9X .!9X .!8X .8!2X 2/!0XTime eposits 0!.X .!6X 7!/X 7!/X 76!0X 70!6X /!8X /7!X

Borro3in s *?$# *$' *#$? *1$' #?$1 #$) #,$* #'$,

+ther iabilities *$# $# $/ .$. $? .$, .$' .$

%otal iabilities #11$1 #11$1 #11$1 #11$1 #11$1 #11$1 #11$1 #11$1

&icro(inance Institutions #@ Banking System '@

'111 '11# '11' '11* '111 '11# '11' '11*

Bonds 1$1 1$1 1$/ #$* 1$1 *$# #$, #$)

Deposits ,/$, .$) ..$1 /1$) .)$# /)$) ?*$) ?$?

&hec3in$ +ccounts 0!.X 0!.X 0!.X 0!.X .2!9X .7!.X .7!.X .!X

Savin$s +ccounts .8!X .!X 20!9X 20!/X .8!6X 20!X 20!X 20!8XTime eposits /8!X 7!/X 7!/X 0!X /6!8X 7!/X 7!/X 78!.X

Borro3ings *1$) ')$ '?$# ''$. #.$. .$, .$, .$/

+ther iabilities ##$. ,$/ ,$* ,$' #$* ?$1 ?$1 .$,

%otal iabilities #11$1 #11$1 #11$1 #11$1 #11$1 #11$1 #11$1 #11$1

de$ree )ecause of the compleit# and cost ofthisproduct!

&FI D!P+SI%S

Given that deposits are the primar# source offundin$ for MFIs% we eplore their structure in

$reater detail! +t the end of 200/% the )rea3-down of total deposits )# t#pe at the 9. MFIswas 9!6 percent ne$otia)le certificates of depo-sit% 96!/ percent other time deposits% 2!8 per-cent savin$s accounts% and 0!. percent chec3in$accounts 'Ta)le 7(!

+s will )e seen in &hapter /% time deposits'Ts( have lower operatin$ costs and in man#cases lower total costs 'operatin$ costs plus fi-nancial costs( than savin$s accounts 'S+s(!Moreover% $iven that their maturities are prees-

ta)lished% matchin$ the maturities of Ts withthose of the loan portfolio is less complicatedthan matchin$ the maturities of S+s with thoseof the loan portfolio! Therefore% MFIs $enerall#$ive priorit# to mo)ilizin$ Ts! In addition% theavera$e size of a T is $enerall# much $reaterthan that of an S+ 'almost 20 times $reater forthe .0 MFIs eamined in &hapter /(! Thus% Tsare a)le to $enerate $reater ;uantities of loan-a)le funds!

Few of the 9. MFIs are permitted to offer chec3-in$ accounts! Those that are authorized haveminimal chec3in$ account operations )ecause ofthe hi$h operatin$ costs associated with theseaccounts and the need for powerful informations#stems that are connected to all of their)ran-

%able *

iability Structure o( &FIs and the Banking System in Bolivia and Peru0 '111-'11*

B+Ia


21/139

Moreover% few microenterprises demand this

%able

Deposits by %ype at .# &FIs

74S> million0 December *#0 '11*8

&FI Country %otal

Deposits

Checking

Accounts

5egotiable

Certi(icateso( Deposit

Savings

Deposits

+ther %ime

Deposits

Bancosol

Prodem

&a>a oMi)anco

&M+&s '.7 MFIs(&=+&s '.2 MFIs(4PM4s '.7 MFIs( .*%+%A Peru

Peru

Peru

Peru

Peru

Peru

.6!6

99!.

7/!0

0!7

0!9

//#$?

0!9

0!2

0!0

0!0

0!0

1$)

0!0

0!0

0!0

0!0

0!0

1$1

2.!2

.7!6

.77!0

70!.

0!9

''1$/

./!8

.!2

27!8

0!7

0!0

,,1$'

%+%A .# &FIs #0''$/ #$/ ?*$/ *'#$1 ?*.$'

o( %otal Deposits

7(or the .# &FIs8

#11 1$# .$/ ',$? ./$*

.* .* 4PM4 4d#ficar has a small amount of deposits, the# are le$al% representin$ deposits of their emplo#ees!Source: Superintendenc# of each countr#!


22/139

%able ,&FI Deposits by Currency

7percent0 December *#0 '11*8

Savings

Deposits

+ther %ime

Deposits

5egotiable

Certi(icates o( Deposit

%otal

Deposits

Country C FC %otal C FC %otal C FC %otal C FC %otalPara ua 6.! 28!. .00 9! /0! .00 87!2 .!8 .00 8.!/ .8!6 .00Peru .!/ 78!6 .00 !6 70!/ .00 6!. 72! .00

5icaragua .7!7 8!9 .00 ! 7! .00 8!7 .!9 .00

Honduras .00 0 .00 .00 0 .00

Note: Blan3 )oes indicate that the product is not offered )# the MFIs!


23/139

%+%A C&ACs and C2ACs in Peru

Segment

5umber o(

Accounts

Balance

4S> 111

Average Deposit

4S>

ess than or eual to 4S> #0)/* 9/6%/2 /!/X ...%/7 2.!7X .6

4S> #0)/* to 4S> 0)** 26%87 7!.X 8/%70 .9!0X 2%6

4S> 0)** to 4S> )0?./ %6 .!X 99%9.7 .2!8X 9%904S> )0?./ to 4S> #)0/** %06 0!6X 98%6. ./!2X ./%2

4S> #)0/** to 4S> /?0)** 2%//0 0!/X 69%67 .7!8X //%0/9

+ver 4S> /?0)** 727 0!.X ..7%20 2.!X 29%2

%otal .?*0#./ #11$1 ,'#0*)' #11$1 /.*

)etween SL .0%00. and SL .00%000% whichrepresented onl# .!/ percent of the accounts )utprovided /6 percent of the funds mo)ilized% withan avera$e )alance of SL /7%/7/! Finall#% the

deposits )etween SL 0. and SL .0%000 rep-resented .2!8 percent of the accounts and 2percent of the total amount mo)ilized% with anavera$e )alance of SL 2%/.2!

%able .Si:e Distribution o( Savings Deposits and %ime Deposits

7December *#0 '11*8

%+%A &FIs in Bolivia

Segment

5umber o(

Accounts

Balance

74S> 1118

Average Deposit

74S>8

ess than or eual to 4S>,11 .8%96 8!8X 9%82/ /!.X 7/4S> ,1# to 4S> #0111 8%27 7!X %0/ 2!6X 6.24S> #011# to 4S> ,0111 .2%820 9!X 2%0/ ./!9X 2%///4S> ,011# to 4S> #10111 2%902 .!7X .%0. 8!6X 6%/04S> #1011# to 4S> *10111 .%06 0!8X 29%29 .2!0X .6%774S> *1011# to 4S> ,10111 799 0!/X 20%27 !/X 7/%74S> ,1011# to 4S> #110111 /88 0!2X /7%77 .!6X 88%02+ver 4S> #110111 28/ 0!2X 69%970 /7!X 260%8./%otal #?,01#/ #11$1 '#)0*/' #11$1 #0#?.

