Commercial banking at the bottom of the Pyramid

Following are excerpts from the presentation by HNB Deputy General Manager Personal Banking and Network Management Chandula Abeywickrema at the Association of Professional Bankers (APB) Sri Lanka Annual Convention held last week. His presentation focused on the new 80/20 definition, profitability from the grass root level banking and asset creation through financial inclusion; Banking for Migrant workers and taking banking to more people, in more places with micro finance & technology.

Over 3 billion poor people seek access to basic financial services to manage their lives. ccess to loans and deposit services has empowered millions to work their way out of poverty,” HNB Deputy General Manager Personal Banking and Network Management Chandula Abeywickrema said.
“The Commercial Banks in the world need to be convinced the poor and the low income clients as a viable business proposition,” he added.

“We need to work towards a world in which Micro Finance is no longer viewed as a marginal or a niche sector but as a world where poor people are considered valued clients of their country’s financial system, where a wide array of financial institutions would provide poor people, people who are at the bottom of the pyramid, with a permanent access to varied financial services they need,” Mr. Abeywickrema pointed out.

According to him, in this rapid changing world, Micro Finance becomes an integral part of competitive and diverse financial system that foster innovation, growth in all segments of society.

“As Commercial Banks we recognise that there are challenges ‘to downscaling financial services to include the poor’. With regard to more time and money to manage millions of small accounts both credit and savings instead of few large accounts of the more wealthy.But one of the most significant features of Micro Finance is that clients are absolutely loyal and their repayment of the loans on time and regular use of deposit services wherever available is an indication how much they value these services,” he said.

“While there are many challenges that need to be overcome the courage of their convictions will allow Commercial Banks to go faster beyond the double bottom line even the triple bottom line, demonstrating development through practical social performance indicators which amply signifies that financial and social performance go hand in hand when taking Commercial Banking to the bottom of the pyramid,” he said.
In his presentation, Mr. Abeywickrema also shared some insights from the ‘Fortunes at the bottom of the pyramid’ by C K Prahalad who had dispelled several dominant negative assumptions about the people at the bottom of the pyramid.Among them are: The poor has no purchasing power, therefore they do not represent a viable market; The poor are not brand conscious on the contrary, the poor are very brand conscious and value conscious by necessity; BOP consumers are getting connected and networked. They are rapidly reaping the benefits of information networks.

80/20 redefined
Focusing on the traditional commercial bank’s 80/20 rule or principle, Mr. Abeywickrema said it was a known fact that most of the Commercial Banks in the country derive 80% of their income from the 20% of their portfolio which constitute Corporate, High Networth and Large and Medium sized Commercial Enterprises.

A Country where the economy is highly volatile, the banks face an unprecedented challenge to either maintain or to increase the size of their share of the market.

In Sri Lanka there are 12 foreign banks and 11 domestic banks totaling to 23 competing in this current scenario and are beginning to feel the impact of trying to win over the profitable segment of 20% of this business.

This particular segment that the banks are vying for, has become very value conscious and price sensitive and by virtue of this phenomenon the customer loyalty does not remain in any particular bank.
“Not only do we see banks focusing on a particular segment in Sri Lanka but see banks heavily concentrate their focus in the area of the Western Province,” he added.

He also endeavoured to define the new 80/20 rule. “The banks need to look beyond this 20% which bring the 80%. To make the 80% strong, the bank’s will have to re-define its role,” he said.

To correct the equation of this 80/20 definition, the banks will have to create attractive opportunities for the 80%, which they consider marginal. There is a definite vacuum and a need to bring economic revival to this 80% and beyond the Western Province, to make the people at the Bottom of the Pyramid more viable and economically strong. There should be a balanced approach in the distribution of the resources to increase the purchasing power of the people through income generation thus enhancing the purchasing value of the people at the Bottom of the Pyramid.

The 20% which the banks heavily depend on can be made stronger which will filter down by strengthening the 80% which is considered marginal,” Mr. Abeywickrema said and cited few examples including a business entity like Elephant House which falls under the 20% category can increase the sale of their Ice-Cream Cups in Thambuttegama from 10 to 100. This is only possible if the income generation capacity of the people (purchasing power) of Thambuttegama is strengthened.

Through his presentation Mr. Abeywickrema also shared with the APB Sri Lanka forum a bit of insight in to entrepreneurship and entrepreneurial skills among the poor apart from creativity, sincerity as well as determination to success. “Women, as a special segment of entrepreneurial poor, are more independent and very active,” he added.
“However what they lack is access to finance, access to market, access to innovative technology, access to partnership / linkages and collateral,” Mr. Abeywickrema said.

He was convinced that banks could profit from grassroot level banking.
“Commercial Banks can successfully down scale its operations for a sustainable microfinance programme. A clear objective and basis for motivation are core elements of successful microfinance operations. Other products (deposits, micro insurance etc) to be designed to conform to the income and employment characteristics of rural villagers served,” he said. Furthermore institutional commitment, operating autonomy and a management environment that encourages responsive procedures enhance programme sustainability was also listed as a key ingredient.

The grassroot banking also helps a bank to achieve its social responsibility goals as well as empowering the rural communities with income and saving opportunities thereby uplifting the masses’ socio-economic life.

Citigroup, HNB success
To substantiate his ideas, Mr. Abeywickrema also shared with the APB Sri Lanka forum several success stories of the bottom of the pyramid strategy of global giant CitiBank as well as BRI Indonesia and certainly HNB’s own efforts.

