Local banking and inclusive finance

  • Hans Dieter SEIBEL, DGRV / e-MFP
  • Wolfram HIEMANN, Consultant
  • Virginie TRACHSEL, Université de Genève


Hans Dieter SEIBEL opened this session by talking about the first credit and savings associations in Germany. He then presented the panellists briefly talking about their experiences in the sector. Wolfram HIEMANN has worked as a consultant with Bank Perkreditan Rakyat (BPR), Indonesia's local banks. There are about 1,800 regulated BPRs in Indonesia, with 5 thousand outlets serving more than 10 million clients. Assets of BPRs reach USD $7 billion. The Banking Law limits their activities to the province. Few BPRs operate outlets outside their district or adjacent districts. BPRs' objective is to finance Indonesia's micro, small and medium businesses, and generate income for their owners. Activities of BPRs are limited to mobilizing funds from the public as savings and term deposits, providing loans, and placing funds with central and other banks. Bank Indonesia, the central bank, continually adjusts BPRs' legal and regulatory framework and offers extensive institutional support. On a highly competitive market BPRs offer higher interest rates on deposits compared to commercial banks, and thus attract more funds.

Hiemann explained the diversity in BPR ownership including village communities, business groups, retired bankers and NGOs as well as various joint ownerships between private and public entities. A quarter of the BPRs belong to regional governments. Java is the main hub of BPRs. From 2002 to 2013, the BPR share in the total banking sector doubled from 0.8% to 1.6%. In 2002, most BPRs had assets less than USD $500 thousand, whereas in 2013, most BPRs recorded assets of much more than USD $1 million. The largest 100 BPRs account for more than 50% of the total BPRs assets (average USD $35 million). The asset composition of BPRs reflects high liquidity. About 20% of the assets are interbank assets while 75% are loan portfolio. The BPR loan portfolio consists of consumption loans, which are very important for BPRs to break even. The other half consists of commercial loans which are given to the informal sector, the self-employed and microenterprises. These clients have weak documentation and their collateral value is often questionable. BPRs charge high interest on loans and are known for fast loan disbursement and door-to-door services. BPRs are mainly funded by savings and term deposits and the largest part of BPRs' income comes from loan interest (83.5% of total income) and other fees (7.5%). Interest costs account for more than a third of the total BPRs' costs, while human resources account for 22.5%. Hiemann closed his presentation discussing the challenges that BPRs are facing. One of them is competition for creditworthy borrowers. The cost of using technology is another challenge, especially for smaller BPRs.

A question from the audience was whether BPRs have a federation. One weakness of BPRs is the cost of technology if the BPR is small. A federation could solve this problem by coordinating some services and by decreasing costs. Hiemann explained that there is a federation for BPRs but it cannot do any kind of investment as BPRs are limited by law to only three functions: giving loans, receiving funds, depositing funds but they are explicitly prohibited to engage in investments, for example in an apex organisation.

Hans Dieter SEIBEL opened his presentation by stating that the objectives of microfinance and banking are different. The objective of banking is economic growth while the objective of microfinance is poverty alleviation. Microfinance originated in Europe in the 18th and 19th century with the objective of poverty alleviation. After the hunger year, 1846/47, the first urban SHG/credit association (Schulze-Delitzsch) and the first rural SHG/credit association (Raiffeisen) were born in Germany in 1850 and 1864, respectively. Both were member-owned and -governed. Their objective was at first poverty reduction and subsequently economic growth. They aimed at achieving their goals by promoting member enterprises with savings and credit, input supply and marketing services. The role of the state was to simply provide a regulatory framework. These first credit associations are now the savings and cooperative banks of Germany. Their mission is universal inclusive banking. There are 429 savings banks and 1,138 cooperative banks in Germany accounting for 27.5% and 10.3% of the banking sector.

Seibel discussed the characteristics of the German savings banks and cooperative banks. Both are based on voluntary savings and have local autonomy in management and governance. Outreach is localized and both have federations, providing a network-wide institutional safety net and deposit guarantee scheme (Haftungsverbund). The banks have access to refinancing by commercial banks and their auxiliary supervision is delegated to auditing federations. Seibel closed his presentation by emphasizing that poverty reduction in Germany followed both economic growth and access to finance, in that order; there cannot be a sustainable eradication of poverty without economic growth. Microfinance alone may alleviate poverty but cannot eradicate it. There is a complex interaction between economic growth, poverty reduction, financial sector development, and microbanking.

Daniel Rozas from e-MFP asked whether consolidation happens because the value of a large institution is bigger today than in the past. Is a local banking approach still effective? Seibel explained that Germans on average prefer local banks to big commercial banks because of a sense of community or house banking. He added that the local banks' network, the Verbund, carries out important functions that would normally be carried out by individual institutions, such as risk management, IT and advocacy. There has been a trend towards consolidation, but not centralization. From a comparative perspective there is a lot of variation between different financial systems and consolidation depends a lot on the extent of centralizations vs. decentralization of a country. Germany is a federal state; Berlin will never have the weight that London or Paris have in UK and France. Seibel remarked that cooperative movements fail in some countries and succeed in others. He gave an example of the People's Credits Funds (PCFs) in Vietnam which was not negatively affected by the global financial crisis.

Virginie TRACHSEL started her presentation by comparing financial inclusion in rural and urban areas in Mexico. Outreach in rural areas is uneven and slow; there are high transaction and opportunity costs, and a small range of financial services. Urban areas on the other hand, offer opportunities for economies of scale. More commercially oriented MFIs are focused on urban areas. She mentioned that remittances can substitute or complement microfinance products. So far, the impact of remittances on microcredit is unclear. Cash transfer programs have a positive impact on credit take-up rate, and possibly on financial inclusion, especially when done through formal financial channels. More developed financial systems attract more remittances.