1 challenges in microfinance : an EY perspective Contents Introduction The evolving We are pleased to present you with our microfinance microfinance brochure. landscape In this brochure, we describe the latest trends 01. in the microfinance industry and present how EY, as a key provider of services to microfinance EY and microfinance institutions (MFIs) and microfinance investment vehicles (MIVs), has the knowledge and experience in handling the challenges you face. We also 03. describe EY's position in the microfinance industry sharing the services and support that we can Eight key challenges provide. in microfinance : how We share your passion for this fascinating industry can EY help and are eager to continue to work with you or to start a dialogue with you. 05 To find out more, please call one of our global or regional contacts whose contact information can be found at the end of this brochure. A call for innovation, adaptability and agility 11.
2 Contacts 12. Glossary 13. The evolving microfinance landscape What once started off as microcredit, a simple service offering micro-loans to the world 's unbanked populations, has evolved into financial inclusion, offering broader services, such as savings, insurance and payment products. From microcredit to financial inclusion Microsavings products aim to provide accessible and safe avenues to save, either for future investments or as a precaution In the last few decades, we have seen an evolution in the against economic shocks. Microsavings products can include microfinance landscape. What once started off as microcredit, simple no-frills bank accounts, as well as commitment-based a simple service offering micro-loans to the world 's unbanked products that encourage deposits or limit withdrawal in order populations, has evolved into complex microfinance markets to help savers reach their savings goals. Recent research shows operated by thousands of MFIs and MIVs.
3 Their products and promising effects of access to savings products both on the ability service offerings aim to provide low-income people with tools to to smoothen consumption by self-protecting against economic meet credit and saving needs as well as manage risk and efficiently shocks and to invest more in their microenterprises. A big execute transactions. This evolution is often called the financial challenge is to make such products cost-effective for MFIs. inclusion agenda, or simply financial inclusion. microfinance can be divided into three broad categories: microcredit, microsavings and Microinsurance products are designed to mitigate different types microinsurance. of risks, such as agricultural or health risks. In emerging markets, the provision of such insurance is faced with two challenges of The promise of microcredit is to provide small loans to micro asymmetric information. First, as in established markets, the entrepreneurs to invest in their businesses, reinvest the returns challenge for any insurance provider is to monitor that claims are and allow them to grow out of poverty.
4 Several recent studies justified, and to avoid selection of particularly risky customers indicate that while microcredit can be a useful financial tool for into their customer base. Second, in new markets, there is an some entrepreneurs, it has not typically generated dramatic additional challenge to establish trust among potential customers increases in income. Some of the key challenges for microcredit, that their insurance will indeed pay out in the event of a future therefore, include the questions of how access to microcredit can negative shock. Current research and innovative microinsurance better contribute to poverty reduction and what credit product models explore how to overcome these challenges . design choices and screening mechanisms could increase their effectiveness, as well as their financial viability. challenges in microfinance : an EY perspective | 1. Innovation as the enabler for financial inclusion More commercialization in microfinance leads to Over the last few years, with rapid changes in technology, opportunities as well as threats microfinance has been evolving, and MFIs and MIVs are expanding Top-tier, regulated and self-sustainable large MFIs are driving a once their services in innovative ways.
5 A case in point is the delivery of development-inspired movement toward a more business-oriented microfinance products using mobile phones. MFIs are leveraging perspective . Direct ( , IPOs) and indirect ( , MIVs) access to this dramatic penetration of mobile technology and mobile financial markets, along with deposit-taking, represent innovative payments to improve delivery of microfinance services and alternatives to commercial banking credit and donor funding on products to their clients. which MFIs are increasingly relying to escalate their operations. Leading MFIs, as well as some promising start-ups, are driving We believe that a responsibly executed commercial strategy can evolution in the microfinance business model. The microfinance contribute to the achievement of an organization's goals. For product and services design has been benefitting from greater instance, transforming entities into regulated financial institutions business awareness and the application of rigorous impact allows for the expansion of financing sources through deposits, measurement methodologies.
6 For instance, the offering of improved commercial credit and equity investments, thus individual microcredit products is increasingly replacing the enhancing resources to expand the customer value offering and traditional group-lending model. Bundle product packages increasing the financial inclusion reach. and commitment devices are tools contributing to tackling the transaction costs and behavioral obstacles that otherwise MIVs channel an increasingly significant part of the microfinance make microsaving unsustainable. MFIs are designing tailored funding. In fact, microfinance has established itself as a leading microinsurance products ( , index insurance) and establishing asset class in the impact investment landscape. partnerships with retailers, utilities and mobile operators. This In an industry where MFIs and MIVs have to balance their financial reduces the cost of providing microinsurance and increases inclusion mission with self-sustainability requirements, multiple customer loyalty.
7 Issues should be addressed. We have observed the following The new microfinance business models are more and more challenges that MFIs and MIVs need to address. technology enabled. The now generally accepted principle that External reporting as well as social impact transparency to credit alone cannot eradicate financial exclusion has led MFIs to investors and other stakeholders imply dealing with ever rely on integrated product and service propositions. The wide changing reporting standards. mobile phone reach in developing countries has allowed MFIs and their partners (mobile operators, retail stores, credit card Specialized skills are necessary to address tax and financial companies, etc.) to develop integrated mobile banking platforms accounting issues. for the delivery of a broad range of products and services. However, When considering microfinance investments, extensive regulators, as well as the industry players that operate in such a knowledge of valuation methodologies and access to reliable new environment, should address a few open issues.
8 Examples are: market information are essential. e-money issuance by non-banking players ( , mobile operators), In cases of major organizational transformations, such as risk-based approaches to know-your-customer controls, feasible recapitalization or listing of a microfinance entity, planning and requirements for nonbank retail agents and adequate customer execution capabilities are key enablers of long-term success. protection. Likewise, day-to-day operations require sound risk management. However, in case of relevant business failures, a structured approach to remediation should be applied. These issues and possible effects are discussed in greater detail in the following sections. 2 | challenges in microfinance : an EY perspective EY and microfinance Our purpose Building a better working world The role of business is changing. It is now widely accepted that At EY, we understand that one of the most significant impacts we business has to do more than make a profit.
9 It also must drive social can have on society is by supporting global and local economic and environmental change. stability and growth, which in turn provides opportunities to address some of the major issues that the world is facing. It's through our A combination of factors evolving relationships between client work and the influence we can have on the wider business developed and emerging economies, global institutions and world by making a commitment to audit independence, financial nation states and public and private sectors has led to a greater transparency and sound governance to build trust in the capital understanding of the connection and interdependency between markets, and by advising our clients to support the successful business and society. There is an expectation that business growth that we can contribute to Building a better working world . addresses social and environmental issues through its operations, products and services and its unique expertise.
10 While the microfinance industry plays an important role in sustainable financial inclusion and economic empowerment, EY. works to build trust and confidence in the capital markets and economies by delivering market insights and quality services. We develop high performing teams of experienced professionals who are in tune with the issues that matter to our clients, and we look beyond the obvious to identify the real challenges and opportunities for them. challenges in microfinance : an EY perspective | 3. How we can support you EY is involved in microfinance from different perspectives. We support main MFI and MIV managers with comprehensive client offerings ranging from assurance to specialized advisory services. Moreover, we are a service provider to financial services organizations active in the microfinance industry. Apart from being a business proposition, providing microfinance services also fits into our sustainability objectives.