Source: Superintendenc# of Bolivia 'SB4F(!

Source: Superintendenc# of Peru 'SBS(!

%+%A Banking System in Peru

Segment

5umber o(

Accounts

Balance

74S> 1118

Average Deposit

74S>8

ess than or e ual to 4S> #0)/* %0/%9/8 88!X 872%7/ 9!7X .9

4S> #0)/* to 4S> 0)** /20%878 !9X 8.%.9 6!7X /%08

4S> 0)** to 4S> )0?./ .62%7 /!0X .%./6%87 8!9X 9%64S> ) ?./ to 4S> #) /** .00%.29 .!6X .%/7%788 .0!2X ./%7/8

4S> #)0/** to 4S> /?0)** 6%929 .!0X .%6.%99 .7!X /7%2.

+ver 4S> /?0)** ..%86 0!2X 9%2.%29 2!7X 66%/6

%otal ,0/,.0/' #11$1 #*0'110#*' #11$1 '0')*

Source: Superintendenc# of Peru 'SBS(!


24/139

Third% MFI deposits in Peru are also heavil#concentrated% with most of the accounts small)ut most of the mo)ilized deposits comin$ fromlar$er accounts! eposits less than SL .%6/represented /!/ percent of total accounts )utcontri)uted onl# 2.!7 percent of the total amountmo)ilized% with an avera$e )alance of SL .6!

B# contrast% ma>or depositors% with )alancesover SL 68%//% represented onl# 0!. percentof total accounts )ut contri)uted 2.! percent oftotal deposits% with an avera$e )alance of SL29%2! Finall#% the intermediate se$ment )e-tween SL .%6/ and SL .%6// is also ;uiteimportant% with 9!/ percent of the accounts and72!0 percent of total deposits!

Fourth% comparin$ the size distri)ution of depos-its at MFIs versus )an3s in Peru% deposits areeven more concentrated at )an3s than at MFIs!

For eample% clients in the hi$hest stratum 'overSL 68%//( provided 2 percent of the totalamount mo)ilized at the )an3s and onl# 22 per-cent at the MFIs! The $reater deposit concentra-tion at )an3s is li3el# due to the )an3s a)ilit# toattract more hi$h- income and institutionalde-positors% which% in turn% is due to the factthat these clients re;uire )an3in$ services thatMFIs are not permitted to offer!

The main conclusions derived from thepreced-in$ anal#sis are

In these two countries% in which the microf i-nance sector is relativel# mature% MFIs haveattracted a lar$e num)er of depositors! Thus%the# have provided a valua)le service toman# thousands of their clients and $reatl#diversified their lia)ilities!

There is mar3ed hetero$eneit# amon$ de-positors in the two countries! Most of the

savers are small and contri)ute onl# a tin#fraction of the total funds mo)ilized! +n e-ploration of the operatin$ costs of servin$this $roup is underta3en in &hapter /!

The intermediate- and lar$e-size savers areimportant client se$ments in )oth countries!

+lthou$h most MFI lendin$ consists ofloans to low- income clients% most of thesav- in$s comes from the intermediate- andlar$e- size savers!

In Peru% deposits are even more concentratedat )an3s than at MFIs!

FAC%+2S B!HI5D S4CC!SSF4

D!P+SI% &+BIIA%I+5

The recent success of MFIs in mo)ilizin$ sav-

in$s in


25/139

2! &haracteristics of the Four T#pes of Fundin$

This chapter eplores the four t#pes of fundin$instruments availa)le to microfinance institu-

tions 'MFIs(! The first section eamines severalaspects of MFI deposit mo)ilization% includin$products offered% client se$mentation% or$aniza-tion and mana$ement% competition% ris3s andmar3etin$! The second section eplores MFI)orrowin$% eaminin$ the characteristics of dif-ferent )orrowin$ sources and the impact of)or-rowin$ on MFI ris3 mana$ement! The third andfourth sections anal#ze the limited MFI eperi-ence in issuin$ )onds and stoc3% respectivel#!

D!P+SI%S

&FI Deposit Products and Clients

In $eneral% orit# of savers provide onl# a limitedshare of the funds!9

%istribution of Time %eposits byMaturity

Ta)le 8 shows the distri)ution of timedeposits )# maturit# for the case of &M+&+re;uipa in Peru! The &M+& +re;uipa datareflect the $eneral trend in Peru towardlen$thenin$ T terms! In the case of &M+&+re;uipa% there are si$- nificant differences inthe etent of thisphe- nomenon dependin$ on thecurrenc#! &M+& +re;uipa has achieved alen$thenin$ of deposit terms particularl# inlocal currenc# '


26/139

Balance

74S> million8

5umber o(

Accounts

Average

Balance 4S>8

Savings Accounts 7/!. 20X 20%029 7X 2.0

%ime Deposits .98! 80X .7%00 9X .2%09%otal 2.2!0 .00X 2.%0/ .00X M98

%able /Deposits in the Five 2egulated &FIs o( Bolivia

#@

7une '118

.* The five MFIs are Bancosol% Prodem% &a>a 8

Average

Balance 74S>8

Average 2ate

78From 0 to .80 da#s 2%087 7X %.6%26 22X 2%870 M!MFrom .8. to /90 da#s .%9/2 /X 8%69%8. /2X %/99 8!6From /9. to 620 da#s 6/ .2X 7%9/9%67 .6X 8%02 ..!7More than 620 da#s /.0 6X 8%.99%27 /0X 29%/7/ ./!9

%otal 0,)) #11 '/0//0/*# #11 ,0)/, #1$1

2ange o( %erms

7days8

%ime Deposits in Foreign Currency

5umber o(

Accounts Balance 74S>8

Average

Balance 74S>8

Average 2ate

78

From 0 to .80 da#s /%728 X ..%/9%287 7X /%/./ 7!6From .8. to /90 da#s .%89 /2X 8%/7/%90. //X 7%7 7!7From /9. to 620 da#s 77M 8X /%69%/ .X 8%79 7!6More than 620 da#s 66 .X .%768%/ 9X .%200 I!7%otal ,0?#1 #11 '0)/,0'#) #11 0')) -$/

Source: &M+& +re;uipa!

of over 620 da#s and .6 percent of


27/139

Time deposits in forei$n currenc# 'F&( present arather different situation% with thepreponderanceof these funds havin$ shorter maturities 7 per-cent of these funds have terms of up to .80 da#sand // percent have terms of .8.-/90 da#s! Thisreflects &M+& +re;uipas much lower level ofinterest in len$thenin$ the terms of its F& time

deposits! This% in turn% stems from the fact that&M+& +re;uipa has an a)undance of medium-term credit lines in dollars which can )ematched to the medium-term microloans that itma3es in dollars! Thus% &M+& +re;uipa doesnot need much medium-term F& time deposits toavoid asset-lia)ilit# matchin$ pro)lems! =ather%&M+& +re;uipa encoura$es rollovers of matur-in$ F& time deposits into new F& time depositswith similar maturities in order to have a sta)lesource of fundin$ and lower financial costs!

