Visa encourages banks to partner with microfinance institutions

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Microfinance can provide tangible commercial opportunities for banks in the region notably if they partner with a microfinance institution, said Debbie Arnold, VP of Emerging Markets at Visa International, the world's leading provider of electronic payments.

'Local commercial banks can benefit in various ways from commercial microfinance opportunities. They gain access to a new customer segment, can cross-sell non-competitive products and also benefit from new deposits and new income streams from the increased use of Visa debit, credit and pre-paid cards at the point-of-sale.'

Arnold explained how electronic payments solutions can support microfinance activities and how partnerships can overcome challenges in the sector. 'Banks have the electronic payments infrastructure but lack the appetite and ability to manage risk and train the target market,' she said. 'Microfinance Institutions (MFIs) have the one-to-one consumer relationships but no access to electronic payment infrastructure to get to scale. Our strategy, therefore, is to encourage bank partnerships with MFIs thereby uniting the convenience and security of cards and electronic payments with the powerful grassroots outreach of MFIs. All of this supports our global efforts to bank the unbanked and increase access to the formal financial sector for low income consumer segments.'

Arnold said that the initial costs of engaging with a large scale, low-income client base may not initially appeal to banks but that by using one example, the Visa's pay-roll model, these can be avoided. 'This kind of card structure means that the bank only has to set up one account - that of the MFI - and can then issue multiple cards from this account. It is commonly used for issuing salary cards for a single corporate that wants to capitalize on the scale efficiencies of electronic payments. It allows the bank to have a single point of account management. It is also often the catalyst for a bank to expand from a commercial to a retail focus,' she said.

Kamran Siddiqi, General Manager of Visa International in the Middle East, who attended the conference noted that using debit and pre-paid cards in microfinance not only benefits the banks but also the customers themselves. 'They gain access to the banking system that they may not previously have been eligible for and also the possibility to save money and earn interest on it. And with the advent of new innovation in technology, such as contactless chip and mobile payments, increasingly we expect to see even the most isolated of communities able to remotely access banking services,' he said.

According to the conference organisers, Planet Finance, there is a gap of some 5 million individuals in the region who would be interested in this form of financial support, were it is available, with a potential commercial value of some $1.5 billion. Conference participants concluded that microfinance in the region had consistently generated high repayment rates averaging 98% and that the sector was often wrongly perceived by commercial banks as 'high risk'. They also pointed out that flat interest rates can be used to produce Murabaha type instruments that are Shariah-compliant and that there are now several new sources of financing for this activity ranging from the globally-focused Gates Foundation to the regional Grameen-Abdul Latif Jameel Pan-Arab Initiative.

'Visa believes that microfinance is an excellent way of providing financial services such as deposits, loans, payment services, money transfers and insurance to low-income households enabling them to raise income levels and improve living standards through the development of a small business or microenterprise,' Siddiqi said. 'By focusing on global technology open platform standards, we can extend our existing infrastructure to rural areas and reach greater segments of the unbanked,' he concluded.

In 2005, Visa was invited to participate as an advisor in the United Nations' International Year of Microcredit. The goal was to provide greater access to credit, savings, insurance and other financial services for poor and low-income households around the world. Visa plans to continue this work with the UN initiative called Building Inclusive Financial Sectors which aims to expand microfinance to more areas of the world and help the estimated 2 billion people who could benefit from such efforts globally.