«Volume 2 Country Studies ii The Role of Central Banks in Microfinance in Asia and the Pacific First published 2000 © Asian Development Bank All ...»
The Role of
Central Banks in
Microfinance in Asia
and the Pacific
ii The Role of Central Banks in Microfinance in Asia and the Pacific
First published 2000
© Asian Development Bank
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ISBN 971-561-310-1 Library of Congress Cataloging-in-Publication Data available Country Studies iii Foreword Country Studies During the last two decades, microﬁnance has evolved from almost exclusively credit- focused operations into increasingly diversified services. Many microfinance institutions (MFIs) in the Asian and Paciﬁc Region are now offering limited deposit services and a few are exploring the possibilities for adding microinsurance to their operations. In the 1990s, the outreach of the industry also expanded in many of the developing member countries of the Asian Development Bank (ADB). Currently, the industry serves close to 22 million poor and low-income households in the region.
Despite the industry’s growth in scope and scale, a large majority of Asia’s poor and low-income households still have little access to formal ﬁnancial services.
MFI expansion has been concentrated in two countries: Indonesia and Bangladesh.
In most countries, the industry is still at an infant stage. The limited outreach in comparison to the region’s large potential market of over 180 million poor households is a major cause for concern for policy makers and development practitioners. There is a consensus among all stakeholders that if microﬁnance is to make a signiﬁcant contribution to poverty reduction, the industry must reach larger numbers of poor households with quality services.
In this context, central banks have a potentially important role to play in the development of sustainable microﬁnance and the integration of microﬁnance into the broader financial sector. However, this role has not been studied systematically, despite the fact that central bank policies often have a vital inﬂuence on the speed with which the microﬁnance industry can grow and on the directions and quality of the growth. Therefore, ADB decided to undertake a study to examine central bank operations in microﬁnance with a view to improving the understanding of how central banks can support development of sustainable microﬁnance.
The study covered twelve developing member countries of ADB: Bangladesh, People’s Republic of China, India, Indonesia, Kyrgyz Republic, Nepal, Pakistan, Papua New Guinea, Philippines, Sri Lanka, Vanuatu and Viet Nam. The Foundation for Development Cooperation in Brisbane, Australia carried out the study using a team of reputed microﬁnance specialists from the region. The results of the studies are presented in two volumes. Volume I, to be released in October 2000, will present an overview of the study. This Volume presents the country studies.
The country studies suggest that operations of central banks for microﬁnance development have varied significantly among DMCs and over time. What central banks should and should not do in the future depends largely on the current stage of microﬁnance development, the structure of the industry and the directions in which it is moving, and the institutional capacity of the central banks. In countries where formal MFIs are playing an increasing role in the industry, central banks need to pay more attention than in the past to regulation and supervision.
The analysis, results and recommendations of the study are expected to be useful to all those concerned with development of sustainable microﬁnance. We hope that the study will generate further interest on this subject among policy makers, development practitioners, and researchers.
Introduction Country Studies The study of the role of central banks in microﬁnance, of which this set of Asia-Paciﬁc country studies is the second part, reﬂects the commitment of the Asian Development Bank (ADB) to assisting the development of sustainable microﬁnance in its developing member countries (DMCs). It demonstrates a concern for good policy as the prerequisite for good practice, and a commitment to the “ﬁnancial systems development” approach to microﬁnance.
An earlier study1 prepared by The Foundation for Development Cooperation (FDC), with the collaboration of members of the Banking with the Poor Network, considered the need for an appropriate policy and regulatory environment for microﬁnance. This was based on case studies of nine Asian countries, all DMCs of ADB. We are grateful to ADB for the opportunity to take this work further by focusing specifically on central banks. We share ADB’s conviction that the findings can be generalized (as they are in the first volume of the study) to develop principles applicable to the operations of central banks, insofar as they have implications for microﬁnance. We are particularly grateful for the guidance and patience of Dr. Nimal Fernando, Senior Project Economist-Microﬁnance, Agriculture and Rural Development Division West, in the completion of the work.
The analytical framework developed for this study, described in Volume 1, has generated some generally applicable principles. But the diversity of institutions and economic conditions in the DMCs of ADB also require country-specific recommendations to enable a supportive policy and regulatory framework to be fashioned. Specific recommendations are needed to enable each particular central bank to shape an appropriate response to the needs of microﬁnance development, in the context of the demands posed by broader financial sector development and macroeconomic concerns. Such recommendations have been provided in each country study.
In bringing this material to publication we have appreciated the professionalism of the other contributing authors, Ms. Ruth Goodwin-Groen, Dr. Gilberto Llanto, and Mr. Sanjay Sinha. Mr. Paul McGuire, consulting associate of FDC, has contributed both to this volume and as senior author of the Overview in Volume 1.
We also appreciate the high standards brought to the work by manuscript editor Dr.