Thus% active mana$ement of time deposits pro-vides an opportunit# for MFIs to miti$ate asset-lia)ilit # matchin$ pro)lems in )oth term andcurrenc#! MFIs can reduce these pro)lems )#offerin$ favora)le interest rates and other incen-tives to depositors who allocate their ecess li-;uidit# in line with the MFIs prior ities!

Institutional%epositors

Institutional depositors can also )e ;uite impor-tant% althou$h their involvement varies with the

conditions in each countr#! This $roup of de-positors includes mutual funds% pension funds'+FPs(% insurance companies% )an3s% credit un-ions% non$overnmental or$anizations and socialpro$rams% all of which can and sometimes doma3e su)stantial time deposits! Because Bo-livias capital mar3ets are less developed% insti-tutional depositors hold a $reater share of theirassets in the form of financial institution timedeposits% as is illustrated )# Bancosol and &a>a


28/139

%able )%ime Deposits o( 2egistered Companies at FI!

7une *10 '118

Segment %ime Deposits o( 2egistered Companies

5umber o(

Accounts Balance 74S> 8

Average Balance

74S>80 to SL 00 . .X .29 0X .29SL 0. to SL.%000 . .X I69 0X I69

SL .%00. to SL %000 7 7X 8%8I/ 0X 2%2./SL %00. to SL .0%000 7 7X 22%862 0X I%6.8

SL .0%00. to SL 0%000 /8 72X .%2.6%292 .7X /2%0//SL 0%00. to SL .00%000 22 27X .%9/0%/.9 .X 67%.0IMore than SL .00%000 2. 2/X %8%.0/ 96X 26%00

%otal )# #11 ?0/*)0#1) #11 ).01*-

Source: FFP FI4!

overall deposits as of une /0% 2007! These $ov-ernment deposits consisted of seven time depos-its% with an avera$e )alance of SL 70%000 peraccount! In $eneral% $overnment deposits havetwo important advanta$es! First% the# ma# havelow financial costs! For eample% in Peru% theinterest rate paid on $overnment deposits ises- ta)lished at the auction! =ecentl#% theinterest rate on local currenc# deposits hasfluctuated)etween 7! and 9 percent% while theinterest rate on dollar deposits has )een 2!6percent! These levels are si$nificantl# lower

than those that &M+& +re;uipa pa#s its otherdepositors! Sec- ond% the lar$e avera$e size of$overnment de-posits )rin$s operatin$ costsdown considera)l#! Kn the other hand%$overnment deposits have at least three cleardraw)ac3s! First% the# $enerall# have shortterms 'mostl# )etween and .8 da#s in thecase of Peru% for eample(! Second% the# arepotentiall# unsta)le )ecause the MFI cannot )esure of winnin$ the net auction and)ecause$overnment a$encies ma# need the funds andthus ma# not renew their deposits at maturit#or ma# reduce their size! Finall#% in times of

$eneralized li;uidit# shorta$es% this source offunds ma# )e costl#!

In turn% the insi$nificance of chec3in$ accountsas an MFI fundin$ source can )e attri)uted totwo main factors! First% most of the MFIs arenon)an3 financial intermediaries% which are notpermitted to offer chec3in$ accounts! Second%

the MFIs that are )an3s still do not offer chec3-in$ accounts or do so onl# in a limited wa# )e-cause of 'i( the compleit# of this product andits hi$h operatin$ costs% 'ii( the lar$e advanta$esof commercial )an3s in this )usiness area% whichin turn $enerate su)stantial scale economies forthe )an3s% and 'iii( the limited interest of micro-enterprise clients in such accounts! Kn this lastpoint% the use of chec3s is not widespread amon$low- income households, instead% a cultureof cash pa#ments prevails! Finall#% the recentin- troduction of a financial transaction ta in

Bo- livia and Peru has further reduced the appealof usin$ chec3s in those countries!

Client Segmentation

+s seen in )oth this chapter and the last% the de-positors of MFIs are ver# hetero$eneous! Be-cause of this% it can )e ver# useful for MFIs tose$ment depositors and then develop se$ment-specific strate$ies in such areas as productsof-

+n interestin$ case of this is Mi)anco% an MFI thatdoes offer chec3in$ accounts! "hile onl# a smallnum)er of Mi)anco clients have opened such ac-counts% Mi)anco still offers this product as aprepara-tion for the medium term% when some of toda#s mi-croenterprise clients will turn into small or medium-size )usinesses% which often will )e interested inchec3in$ accounts!


29/139

fered 'includin$ new products(% level of serviceand $rowth tar$ets!

For eample% &M+& +re;uipa has se$mentedits depositors )# size% settin$ the followin$ ser-vice levels

&lients with )alances over SL .77%000 arethe responsi)ilit# of the +ssistant Mana$erfor Savin$s and Finance!

&lients with )alances )etween SL 89%000and SL .77%000 are the responsi)ilit# ofthe re$ional mana$er!

&lients with )alances )etween SL 7/%000and SL 89%000 are attended to )# the)ranch mana$er!

&lients with )alances )etween SL .7%000and SL 7/%000 are attended to )# an opera-tions assistant!

&lients with )alances )elow SL .7%000 arehandled )# lower level staff or at a tellerwindow!

Thus% different se$ments are handled differentl#!illo has anal#zed the $ender compo-sition of its clients! In ul# 200/% at its two mostimportant )ranches1the main office and the)ranch on +venida 4spa:a1women provided7. percent and 7/ percent of total deposits% re-spectivel#! Men provided 28 and 2 percent%respectivel#% and re$istered companies% /. and28 percent% respectivel#! Several factors eplainthe importance of women depositors the factthat women ma3e most of the household invest-ment decisions in Tru>illo% &M+& Tru>illosstron$ re$ional roots and the institutions polic#of not char$in$ monthl# fees for its savin$s ac-counts! Interestin$l#% at )ranches in small citiesin the hi$hlands 'the sierra(% the situation is re-versed men account for )etween . and 9per-cent of the deposits mo)ilized!

