Social

ADFIAP, UNDP conduct Microfinance Study Tour Program for Uzbek policy makers

May 25-31, 2010- Kuala Lumpur, Malaysia


The ADFIAP’s Institute of Development Finance (IDF), in cooperation with the UNDP in Uzbekistan, GTZ in Uzbekistan and the Central Bank of Uzbekistan conducted a Microfinance Study Tour Program (STP) for Policymakers of Uzbekistan on May 25-31, 2010 in Kuala Lumpur, Malaysia. The event was attended by nine (9) delegates from the Cabinet of Ministers of Uzbekistan, Central Bank of Uzbekistan, UNDP and GTZ. ADFIAP was represented by its Deputy Secretary General and concurrently Chief Executive of the IDF, Mr. Isidro A. Sobrecarey and Sr. Executive for Programs, Ms. Sandra Honrado.

This event, which was co-organized with MNY Consulting Sdn Berhad, represented by its Chairman & Managing Director Dato’ Md. Noor Mohammad Yusoff, provided the participants an effective understanding of the policy and regulatory frameworks, business principles, and best practices on the microfinance sector in Malaysia.

Through institutional visits, the program provided the participants the chance to directly interact with senior officers of the Bank Negara Malaysia, Ministry of Rural & Regional Development Corporation (MRDC), and the major microfinance organizations in Malaysia like the Amanah Ikhtiar Malaysia (AIM), Tekun Nasional, Bank Simpanan Nasional, Bank Rakyat, and Agrobank. In a project visit, the participants also had the opportunity to observe the actual operations of microfinance enterprises being financed by Amanah Ikhtiar.

For more details about the program, please email inquiries@adfiap.org,


Welcome to the ADFIAP Responsible Citizenship Institute (The ARC Institute), the CSR and outreach unit of the Association of Development Financing Institutions in Asia and the Pacific (ADFIAP), the focal point of currently 117 member-institutions in 42 countries and territories engaged in the financing of sustainable development in the region.

The ARC Institute capitalizes and builds on the many years of ADFIAP’s experience, network and partnerships in the area of financing sustainable development initiatives, more specifically, in relation to environmental, governance and social (ESG) issues.

This homepage provides the basic information on The ARC Institute and how it works to serve its constituency.
What is The ARC Institute?

The ARC Institute provides a focused platform for ADFIAP to develop and carry out programs and activities on ESG issues and trends for the benefit of its member-DFIs and other institutions in pursuit of their sustainable growth and development objectives.

The ARC Institute’s vision is to be an eminent advocate, capacity builder, resource provider and innovator on ESG matters as it relates to development finance.

The ARC Institute’s mission is to strengthen the capacity and sustainability of member-institutions and same-purposed organizations through its extensive work experience, network and alliances.
Who comprises The ARC Institute?

The ARC Institute’s people resources consist of practitioners within the ADFIAP network with extensive work experience on development finance, environmental and sustainability management and reporting, corporate governance, corporate social responsibility, training and human capital development and related sustainable development areas.
How does The ARC Institute work?

The ARC Institute works with and through ADFIAP’s network of members and partner-organizations worldwide such as UN bodies (UNEP, UNDESA, UNESCAP), grant institutions (EU, CIPE), learning institutes (CSCP, Wuppertal) as well as like-minded associations (ASAE &The Center, ECCP).
What does The ARC Institute do for its constituency?

Advocacy – The ARC Institute engages with its constituency in the sustainability sphere by mainstreaming ESG principles and best practices and by working with others that espouse the same advocacies.

Resource Provision – The ARC Institute organizes training programs and other events as well as publishes numerous knowledge resources, both printed and web-based.

Innovative Services – The ARC Institute develops and undertakes various development interventions and formulates programs that support the realization of the mandates of DFIs, thereby attaining sustainable economic, social and environmental growth.
How can we contact The ARC Institute?

Please contact The ARC Institute at:
2/F Skyland Plaza, Sen. Gil Puyat Ave
Makati City 1200, PHILIPPINES
Telephone Nos.: (63-2) 816-1672 / 843-0932 / 844-9090
Fax No.: (63-2) 817-6498
Email: inquiries@adfiap.org
Website: http://www.adfiap.org


ALIDE

Municipalities access to banking services

Not long ago, only the fourth part of the Mexican municipalities used credits to finance their public works; and in the less developed places, the situation was even less optimistic. However, today this scenario looks a lot better.