Barbara Henson, as well as the contribution in book design and layout of Peter Evans.
We have beneﬁted from the comments of a number of ADB staff and are grateful for the professional support and guidance of Ms. Lynette Mallery in the Ofﬁce of External Relations, as well as for assistance from Ms. Stella Lorenzo.
The work in the ﬁeld was facilitated by a great many people, and the authors have acknowledged this assistance so far as possible in their individual country studies. We trust that, in turn, the findings of each country study and the recommendations which ﬂow from them will prove a valuable contribution to both domestic policy making and external technical assistance.
Notes on Authors Country Studies John Conroy is special consultant to The Foundation for Development Cooperation (FDC) (based in Brisbane, Australia), having previously served as executive director for nine years from 1991. He is co-author of several FDC monographs on microﬁnance, including those dealing with NGO-commercial bank linkages and the policy and regulatory environment for microﬁnance in Asia. Dr. Conroy has worked for extended periods in Indonesia and Papua New Guinea, and has published on development issues in a number of sectors, including education, labor and human resources, population and family planning, human settlements and shelter, and development cooperation policy as well as microﬁnance. He serves as secretary to the Banking with the Poor (BWTP) Network, comprising microﬁnance institutions, commercial banks, and central banks in nine Asian countries which collaborate in research and advocacy in support of sustainable microﬁnance for the region.
Robyn Cornford edited this volume jointly with Dr. John Conroy. An Australian national, Ms. Cornford is a chartered accountant with more than fifteen years of ﬁnancial and management experience in the private and nongovernment sectors in Australia, the United Kingdom, and the United States. After undertaking her MBA at Georgetown University in Washington, DC, Ms. Cornford joined FDC in 1999 with the primary objective of developing her professional interest in microﬁnance. Apart from project managing this study for the Asian Development Bank (ADB), she has managed an FDC project on impact analysis of microﬁnance, and researched the prospects for microﬁnance to contribute to reconstruction in post-conﬂict East Timor. She has also developed training materials and conducted training sessions in microﬁnance.
Ruth Goodwin-Groen is an independent consultant specializing in microﬁnance. An Australian now resident in New York City, she gained her initial experience of international development issues working with the Australian Agency for International Development (AusAID), before graduating from Harvard Business School. Subsequently, she has spent more than a decade working with and advising retail and wholesale institutions and donor agencies worldwide. This period included several years with Women’s World Banking and, more recently, consulting for the World Bank, the United Nations Development Programme (UNDP), the Small Enterprise Education and Promotion (SEEP) Network, the Soros Foundation, AusAID, and FDC, among others. Ms. Goodwin-Groen is currently manager of the Consultative Group to Assist the Poorest (CGAP) program of microﬁnance capacity-building courses. She is the author of a study of the role of commercial banks in microﬁnance in the AsiaPaciﬁc region, conducted for FDC.
Gilberto M. Llanto is a senior research fellow at the Philippine Institute for Development Studies and, currently, a ﬁnancial and credit policy consultant to the National Credit Council, Department of Finance. Among other board memberships, he is currently a director of the Center for Agriculture and Rural Development (CARD) Rural Bank, the first Philippine microfinance bank. He has over twenty years of research experience in monetary economics, development finance and banking, public ﬁnance, and local government, and has published extensively in these areas.
Dr. Llanto has extensive consulting experience in the ﬁelds of monetary and ﬁscal policy, and has worked as a consultant to the World Bank, the Food and Agriculture Organisation (FAO), ADB, and UNDP, among others.
Paul McGuire is a consulting associate of FDC, for which he has researched issues relating to microfinance and financial systems policy, as well as the assessment of microﬁnance institution capacities. He was principal researcher for a major study of the policy and regulatory environment for microfinance in nine Asian countries in 1997, conducted for FDC. Mr. McGuire also prepared an assessment of the status of microfinance in the small island states of the Pacific for UNDP in 1996, and is the author of numerous articles and monographs on microﬁnance. He has worked as an x The Role of Central Banks in Microfinance in Asia and the Pacific
economist for the Australian Treasury, the Organisation for Economic Co-operation and Development (OECD), the Government of the Cook Islands, and (currently) the Queensland Treasury.
Sanjay Sinha is managing director of EDA Rural Systems, an India-based consulting firm. A graduate (M.Phil.) of Oxford University, he specializes in micro-enterprise development strategies and microﬁnance program development, as well as ﬁnancial and socioeconomic appraisal. He has worked in India, Nepal, Bangladesh, Sri Lanka, and Indonesia, and has consulted for the Ford Foundation, the Government of India, ADB, the World Bank, and CGAP. Mr. Sinha has been instrumental in establishing a credit rating mechanism and guarantee fund for microﬁnance institutions operating in South Asia. He has published extensively in the areas of ﬁnance and development, rural ﬁnancial markets, community development, and related topics.