Ta)le .0 shows the results of &M+& Tru>illosstud# of the distri)ution of deposit )alances )#deposit t#pe and a$e of the client! Individualsover a$e 0 hold 0 percent of total time depos-its and /6 percent of total savin$s deposits! Thedistri)ution of savin$s )# a$e $roup fits the life-c#cle h#pothesis ;uite well! .0 Klder personshave more si$nificant savin$s )ecause the# havehad a lon$er accumulation period and )ecausethe# need to )uild up assets for old a$e! The sur-ve# also shows the importance of those under.8% especiall# in savin$s deposits! It is importantto )uild and maintain the lo#alt# of these clients%

not onl# )ecause of the siza)le savin$s accountsthe# have now% )ut also )ecause the# ma# )e asource of even lar$er deposits in the future!

.0 See +ndo and Modi$liani '.9/(!


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%able #1Distribution o( Deposit Balances by %ype o( Deposit and

Age o( Client at C&AC %ruEillo

7&ay *#0 '118

Age 7years8 Savings Deposits 78 %ime Deposits 78

nder .8 .!X !X.8-27 /!X 7!X

2-/0 8X 8!8X

/.-70 .8!9X ..X

7.-0 .6!7X .!/X

.-9 2!6X /0!/X

Kver 9 6!/X .!X

%otal #11

4S> '1$? million

#11

4S> *$ millionSource: &M+& Tru>illo!

&M+& Tru>illos anal#sis of its clients )#$ender and a$e has proven ver# useful! +s a re-sult% &M+& Tru>illo has )een a)le to $ear itsmar3etin$ campai$ns and structure its services)ased on the needs of the 3e# client se$ments ithas identified!

In $eneral% MFIs need to anal#ze their client da-ta)ases in $reater depth in order to )e a)le toorient mar3etin$ and cross-sellin$ efforts more

effectivel# and )etter adapt products to the needsof different client se$ments! MFIs often do littleor none of this anal#sis% in some cases )ecauseof the limitations of their data)ases )ut% in mostcases% )ecause the# have not reco$nized its im-

portance!

+rgani:ation and &anagement

Kversi$ht of the deposit-ta3in$ operations of anMFI falls either to the MFIs savin$s and fi-nance department or% alternativel#% to its opera-

tions department! In $eneral% MFIs set deposit

mo)ilization tar$ets as part of an overall set ofconsistent financial pro>ections made durin$ theannual )usiness plannin$ eercise!

MFIs )rea3 down their overall deposit-mo)ilization tar$ets )# )ranch in consultationwith )ranch mana$ers and after considerin$ thecurrent and li3el# future state of financial mar-3ets! The# evaluate the etent to which thesetar$ets are )ein$ met on a monthl# )asis and

anal#ze the possi)le reasons for discrepancies inorder to implement corrective measures!

In most MFIs% either mana$ement or the )oardof directors sets interest rates centrall#% )ased onan evaluation of financial mar3et trends% therates offered )# competitors% and the MFIs pri-orities! +s an eample of this last consideration%to help rectif# currenc# mismatch pro)lems%man# MFIs in Peru offer si$nificantl# hi$herinterest rates on local currenc# deposits than on!S! dollar deposits... In some cases% )ranch

mana$ers are $iven flei)ilit# to modif# deposit

.. This is true despite the fact that Peruvian and !S!inflation levels have )een similar in recent #ears!


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Branch %ype 9ears

5umber o(

Depositors

Deposit Balance

74S> million8

Average Deposit

74S>8

+utstanding oans

74S> million8

a &erced

7C&AC Areuipa8Main 9

Savin$s .0%800Time ep! .%00

Savin$s 2!67Time ep! .8!6

Savin$s 27Time ep! .2%978

..!2

&ercaderes

7C&AC Areuipa8

epositMo)ilizer

.ISavin$s 2%99Time ep! 7%09"+G/%/67

Savin$s .0!.0Time ep! .9!/0"+ 7!08

Savin$s /7Timeep!G/%9.6"+G .%20M

..!I

!l Porvenir

7C&AC %ruEillo8


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rates% as lon$ as the# sta# within a previousl#-approved ran$e! Prodem and &M+& Tru>illovar# their deposit rates )# )ranch1)ased onlocal mar3et considerations% includin$ the de-posit rates paid )# local competitors1in an at-tempt to minimize the overall financial costs ofmo)ilizin$ a $iven amount of deposits! How-

ever% MFIs $enerall# do not use anal#ses of theoperating costs of different deposit products to$uide them in settin$ their deposit rates 'for e-ample% to help them minimize the total costs ofmo)ilizin$ a $iven amount of deposits% wheretotal costs are the sum of financial and operatin$costs(!

Some MFIs use incentive pa# s#stems to reward)ranch mana$ers and emplo#ees involved indeposit-ta3in$ for meetin$ their assi$ned de-posit-mo)ilization tar$ets! However% this ismuch less common than the use of pa# incen-tives for loan officers! This is )ecause mostMFIs still pla ce $reater emphasis on credit and)ecause it is easier to evaluate loan officer per-formance! MFIs that do not use incentive pa#s#stems for emplo#ees involved in deposit-ta3in$ and for )ranch mana$ers should considerintroducin$ such s#stems as a wa# to motivatethese personnel to reach the deposit tar$ets thatthe MFI has set!

%he Competition

In ma3in$ loans to microenterprises% MFIs $en-erall# face onl# limited competition from com-mercial )an3s% which are often not interested inthis mar3et se$ment! However% man# )an3scompete with MFIs for the deposits of microen-terprises! Ban3s can $enerall# offer their clientsan ima$e of financial stren$th and securit#% asiza)le )ranch networ3% )etter facilities for ma3-in$ transfers and pa#ments% +TMs% credit cardsand some products such as chec3in$ accountsand forei$n trade finance that are mainl# impor-tant to lar$er )usinesses and middle - and

upper-

Kftentimes% MFIs face tou$h competition fromother MFIs for microenterprise deposits sinceman# of these other MFIs offer similar productsat compara)le interest rates and have a similartar$et clientele! Mutual savin$s Q loan institu-tions and credit unions ma# provide additionalcompetition% the importance of which varies$reatl# from mar3et to mar3et!

The main stren$ths of MFIs in depos it mo)iliza-tion include the followin$

Hi$h interest rates4fficient% personalized serviceIma$e of financial stren$th and securit#')etter in some MFIs than in others(+)sence of fees! eposit rates clearl# indi-cate the return on savin$s% and are a moretransparent indicator than deposit rates at

)an3s!illo!

