August 2008 · Number 134 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. 46982 Building a Dialogue to Promote Microfinance Best Practices in South America Mike Goldberga and Eric Palladinib When World Bank staff members meet with representa- The Latin American Markets and International Trade Pro- tives of a country's microfinance sector, microfinance gram (LAMIT), established by the United Kingdom's De- institution (MFI) managers assume that they can expect partment for International Development (DFID), and the some kind of new financing--credit lines, guarantees, or Global Development Learning Network (GDLN) provided grants--and nothing more. But, thanks to a new initiative, financing and technical support for the videoconferences. microfinance practitioners are learning that the Bank can To facilitate the dialogue, the team established a collabor- also be a source of world-class expertise on a number of ative online space (using the donor-supported "dGroups" challenges. In addition, they have found that access to new platform, see www.dgroups.org). The website provided a products, innovative technologies, and additional tools in forum for participants to share experiences and to respond risk management can play as important a role in the suc- to further questions. The videoconferences reached an cess of their institutions as access to funding. average of more than 200 practitioners and government regulators in eight distance learning centers in the four This note provides a summary of how the Bank estab- countries. In addition, thanks to simultaneous webcasts, lished an eight-part distance learning series for dia- a group of Argentine practitioners were able to view the logue with South American MFIs. The objectives of the presentations. dialogues were to: (1) highlight the Bank's ability to mobilize international techni- The move to engage with MFIs in the four cal expertise in microfinance; countries began in 2006--a critical year for (2) strengthen MFIs by dis- microfinance in Latin America. In that year, seminating new knowledge and the Bank recognized a need to respond to technological best practices; (3) a regional trend of proposed government promote the sharing of experi- policies that would artificially lower micro- ences and lessons learned; and finance interest rates and interfere with the (4) promote greater ties among sustainability of MFIs. Rather than expanding the MFIs in the region. The product menus and introducing cost saving events became an ongoing forum technologies, populist governments in Bolivia to provide technical assistance and Ecuador, for example, sought to improve to microfinance networks in Bo- access to credit by mandating interest rates livia, Colombia, Ecuador, and below the rate of inflation. In contrast, the Peru. By way of example, this note summarizes the pre- Peruvian and Colombian governments sought to ensure sentations of three developing areas in microfinance. The the sound growth of the microfinance industry and were complete results of the presentations and exchanges will considering a number of regulatory and supervisory op- be published in a book-length report. tions. In all four countries, the Bank recognized a need The work described in this note was supported by the UK Government's Department of International Development (DFID) through the Markets and Governance for Poverty Reduction Fund (MGPR) Trust Fund. The views expressed in this document are not necessarily those of the UK Department for International Development' to engage the policy makers and the national microfi- pected and devastating events as the wealthy. Micro- nance industries in a broad policy dialogue to promote insurance protects the poor individual, household or outreach and sustainability. the micro enterprise from some or all financial losses linked to an unpredictable event or risk. It does this The organizing team surveyed the microfinance asso- through risk pooling and client education on coverage ciations to identify the most important topics in micro and benefits, in exchange for payment of a premium. finance. The survey respondents identified eight issues: (1) innovative technological solutions; (2) the role of There are four groups of micro insurance products: (1) government in setting interest rates; (3) microinsur- Life, (2) Disability, (3) Health, and (4) Property. Each ance; (4) housing; (5) leasing; (6) risk management; (7) group includes a range of potential options. Although governance; and (8) disaster preparedness. it is not feasible to provide a comprehensive package of these services, the decision to make specific options In response, the Bank team sought out international available will depend on demand, cost, and perceived experts and coordinated with leading regional microfi- need, among other factors. For instance, in a country nance networks and Consultative Group to Assist the with a good public health infrastructure, health insur- Poor (CGAP) to provide the latest research, cases, and ance needs will be a lower priority for potential clients. products (see www.cgap.org). Each session included an On the other hand, in a community with a strong tradi- opportunity for questions and observations from the par- tion of mutual support in times of death (such as burial ticipants and follow-up questions through the dGroups societies) death benefits and coverage will be lower on website for up to two weeks. Most sessions included a the priority list. Therefore, a micro insurance program presentation from one of the South American microfi- must be based on an understanding of the particular nance institutions. The team reviewed the draft presenta- priorities of the individuals, households, or businesses tions, offered technical observations, and provided trans- in a specific market. To that end, client education plays lation services when needed. The consultants prepared a a key role in understanding the best set of services and pre-session summary and agenda, which was distributed delivery mechanisms. through the website. Three developing issues in microfi- Box 1 - Life Insurance: the Case of Financiera FINSOL nance-- insurance, technology, and hous- In 2002, a group of investors created Financiera FINSOL, a regulated limited objec- ing--were