Not long ago, Mexican municipalities had a restricted access to credit. Why? Besides the lack of a credit culture and the high costs of origination fees, there was a low capacity to take steps toward the necessary local authorizations, not enough federal participation to be used as a source of payment, and a need for a portfolio of relevant infrastructure projects.

As a result, at the end of 2006, only 25% of Mexican municipalities used credit to finance their infrastructure projects, and this coverage was even smaller for less developed municipalities in the country.

It was necessary to attend the municipal credit market and the development banking was to give the first step. For this reason, the National Works and Public Services Bank (Banobras) designed the Banobras-FAIS program, which uses the Social Infrastructure Contributions Fund (FAIS) as a source of payment. This federal fund is addressed mainly to the development of basic infrastructure and is given to the states and municipalities through ten transferences between February and November of each year.

FAIS CHARACTERISTICS

* Maximum amounts of credits are set for each municipality according to the corresponding FAIS resources.
* Credits have a maximum term of 3 years, which fits the municipal administration periods.
* Credits have a fixed interest rate, mainly to provide security to municipalities with regard to monthly payments; to use up to the 25% of the FAIS established by law as a source of payment, and to provide municipalities with a coverage in the event of volatility in the financial markets.
* As part of the program, counseling is provided for creating templates of town-council minutes for municipalities, to facilitate credit management in the city councils.
* A trust fund is created to receive all the FAIS to pay credits and deliver the remnant to municipalities through state governments.
* The program promotes a better use of the support of Federal Government to cover origination fees, represented in the initial commission of the credit. Thus, municipality only covers the interest and structuring rate.
* A training program for the local authorities was created with the Inter-American Development Bank (IDB) resources. In April 2010, workshops were performed in ten entities, with the attendance of 818 municipalities, 392 municipal presidents, and 2,945 municipal officers.

IMPACT OF THE PROGRAM

The Banobras-FAIS program promoted a credit investment of 300 million US dollars in priority sectors for development. The program enabled municipalities to boost their investments and to perform more ambitious works through the combination of resources and a better profiting of available funds.

By December 2009, it granted credits for about US$ 640 thousand to 462 municipalities, reaching small and medium municipalities. In the seven states where FAIS has operated, the mean coverage of municipalities with credit went from 20% to 41% between 2006 and 2009.

The program was particularly successful in Chiapas State, the second most deprived in Mexico. The amount financed represents more than the 30% of the total municipal investment in this state, and the coverage of municipalities assisted in this state increased considerably from 36% to 84%.

The program has also contributed to develop credit market for local infrastructure by crediting 225 municipalities for the first time.


Agricultural financing looks for the design of products with greater social impact

Development banking provides agricultural and rural sectors with more than credit, as it allows for technology and technical assistance in the country; however, is it really generating the impact that it looks for? ALIDE Technical Committee on Agricultural and Rural Financing examined this subject at the ALIDE 40th assembly (ALIDE 40) and synthesized some proposals.

In Latin American and the Caribbean countries (LAC), there is a low financial penetration, which is even lower within the rural area. Development financial institutions reach the rural sector to a greater extent; however, its penetration is not sufficient in order to meet the needs and to support the small-scale producer.

By having difficulties to access the financial system, these small-scale producers have no other option but to turn to loan sharks, who charge them extremely high interests. This will prevent them from producing a surplus in order to move out of poverty and to improve their economic and social situation.

This is the vicious circle that characterizes the segment of the population with lower resources and was one of the topics addressed in the ALIDE Technical Committee meeting on Agricultural and Rural Financing, within the framework of ALIDE 40, in Fortaleza (Brazil).

In this meeting it was discussed that, although development banks have enough resources to guide and finance agricultural producers, they do not always meet the demand, as it is not effective but potential, as a great portion of producers are not considered eligible for credit, do not generate the sufficient production surplus to be located in the market and gradually become poorer. Even though credit is a powerful mechanism for development, they need to have access to technology, to generate incomes, to go into partnerships and to organize.