The wea3nesses of MFIs in mo)ilizin$ depositsinclude the followin$


33/139

Country and &FI 9es 5o

Peru

&M+& +re;uipa [&M+& &hincha [

&M+& Tru>illo [

&=+& Se:or de a


34/139

transparenc#% all of which contri)ute to their$ood ima$e!

"hether an MFI should use raffles to stimulatedeposits depends on the reputation of raffles inthe countr# and on the de$ree to which the MFIneeds additional deposits! For eample% &M+&

+re;uipa alread# has the second lar$est share ofthe deposit mar3et in the cit# of +re;uipa! It issurpassed onl# )# Banco de &rAdito% the leadin$financial institution in Peru% which has /9 per-cent of the countr#s deposits! For this reason%&M+& +re;uipa has decided not to use raffles!

Kn the other hand% raffles ma# )e useful whenthe# en>o# a $ood reputation in the countr# andthe MFI would li3e to increase its deposits! Tomaimize the )enefits of the raffle% the MFIshould carefull# desi$n its incentives! For eam-

ple% at man# Peruvian MFIs% more chances towin are $iven to those with lon$er-term timedeposits in local currenc# )ecause these charac-teristics help the MFI to improve the matchin$of its assets and lia)ilities in )oth term and cur-renc#! MFIs should also carr# out an e postevaluation to determine whether the profits $en-erated )# the raffle eceeded the costs% as illus-trated in Bo 2!

Principal 2isks

Mo)ilizin$ deposits has clear impacts on thefour mar3et ris3s faced )# MFIs li;uidit#% termmismatch% interest rate and echan$e rate ris3!+ttractin$ deposits also $ives rise to additionaloperational ris3s!

0i)uidity/is.

illo% have an internal polic# that re;uireshi$her li;uidit# ratios% .0 percent in


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Costs o( Deposits 7annual8

Percentage o( Deposit

%ar et 2eached

Interest

Costs

2a((le

Costs

%otal

Costs

Increase (rom

2a((le

,1 9!0X !78X .!9X .9X

#11 9!0X 7!67X .0!8/X 68X

#,1 9!0X /!.9X !2X 2X

Bo" ' %he 4se o( 2a((les at C2AC SeGor de uren

The recent eperience of &=+& Se:or de


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# &onth

or ess

#-'

&onths

'-*

&onths

*-.

&onths

.-#'

&onths

&ore

%han #'

&onths

%otal

Assets 72! 9! !2 .!2 2/!7 /7!0 #'/$.iabilities 2.!7 .2!2 ..!0 ./!2 .9! /.!8 #1.$16ap 2.! -!2 -!8 2!0 9! 2!/ '#$.Cumulative

gap

'#$, #.$' #1$ #'$ #)$ '#$.

part of their annual )usiness plannin$ eercise!This ta)le is fre;uentl# updated and used tomana$e li;uidit#! urin$ times of political orfinancial insta)ilit#% such as the 200/-2007 crisisin Bolivia% it is important to increase li;uidit#reserves in preparation for possi)le future con-tin$encies% even at the cost of slowin$ the

$rowth of the loan portfolio! If a countr#s fi-nancial s#stem is shallow% ris3s can )e $reatl#increased% as occurred in Bolivia durin$ the200/- 2007 crisis! This is )ecause pro)lemsinone sector can a)sor) most of the availa)le li-;uidit# in the econom#% so that li;uidit# short-

a$es spread rapidl# to all intermediaries and sec-tors% pressurin$ the entire econom#!

Stress tests can help evaluate li;uidit# ris3s! Foreample% &M+& Tru>illo simulates the impactof earl# withdrawals of time deposits simultane-ousl# with withdrawals from savin$s accounts

and dela#s in loan repa#ments! The institutioncompares the resultin$ im)alances with its pri-mar# and secondar# li;uidit# reserves and pre-pares a contin$enc# plan! In this wa# the MFIcan evaluate its response to stress!

Bo" * %he 6ap &odel in an &FI


37/139

eposit mo)ilization can also lead to certainconcentration ris3s if a small num)er of deposi-tors hold a si$nificant share of total savin$s% adan$er that is more li3el# to occur when thereare institutional depos itors! Thus% it is importantto periodicall# evaluate the share of total depos-its held )# the lar$est .0 or 20 depositors and

esta)lish maimum limits! For eample% &M+&+re;uipa limits its .0 lar$est depositors to hold-in$ a total of no more than 20 percent of &M+&+re;uipas net worth! To reduce concentrationris3s% an MFI should diversif# its clientele% es-ta)lish ade;uate li;uidit# reserves and developcontin$enc# plans!

Term Mismatch

/is.

To understand this ris3% one can )e$in )#

e- tendin$ the $ap model to assets andlia)ilities ordered )# time intervals $reater thanone #ear! For eample% time intervals of .-2#ears% 2-/ #ears% /-7 #ears% 7- #ears% and$reater than #ears can )e used! +ll assetsand lia)ilities areplaced in the interval thatcorresponds to their maturit#! The aim is tomatch the amount of assets and lia)ilities thatmature in each interval to avoid li;uidit#pro)lems in the future!

eposit mo)ilization can hei$hten term mis-match ris3 for MFIs )# financin$ lon$-term

loans with short-term lia)ilities savin$s ac-counts and short-term time deposits! The pre-dominance of short-term wor3in$ capital loans'$enerall# for terms less than one #ear( meansthat this ris3 is not so si$nificant for most MFIs!However% two recent trends are increasin$ termmismatch ris3s! First% MFIs are increasin$ loanterms due to $reater competition! Second% MFIsare increasin$l# lendin$ to small and medium-size enterprises% and these loans are normall#lon$er term 'up to three #ears( )oth for e;uip-ment purchases and wor3in$ capital!

+s a response to term mismatch ris3% some MFIsencoura$e lon$er-term deposits% offerin$ clientshi$her interest rates for time deposits of .-2#ears or more! This measure can )e adopted insta)le macroeconomic situations! Kther optionsinclude lon$er-term )orrowin$ and stoc3 and)ond issue! Finall#% some MFIs can match apor-tion of their savin$s account deposits 'the sta)le

portion( with medium-term loans! In these MFIs%a si$nificant share of savin$s deposits 'up to 2percent or more( is ver# sta)le% even thou$h thedepositors have the ri$ht to withdraw theirmone# at an# time! Man# small depositors useMFIs )ecause the# are convenientl# located orre;uire a low minimum deposit! These deposi-

tors tend not to withdraw all their savin$s unlessthe# fear that the MFI ma# )ecomeinsolvent% which could >eopardize theirdeposits! In such cases% MFIs can match theirmedium-term loans a$ainst the sta)le portion oftheir savin$s deposits with little or no ris3%as lon$ as the MFI maintains its financialsolidit#!