of particular interest to the par- tive financial company in Mexico. FINSOL began operations in August 2003, and ticipants. This note broadly reviews the by mid-2007 was serving more than 200,000 clients through 105 branches in 28 dialogues regarding these issues. Later states. Microcredit methodologies included village banking, solidarity groups, and En Breve notes will describe the discus- individual credit. FINSOL also serviced remittances. sions that took place on the other topics in the forum. As the institution evolved, FINSOL's management decided to address the lack of insurance coverage for their clients. Because of the high costs of promotion and Insurance for Individuals, Households, and operations and the geographic isolation of many potential clients, traditional insur- Businesses ance providers had ignored this market. In addition, the local MFIs did not have the Early in the dialogue, the participants heard specific insurance design and delivery skills. Yet, in combination, the insurance from three experts in microinsurance: providers and the MFIs could design an appropriate insurance product that would be marginally profitable for both institutions. Michael McCord of the Microinsurance Within one year of start-up, FINSOL life insurance had reached more than 180,000 Centre, Carlos Arce of the World Bank, of borrowers. The insurance policy includes the following: and Héctor Rivas of Financiera FINSOL in · No medical examination required for coverage Mexico (see Box 1). The first two speakers · Policy costs kept low. described the policies and practices neces- · US$3,000 coverage. sary for a successful micro insurance pro- · Immediate pay-out of 30 percent for funeral expenses; remaining pay-outs gram. Hector Rivas discussed the success of made within three days. FINSOL's life insurance program. · Coverage of individuals ages 16 to 65. · Use of a collective policy format. Poor households and micro enterprises · Double coverage for accidental death. require the same protection against unex- 2 · August 2008 · Number 134 To choose the most appropriate policies and level of an important competitive advantage in an increasingly coverage, the individual, household or business will need competitive financial services market. Efficient technolo- to have a complete understanding and appreciation of the gies do not require the opening of a new branch to reach benefits of the insurance products available. Given the clients; many interactions with an MFI involve deposits, unique needs and sheer number of the pool of uninsured withdrawals, payments and disbursements of credit. The households and micro enterprises, micro insurance decision to use new technologies has important impli- products should be simple to understand and determined cations for the MFI's capital investment and operating by available delivery channels. In addition, MFIs should budgets, staff training, promotional activities, and other understand and prepare for the limits and barriers to aspects of the business. For instance, opening offices in re- delivery of an insurance policy. For example, the MFI or mote locations continues to be expensive for any financial the insurance agency must be able to reach large numbers entity. Low-cost alternatives could be the personal digital of interested clients, provide appropriate incentives and assistants (PDAs) for computing and information storage respond rapidly to claims. and retrieval, or smart cards for automated teller machines (ATMs) or m-banking. The PDAs would reduce the need Even when an MFI cannot provide a complete insurance for more expensive solutions by facilitating the processing package, it can become a valuable partner with insurance of applications and reducing the time and number of docu- companies, government agencies and other actors in the ments needed. The smart card with fingerprint recognition delivery of micro insurance. The MFI can play a decisive technology accommodates the needs of members who role in the design, delivery, monitoring, and evaluation cannot read or write or who do not speak the dominant of micro insurance products. To maximize the benefits to language of the country--Quechua and Aymara speakers their clientele and themselves, MFI managers should; (1) in Peru and Bolivia, for example. Clients appreciate these leverage their intimate knowledge of their client base to solutions because the transactions costs, including trans- encourage insurers to offer attractive products to this large portation and time, drop dramatically. market niche; (2) encourage competition by using more than one insurer, through competitive processes, and an- Providing Shelter and a Place to Work through Progressive nual policy reviews; (3) improve integration of micro in- Housing Microfinance surance with MFI incentives and policies; (4) recognize the Another popular distance learning dialogue focused on value of a broad range of insurance products to MFI clients housing microfinance, which has emerged as a key finan- and indirectly to the MFI itself; and (5) review the cost im- cial service to alleviate the housing needs of poor and ec- plications and benefits of offering micro insurance. onomically vulnerable families. In addition to providing shelter, housing provides a place to work. Participants Using Technology to Expand Outreach and Reduce Delivery Costs heard from Jesús Ferreyra of MiBanco in Peru (see Box One of the more popular distance learning dialogues pro- 2) and Richard Schumann of the Cooperative Housing vided the latest information on technologies that have Foundation (CHF International). revolutionized microfinance in other regions. Participants heard from and posed questions to three experts in the field The discussion focused on the most viable approach to of technology and microfinance: Hannah Siedek of Con- housing finance for the poor, progressive housing mi- sultative Group to Assist the Poor (CGAP), Alice Liu of crofinance. This model provides funding for building or Development Alternatives Inc. (DAI), and Santiago Saave- home improvement in ways that mirror the most com- dra of the Red Transaccional Cooperativa in Ecuador. mon approach to home building among the poor. The poor tend to build or improve existing homes, which