Cull then considered two greenfield models for expanding financial inclusion in countries in Sub-Saharan Africa: a top-down approach that uses branded retail banking networks and a bottom-up one that relies on consolidating an existing network of affiliates while adding new affiliates.
Drawing on data from MIX and IFC that spanned 2006-2012, he traced the evolution of these models from low profitability to considerable growth and increases in the number of branches. In terms of growth and loan size, “Relative to young African microfinance institutions, they perform very well,” said Cull. “Greenfields are an effective way to reach a large number of people. They also seem to be commercially viable and sustainable. However, they are not reaching the poorest of the poor.”
If these firms had to pay a market rate on their sources of funding, “very, very few microfinance institutions are profitable, from the point of view of a true opportunity cost of capital, which suggests that there is a lot of subsidy in this market still.” In fact, Cull found that the subsidy per borrower is much higher for borrowers at the higher end of the loan scale, suggesting that subsidies are not pro-poor, and the per borrower subsidies for banks are higher than for NGOs. In addition, the subsidy per dollar and per borrower does not increase with the percentage of women borrowers, so subsidies are not pro-women, either. Furthermore, these subsidies decline as MFIs age but not that rapidly, indicating persistence in their allocation.
In addition to subsidies, Cull suggested a variety of measures to help meet the challenge of reaching the poor and emphasized that microfinance is not just microcredit. He highlighted measures such as technological innovations like mobile banking services, offering agents as nearer points of contact, and a better understanding of client needs including savings devices, electronic payments, and more flexible loan repayment schedules.
Discussant Sebastian-A Molineus, Director of the World Bank Group’s Finance & Markets Global Practice, discussed the role of microfinance in the context of the World Bank’s goal of achieving universal financial inclusion by 2020. “There is no one-size-fits-all answer to microfinance. Indeed, there is a range of providers that are needed for full financial inclusion: banks, non-bank financial institutions, NGOs, etc.” He pointed to the Bank’s multi-tiered approach to supporting the microfinance industry: at the macrolevel with legislation, regulation, and supervision; at the mesolevel with support services and infrastructure; and at the microlevel with financial service providers.
Molineus also emphasized that microfinance fits within a broader framework of achieving financial inclusion—an approach that is reflected in the World Bank’s Financial Inclusion Support Framework (FISF). The FISF offers national counterparts scaled-up support in achieving their financial inclusion targets, including in MSME finance, digital payments, financial consumer protection, financial capability, financial infrastructure, and agricultural finance.