Interest /ate/is.

The other conse;uence of assets and lia)ilities

that are not matched )# term ')esides future li-;uidit# ris3( is interest rate ris3! To understandinterest rate ris3% suppose that an MFI ma3es asu)stantial amount of 2-#ear loans at an interestrate of / percent and that all of these loans arefinanced with .-#ear time depos its pa#in$ .2percent! +lso assume that the MFI re;uires amar$in of .8 percent to cover its operatin$ costsand epected loan losses! The MFI loo3s toma3e a health# profit of percent on these loans'\/X - .2X - .8X(! But what happens if inone #ears time the countr# enters a period ofti$ht mone# or inflation that pushes time deposit

rates up )# .0 percenta$e points% from .2 to 22percent? "hen the MFI rolls over those depos-its% its percent profit turns into a percent loss!This is an eample of interest rate ris3% which isthe ris3 that chan$es in mar3et interest rates willaffect the MFIsprofita)ilit#!

Four important caveats should )e attached to therule that MFIs should match the amount ofas- sets and lia)ilities that mature in each timein- terval! The first is that for purposes ofinterest rate ris3% assets and lia)ilities should )e

classified not )ased on their maturit# )ut on thetime until the net updatin$ of the ir interestrate! For eample% consider the case of a /-#earloan that the MFI has >ust made with avaria)le interest rate indeed to a reference ratethat is ad>usted ;uarterl#! For interest rate ris3purposes% this asset should )e classified in the /-9 month interval% not in the 2-/ #ear interval!Thus% the anal#-


38/139

sis measures the $ap )etween the amount of as-sets sensitive to variations in interest rates andthe amount of lia)ilities sensitive to variations ininterest rates in each time interval 'for eample%up to . month% .-2 months% 2-/ months% /-9months% 9-.2 months% .-2 #ears% 2-/ #ears% etc!(!

The second caveat is that li;uidit# ris3 and termmismatch ris3 are )oth avoided when lia)ilitieshave a lon$er maturit# than the assets the# fund!Interest rate ris3 is also avoided under this con-dition as lon$ as the lia)ilities are prepa#a)lewithout su)stantial penalt# and can )e replaced)# new and similar lia)ilities! To understand thislast statement% suppose that an MFI ma3es2- #ear loans to its clients us in$ mone# it

)orrows for three #ears! If interest rates havefallen su)- stantiall# )# the time the 2-#earloans mature% the MFI can prepa# its /- #earloan and o)tain cheaper fundin$% thus avoidin$interest rate ris3!

The third caveat is that% in fact% MFIs ma# oftenwant to use lia)ilities that have somewhatshorter terms than the assets the# fund! This is)ecause lia)ilities normall# )ecome cheaper astheir term is shortened% so that the MFI ma# ac-cept a certain amount of interest rate ris3% termmismatch ris3 and li;uidit# ris3 in echan$e forcost savin$s% especiall# if the these cost savin$sare si$nificant! The $oal of the MFIs fundin$strate$# is not necessaril# to eliminate all ris3%

)ut to maimize profita)ilit# at accepta)le levelsof ris3!

The fourth caveat is that for purposes of measur-in$ and miti$atin$ interest rate ris3 ')ut not li-;uidit# ris3 or term mismatch ris3(% it is )etter touse duration anal#sis than the $ap model! Theidea of duration anal#sis is to set the duration ofa financial institutions total assets e;ual to theduration of its total lia)ilities!.6 urationanal#-sis is an ideal tool for anal#zin$ interest rate ris3

)ecause of the fact that the chan$e in present

.6uration measures the effective or avera$e matur-

it# of a stream of cash flows! For eample% the dura-tion of a -#ear loan% repaid in 90 e;ual monthl#

pa#ments of principal and interest % ma# )e a)out two#ears% which means that in terms of theirpresentvalue% the pa#ments are received on avera$e in two#ears!

value of a stream of cash flows that is $enerated)# a chan$e in the interest rate is proportional tothe duration of the stream of cash flows! Be-cause duration anal#sis is a comple tool% its useis su$$ested mainl# for more sophisticatedMFIs!

To reduce or eliminate interest rate ris3% the MFImust match its assets and lia)ilities )# time in-tervals 'usin$ a series of intervals from less thanone month up to more than five #ears(% or even)etter% )# duration! For man# MFIs% interest rateris3 is created )# capturin$ short-term savin$s oro)tainin$ short-term loans on the one hand% andofferin$ lon$er-term loans on the other!

+ll of the measures discussed a)ove for reduc-in$ term mismatch ris3 can also )e used tore- duce interest rate ris3! In addition% MFIs

can char$e varia)le interest rates on theirloans% so that their loan rates rise or fall with thedeposit rates the MFI is pa#in$! However% suchvaria)le loan rates can )e ;uite unpopular withclients)ecause of the additional ris3s the clientsmust)ear as hi$her interest rates on their loansare translated% for eample% into hi$her monthl#pa#ments or lon$er loan terms! B# settin$ theinitial interest rates char$ed for varia)le -rateloans )elow those char$ed for fied-rate loansand )# also cappin$ an# interest rate increasesover the life of the varia)le -rate loan% MFIs canreduce client ris3s and overcome some of theclient resistance! However% cappin$ loan rateincreases returns some of the interest rate ris3 tothe MFI! Moreover% while char$in$ varia)le in-terest rates on loans can reduce or eliminate in-terest rate ris3 for the MFI% it does so at the costof inducin$ additional credit ris3! This is )e-cause% if loan rates rise% client default rates can)e epected to increase under the strain of lar$errepa#ment )urdens!

1oreign *urrency/is.

MFIs that mo)ilize deposits or )orrow in forei$ncurrenc# 'for eample% in dollars( in order tofund loans in local currenc# 'for eample% inpesos( run the ris3 that a devaluation will $reatl#increase the size of the MFIs de)t% epressed inlocal currenc# '


39/139

lion pesos if the pesodollar echan$e rateincreases from .0. to 20.! Such a de)t would

)e much more difficult to service and repa# ifthe MFI and its clients primaril# earnpesos!

Some )elieve that to avoid forei$n currenc# ris3an MFI need onl# match the currenc# of its as-

sets with that of its lia)ilities! For eample% thiswould mean that if an MFI has )orrowed SL .million% all it needs to do is to lend these fundsout in dollars in order to avoid forei$n currenc#ris3! This is correct if the MFIs clients producetraded $oods 'meanin$ $oods that are eportedor that compete directl# with imported $oods(and is not correct if the clients produce non-traded $oods 'meanin$ $oods that are neithereported nor compete directl# with imported$oods(!