of- Many MFIs in the Andean countries are not well-informed ten include microbusiness workshops, in increments that about the technology options available for lowering costs are short-term and affordable. Similarly, housing micro- and expanding outreach. For example, while mobile finance provides small, short-term loans for parts of the phone-based banking (also known as "m-banking") has ex- building process. For example, the first loan may cover ploded in the Philippines, South Africa and India, there are the costs of one room--with the electricity and water only a few examples of this application in Latin America, hook-ups for the microbusiness. This approach is popular despite the enormous opportunities in the region. The pre- because it starts with a room with reliable utilities as a sentations described how new operational technologies can way to begin to formalize the family business. As clients reduce loan processing and approval costs through faster become ready to add another room, or improve the exist- response times and automatic review. This represents ing structure, they borrow only enough for that purpose. August 2008 · Number 134 · 3 and post-loan inspections. Such programs require Box 2 - Progressive Housing in Peru: Micasa the MFI to train loan officers in basic construc- Mibanco, Peru's first for-profit, fully regulated commercial microfinance tion, or to train construction specialists as loan bank (and a member of the Acción International Network), offers some of officers. In either case, good technical assistance the region's leading microfinance products. Micasa, the largest of Miban- can improve the relationship with the client and co's five progressive housing products, finances up to 100 percent of provide improved housing. the costs to complete a house. These housing projects may also involve expanding or adding a microbusiness workshop. Loan terms include a The Work Ahead: Dissemination and Building on minimum of three months and a maximum of five years for maturity. The the New Partnerships minimum amount of the loan depends on the credit evaluation. With a few The dialogue's first objective--to highlight the exceptions, the maximum loan amount is $US10,000. As of the end of Bank's ability to mobilize technical expertise in 2007, Micasa's portfolio exceeded US$50 million. microfinance--has been largely achieved. The other objectives represent on-going efforts that Lessons learned by Micasa and the other progressive housing products can build on the achievements of this dialogue. of MiBanco include the importance of providing a demand-driven product A final document, in English and Spanish, will with efficient service and ongoing follow-up. Moreover, the programs' further these objectives as it is distributed to a sales plans have learned not to exaggerate the products' values: it is more wide audience of practitioners, supervisors, and effective for clients to choose from a menu of housing loans. Finally, it is regulators. Bank staff will benefit directly from important to set realistic and progressive goals and include risk manage- the dialogue series, since these presentations will ment and results-based follow-up plans. be integrated into staff training on microfinance and into the web-based Latin America regional To accommodate the different characteristics and re- microfinance toolkit currently under development. quirements of housing microfinance, MFIs will need to adapt their lending practices in such areas as collateral In strategic and operational terms, the results were en- requirements, grace periods, loan terms, amount lent, and couraging. First, the national associations in Ecuador technical assistance. For example, one of the primary and Bolivia found ways to cope with new government characteristics of microfinance is the lack of formal title, microfinance interest rates and lending initiatives, thanks collateral or guarantee. Housing microfinance may allow to exchanges with experts and colleagues in neighboring a client without a formal land or property title to use other countries. Second, led by Peru, the regulators in the four documents to prove ownership or at least to demonstrate countries took advantage of the dialogues to share con- a minimum period of residence. These documents might cerns and discuss ways to measure and control systemic include tax receipts or public utilities service receipts. The financial risks. Finally, a number of the microfinance lack of formal title also means that the client has no for- institutions decided to pilot new products, such as micro- mal collateral to offer. Housing microfinance recognizes insurance, with support from the experts they met through this constraint and offers more flexible forms of guaran- the dialogues. Other benefits will be seen in the long term, tee, such as a co-signer, chattel mortgages, a compensa- as microfinance institutions prepare contingency plans for tory savings balance, and the like. rapid responses to disasters, adjust their governance struc- tures to meet new challenges, and adopt new technologies. Finally, housing microfinance may include technical assistance in the loan agreement. Some MFIs view Finally, when new Bank projects include micro technical assistance as an integral part of their pro- finance in projects for the four Andean countries, the gressive housing methodology. Others view this as an relationships built through this dialogue will provide additional cost, with little impact on loan repayment. a strong base for operationally relevant solutions and Technical assistance includes help in construction design useful policy dialogues. Such relationships will reduce to improve the quality of the building, pre-loan inspec- the time required to reach consensus on industry needs, tions and help in getting low-cost construction materials, clients' requirements, and the most cost-effective ways to expand the microfinance revolution to the millions in About the Authors Latin America who wait for reliable, affordable access to a. Senior Microfinance Specialist, Finance and Private Sector, Latin financial services. America and Caribbean Region, World Bank, b. Consultant "en breve" is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac 4 · August 2008 · Number 134