The phrase “they are not considered eligible for credit, therefore, they do not have access to the financial system” is commonly heard, so the logic question is: who does not consider them eligible for credit? Because we notice that rural producers are not considered eligible for credit by private banks, but by development banks, and those that are not considered eligible for credit by development banks, are considered eligible for credit by cooperatives or non-banking financial intermediaries.

This can indicate three points:
(1) that producers can be considered eligible for credit or not depending on the segment to which they belong or in which the financial entity specializes, and this is reflected on the type of client and the loan average amount;

(2) that technology, be it financial or activity-support ,used by financial entities is not appropriate to attend segments that are out of their scope of attention; and

(3) that there may be a lack of products adjusted to the demand or the need of those that are not considered eligible for credit yet. This may be due to the banking trend to focus, rather than on the design of the product, on interest rate, which although relevant, the important point is the opportunity offered by financing.

EXPENSIVE ATTENTION
Attending the rural sector is very expensive, as they are very dispersed. Therefore, in some countries, transaction costs are subsidized, that is, a percentage of the costs is paid to the financial intermediaries (FI) if a credit granted to the rural sector is evaluated or an amount is paid for each new credit granted to this sector. The questions in this case are: Who pays the subsidy? and Where do the resources come from? Resources generally come from the budgets; Brazil, Chile, Colombia and Mexico are an example.

LACK OF GUARANTEES
Another obstacle in the agricultural and rural financing is the lack of guarantees and title documents. However, there are some leading countries in these processes, such as the case of Mexico, where Fideicomisos Instituidos en Relación con la Agricultura (Agricultural Trust Funds) (FIRA) and the Mexican government have different types and modes of guarantee funds for small-scale producers. However, when the small agricultural property can be used as a guarantee, financial entities do not accept it as such, as executing them is complicated and it is unlikely that justice shall favor them.

On the other hand, the law in Brazil does not allow small agricultural property to be used as a guarantee; and when financing is carried out through cooperatives, which receive resources from development banks; guarantees are not required since they use the joint and several guarantee system in the lending process. However, this model is not widespread in Brazil; it has not been developed in some states.

HEALTHY HABITS
One of the most criticized problems around agricultural financing has been the generalization of subsidies to interest rates in development financial institutions (DFI).Both the large-scale and small-scale producer received subsidized credit. This policy has really changed, there are a large number of countries that use subsidies to induce financing to the agricultural and rural sector, but do not direct it to interest rates, but to technical assistance, agricultural insurance, etc.

So as not to jeopardize the sustainability of DFIs, it is recommended to eliminate the practice of debt relief or remission. If there were cases that justify it, this must be done with special or public budget resources that do not affect DFI balance. For example, in Brazil, the law does not contemplate remission of debt; instead, the debt term is extended.

RISK DIVERSIFICATION
In order to have a greater social impact and to bypass all these obstacles, a financial institution must diversify its risks, provide integral support to both agricultural and non-agricultural activities in the rural sector, and insist before the regulatory entities to reduce the excessively strict treatment of the sector, as there is still an excess of rules and regulations in the rural sector financing.

In the product and client portfolio of financial intermediaries (FI), rural credit competes with consumer, mortgage, corporative credit, and they lend the rural sector only if the business is as profitable as those in other sectors. FI prefers the most profitable business and not the rural sector, due to the market risk and price volatility.

Another great challenge is to have an agricultural risk management system, which includes, for example, agricultural insurance, catastrophic insurance, price coverage, although all the products do not have futures markets, and contract farming, in which large-scale companies contract producers and promise to buy the production at the end of the harvest at a specific and previously fixed price.

What should development banking do? Do more than just grant credit, but up to what extent? Even though the field of action is different in each country, it was pointed out that development banking could provide, besides credit, insurance, financial and environmental literacy, mechanisms for coverage, information, government supporting programs management and incentives management for the promotion of financial penetration in the agricultural and rural sector.

For this reason, it is advisable to design products that have demand, meet the needs and, at the same time, incorporate those that are not eligible for credit. In short, financial institutions with technology and ad-hoc products are required for the segment of those without access to credit.

To the extent that the DFIs achieve adequate administration and risk management, a revolution in the agricultural and rural financing will have taken place; furthermore, when the climate change is tangible and is affecting the activity of financial institutions. In addition, funding providers may soon start to request climate and environmental risks coverage. Therefore, climate change-derived risks must be added to the present risk management.