Man# a$ricultural% minin$% and manufacturin$products are traded $oods% while most commer-cial sector activities and services are normall#nontraded! Since MFI clients are mostl# in thecommerce and services sector% most producenontraded outputs! 4ven those MFI clients whoare in the manufacturin$ and a$r iculturalsectors sometimes produce $oods that are rusticor oth- erwise onl# consumed locall#% and are notclose su)stitutes for $oods tradedinternationall#! These clients also producenontraded outputs!

The importance of this distinction is that if thereis a devaluation of% sa#% 2.% the prices of traded$oods t#picall# rise )# 2. also% in proportion tothe devaluation! The prices of nontraded $oodst#picall# rise )# much less than 2.! This meansthat if the MFI $ives a dollar loan to a client whoproduces nontraded outputs% that client couldeasil# )e ruined )# a sharp devaluation since the

pric e of what the client produces 'in thelocal currenc# the client earns( will not 3eep upwith the clients loan service pa#ments 'also e-pressed in local currenc#(! For eample% with a2. devaluation% the loan service pa#ments willdou)le in local currenc# terms% while the valueof what the client sells will t#picall# rise )#much less!

urin$ the +sian financial crisis of the late.0s% man# financial institutions learned thislesson the hard wa# when their clients who had

dollar loans and nontraded outputs could notrepa# and the financial institutions were facedwith hu$e defaults in their creditportfolios!

To minimize forei$n currenc# ris3% MFIs shouldlend in local currenc# to clients producin$ non-traded outputs and lend in forei$n currenc# to

clients producin$ traded outputs! The currenc#composition of the MFIs lia)ilities should then)e matched to that of the resultin$ loanportfolio!

To match the currenc# of the MFIs lia)ilities tothat of its loan portfolio and other assets% it isuseful to estimate a $ap model of assets and li-a)ilities )# currenc# at least once a month!


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4d#ficar calculated that swap transactionswould )e .00 )asis points '. percenta$epoint( cheaper than )ac3-to-)ac3 operationsfor coverin$ its currenc# mismatch pro)-lems% if the Superintendenc# of Ban3s andInsurance allowed 4d#ficar to use them!

This last )ullet refers to the possi)ilit# of usin$local 'not international( swap mar3ets% whicheist in a num)er of ust one more future dollar lia)ilit# andone future peso asset in its off )alance sheet ac-counts% which it will )alance off alon$ with allof its other future dollar and peso commitments!The )an3 re;uires that the MFI )e creditworth#in order to limit its counterpart# ris3% that is% theris3 that the MFI will not come forward with thepredetermined amount of pesos in two #earstime! For this purpose% the )an3 ma# insist thatthe MFI have a line of credit availa)le to it! Inprinciple% the swap transaction should provide a

cheaper method of coverin$ forei$n echan$eris3 for the MFI than )ac3-to-)ac3 operations!This is )ecause )ac3-to-)ac3 operations includethe loss 'for the MFI and participatin$ )an3( ofthe interest that could have )een earned on thereserve re;uirement associated with the dollardeposit!

2perational/is.

Mo)ilizin$ deposits can also lead to operationalris3s for MFIs due to the lar$e num)er of trans-actions and clients involved! To reduce theseris3s% MFIs should have or$anizational% operat-in$ and procedural manuals% as well as internalre$ulations and properl# trained personnel! Theinformation s#stem should include well-desi$ned securit#% confidentialit# and )ac3upfeatures! It is useful to develop contin$enc#

plans to handle natural disasters 'such as earth-;ua3es and floods( and periods of social up-heaval% such as the lootin$ of )an3 and MFI)ranches that occurred durin$ the conflicts in 4l+lto% Bolivia in Kcto)er 200/!

&arketing

eposit mo)ilization creates new mar3etin$challen$es! "hile new MFI )orrowers are often

Bo" C&AC Areuipas &arketing Campaigns and 4se o(Promoters

To promote &M+& +re;uipas deposit products% its mar3etin$ unit has developed an effectivestrat- e$#

Mana$ement selects a $roup of promoters with eperience and s3ills in sellin$ intan$i)le $oods!Promoters are paid a relativel# low )ase salar#, the# earn performance )onuses that var# withthe amount and composition of savin$s captured% $ivin$ priorit# to time deposits!Knce a #ear% the MFI conducts an in-depth anal#sis of the competitions deposit products%comparin$ them to its own products in such areas as interest rates% other fees and char$es%

pu)licit# and ;ualit# of client service!Based on this anal#sis% the MFI esta)lishes its sales strate$#% ta3in$ into consideration the advan-

ta$es of its products and the wea3nesses of the competitors offerin$s!Based on the selected sales strate$#% the mar3etin$ unit desi$ns the needed pu)licit# material%tests it and incorporates improvements!+ sales plan is esta)lished with $oals forpromoters!The institution monitors the implementation of the plan as well as its results!

4perience has shown that the strate$# of usin$ promoters to capture time deposits is often moreef- fective and economical than advertisin$ in the mass media!


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recruited directl# )# loan officers and throu$hreferrals )# other MFI )orrowers% all in the con-tet of limited competition )# traditional )an3s%attractin$ depositors entails the MFIs competin$with all esta)lished intermediaries for mar3etshare! For this reason% MFIs need a mar3etin$department or unit!

To attract savin$s% the mar3etin$ unit should dothe followin$

Plan and launch promotional campai$ns&onduct anal#ses of clients and their levelof satisfaction with the MFIs financial ser-vices

Pro$ram and supervise the use of communi-cations media

It is also important to eamine the financial

needs of the clients in the different mar3ets inwhich the MFI operates! For eample% )eforeopenin$ a new )ranch% &M+& Tru>illo conductsa mar3et stud#% eplorin$ the characteristics ofthe new mar3et and its clients in order to definea mar3et penetration strate$# and esta)lish ap-propriate $rowth $oals! To improve its savin$saccount and time deposit products% &a>a


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%able #'!stimated Distribution o( Spending on Advertising at Four &FIs

7(irst hal( o( '118

C2AC SeGor

de uren

C&AC

%ruEillo

C&AC

AreuipaBancosol

T5 8X 7X 70X 70X=adio .X 2X /X .2X

Eewspapers na .X .X .0X

Pamphlets% sponsor-ships andpromotions

na .X .0X /8X

%otal #11 #11 #11 #11

Note : VnaW indicates information not availa)le!Source: The MFIs!

are su)stantial! Moreover% a si$nificant share ofthese total campai$n )ud$ets are )ein$ used topromote deposit products% for eample% 9 per-

cent in &M+& Tru>illo and 7 percent in &=+&Se:or de illo to &a>a Tru>illo(% adopted anew and more modern lo$o and a new slo-$an 'VGrow "ith sW(% $enerall# made overits corporate ima$e% and emplo#ed this newima$e in its )ranches andproducts!

+s part of its transformation into a )an3%&a>a aW.8 and)uildthe )rand name Procredit 'the )an3s futurename(! +s part of this process% its lo$o has

.8In Bolivia% the word Vca>aW is associated with the

insurance )usiness!


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)een modified and a campai$n to esta)lish anew corporate ima$e has )een launched!

Bancosol has launched a successful cam-pai$n to stren$then its )rand ima$e and po-sition itself with the $eneral pu)lic as a mi-crocredit )an3 offerin$ $ood service!

+s part of its )rand identit#% Prodem hasadopted the slo$an VKportunidad%W which inSpanish means )oth Vopportunit#W andVtimeliness!W Its lo$o reflects the three 3e#components of the compan# shareholders%emplo#ees and clients! 5illa$e cloc3s have)een installed outside Prodems rural)ranches1as a communit# service and alsoto associate its name with timeliness!

+s has )een discussed% mar3etin$ activities are

ver# important for MFIs as part of a lar$er effortto capture savin$s! For this reason% the results ofthese activities should )e s#stematicall# evalu-ated! In most MFIs% these evaluations have )eenlimited to a comparison )etween the pro>ectedresults and those actuall# achieved! However%&M+& Tru>illos eperience has demonstratedthat it can )e ver# useful to carr# out acost*)enefit anal#sis of each mar3etin$ cam-pai$n to determine lessons learned and improvefuture campai$ns!

B+22+=I56

Current Sources o( Borro3ing

Characteristics and Conditions

"hen man# of toda#s MFIs )e$an operations%their main source of fundin$ was loans from do-nors and $overnments! However% )# the end of200/% )orrowin$ represented onl# 26 percent ofthe total lia)ilities of


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%able #*

2elative Importance and Cost o( Di((erent Sources o( Borro3ed Funds

in a Sample o( '* 2egulated &FIs in atin America

74S> thousands0 December *#0 '11*8

ocal CommericalBanks

6overnment and +therDomestic Sources

Donors Social and +ther

Foreign Investors%otal %+%A

XC FC C FC C FC C FC C FC

Short term

Cost

70%0/6 %.0!/X 8!/X

20%..9 %006..!/X !6X

992 8%/9..0!2X 9!/X

/6 .7%886.0!0X 8!/X

.10?,# */0,

#1$1 /$'

)?0').

?$)

/6X

ong term

Cost

69 /%/786!6X ..!7X

2%0. 99%/.7!X !7X

%7.7 72%.608!0X !X

.%9.0 .8%77

.7!2X 6!6X*/0.) #*10'?.

)$ .$#

#./0)?1

.$?

9/X

%+%A

Cost

10?1, ?0,*?

)$* )$,

,101#/ /,0*'#

#1$' ,$

.01/. ,10,*#

?$' .$1

#0./ **0*#

#$# ?$1

)?0,, #./0/*#

)$? .$*

'..0'/.

/$.

.00X

.X /X .X 28X 2X .X .X ./X /6X 9/X .00XSource Micro=ate!

B# anal#zin$ data made availa)le to us )# Mi-cro=ate coverin$ 2/ re$ulated MFIs in


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percent for local )an3s and .0!2 percent for $ov-ernments!

In summar#% the si$nificance of $overnment anddonor loans is that MFIs can o)tain terms andrates that would )e difficult to secure from do-mestic or international commercial sources!

Thus% an MFI can reduce its li;uidit# and termmismatch ris3s )# )orrow in$ fromthose sources! The interest rates char$ed )# thesesources are clearl# positive in real terms and areapproachin$ mar3et rates! This prevents the $en-eration of serious distortions in the financial s#s-tem and prepares the MFIs to access more com-mercial fundin$!

2isks

Borrowin$ affects ris3 mana$ement in MFIs in

several wa#s! First% when MFIs have credit linesthat have not )een full# utilized% li;uidit# man-a$ement is $reatl# facilitated since these fundscan )e mo)ilized ;uic3l# to deal with short-termdifficulties! Short-term credit lines from local)an3s can )e used for this purpose% althou$hilli;uidit# often spreads ;uic3l# throu$h shallowfinancial mar3ets% limitin$ the use of these creditlines for this purpose! Man# MFIs tr# to main-tain an unused portion of their loans from sec-ond-tier institutions and donors as a li;uidit#reserve% since the availa)ilit# of these funds is

not closel# correlated with the li;uid-it#*illi;uidit# c#cles of the local financial mar-3ets! =efinancin$ ris3 alwa#s eists% since therenewal of loans upon maturit# is not $uaran-teed! espite these draw)ac3s% loans% partic u-larl# those with lon$er terms% are valua)le inmiti$atin$ )oth li;uidit# ris3s in the short runand term mismatch ris3s in the medium run!

Second% echan$e rate ris3 is normall# in-creased% $iven that a su)stantial part of MFI )or-rowin$ is in forei$n currenc#% while most MFI

loans are denominated in local currenc# and fi-nance mostl# nontraded $oods and services!

Third% interest rate ris3s increase% $iven thatmost MFI )orrowin$ is at varia)le rates 'espe-ciall# )orrow in$ from $overnment second tierfacilities% donors and social investors( and mostMFI loans carr# fied rates! This ris3% however%

is $reatl# reduced )# the fact that most MFIlendin$ consists of short-term wor3in$ capitalloans with terms under one #ear! Thus% MFIs canoffset increases in their )orrowin$ costs )# in-creasin$ their loan rates% the effect of which will)e seen in their portfolio #ield within a fewmonths! MFIs that offer lon$er-term loans to

small and medium-size enterprises are in a dif-ferent situation! To counteract their $reater e-posure to interest rate ris3% the# offer varia)le- rate loans!

Finall#% )orrowin$ can increase concentrationris3s )# le adin$ MFIs to depend on asmall num)er of creditors! This ris3 often ariseswith respect to $overnment institutions! Inrecent #ears% man# MFIs have made si$nificantefforts to diversif# their )orrowin$ sources%turnin$ to the local )an3in$ s#stem% donors

and international social investors! evelopmentof closer relations with these creditors is oftena multi- #ear tas3% )ut it is well worth $ettin$started on in order to move )e#ond the initiall#hi$h transactions costs associated with)orrowin$ from a new source!

B+5D ISS4!

+mon$


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of issuin$ )onds are relativel# hi$h% an

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