Citigroup, the largest financial service company in the world with some 200 Mn customer accounts in more than 100 countries provides consumers, corporations, institutions & governments with a range of financial services. Its objective is to be the most respected financial services company of the world.

Citygroup has a long established presence in many markets it serves. Operations dates back to 1812 in US and over a century in China, Hong Kong, Japan, Philippines, Singapore, Panama & London.

Under the Citigroup trademark red umbrella is a family of companies that includes Citibank, Citimortgage, Citifinancial, Primerica, Smith Barney and Banamex with over 300,000 employees serving customers & their local communities.

In 2005 Citigroup launched Microfinance as an initiative to accelerate and expand the scale and scope of financial access in many countries. Citigroup works with subsidiaries & large microfinance institutions (MFI) for microfinance delivery. It has already established relationships in 20 countries.

Several quotations from CitiGroup officials was also shared. “Challenge of reaching the “un-banked” is so vast that there is room for every approach; profitable, sustainable and subsidized. But as a commercial banker, it is not only about reducing poverty but also financial inclusion, which includes loans, savings accounts, insurance and remittances. - Robert Annibale Global Director – Microfinance Business Division,

CitiGroup
Microfinance clients would develop economically and become a whole new client base for CitiGroup- Stanley Fischer – Head of Bank of Israel, former President of CitiGroup Int.

Citigroup Global Consumer Bank in India recently launched an innovative micro-savings product called Citibank Pragati. Citibank has begun to install ATMs in microfinance institutions, and clients will be able to open Citi savings accounts, the machines, which can identify clients by their fingerprints, will speak to them in any of six dialects.

In the past several years, Citigroup and its subsidiary Banamex raised seventy million dollars in the capital markets for the Accion affiliate Compartamos, the largest microfinance institution in Latin America, with more than five hundred thousand clients.

With regard to BRI Indonesia’s success, Mr. Abeywickrema said PT Bank Rakyat is the oldest bank in Indonesia and was started in 1895 as a small financial institute. It managed the Mosque fund as a source of fund to grant loans to the people in the neighbourhood.

With the growth & transformation of over a 100 years period the present Bank BRI evolved. This Bank was transformed as the first state owned bank in 1960 with the present name, Bank BRI. In 2003 BRI went public (43% public ownership)

BRI is the only bank that survived and came out from the Asian financial crisis. The officials boldly state that this is due to their main focus (80% of this business is Micro & SME sector)

Sharing the HNB’s success story, he said in 1973 i.e. 3 years after incorporation, the bank started the rural village uplifting program at Debara-ara-wewa. (Grameen started microfinance in 1976). In 1979, the bank commenced SME lending by participating in government sponsored refinance credit lines.

Bank’s flagship microfinance program ‘Gami Pubuduwa’ (Village awakening) started in 1989. “Microfinance is in the DNA of HNB,” he added.

Poor are bankable
Disclosing the performance of HNB in micro finance, Mr. Abeywickrema said the present outstanding of Gami Pubuduwa microfinance portfolio is Rs 2 Bn while the existing portfolio caters to 15,000 BOP clients in 106 microfinance units throughout the country. The scheme also maintains a NPA rate below 5% due to close supervision & follow-up of the 120 dedicated field staff. “Overall, during the past 17 years loans amounting to Rs 4 Bn have been provided to 75,000 BOP customers,” he added.
One of the most difficult places for banking in the current scenario. Mobilizing rural poor in Jaffna peninsula stands as a recent example. HNB has financed 146 entrepreneurs in Arali, Moolai, Mathagal and Pandeterrippu villages through Jaffna, Nelliady & Chunnakam branches. “The strong linkage created by the Bank effectively addressed the issue of sustainability. They are ready for the 2nd stage of loans at present,” he added.

He said that total micro finance solutions include Providing technical assistance; Inculcating the savings habit; Continuous awareness on new potentials & trends; Graduation to next level and Micro Insurance.
Migrant workers

Focusing on the linkage of Migrant worker to microfinance, Mr. Abeywickrema said globally accumulating assets and asset creation has many positive economic and social development outcomes for migrant worker families, communities and for the nation. The families holding assets provide a way to smooth consumption, stability in the event of unforeseen income fluctuations and serves as a stock resource to invest in long term development. It is through the accumulating and creating of assets in education, homes and enterprises that individuals & families do better over a long time.

Many banks have in the recent past shown tremendous interest in the Migrant Worker Remittances as a key business opportunity. However, the banks are moving very tread fully and slowly in the area of financial inclusion for Migrant Workers.

The Migrant Workers globally now constitute a very significant economic entity which needs the attention of the Commercial Banks, not only for money transfer & remittance but also in the financial inclusion into areas of savings, micro finance and micro insurance.

According to him, in Sri Lanka, year in and year out Migrant Worker Remittances have become a more dominant income earner for our country, particularly in the area of Foreign Exchange. Currently over 1.5 Million Sri Lankans are employed abroad as Migrant Workers. Majority of them are blue collared workers in the Middle East and some parts of Europe, on short term contracts for 2 to 3 years.

In the year 2006, Migrant Workers remitted Rs. 241 billion. This is an increase of 21% from the previous year of 2005.

“While we have significantly witnessed that most of the banks now create awareness of their money transfer mechanisms using mediums like, ‘Western Union’, ‘Moneygram’ whilst some of the banks own technological solutions for efficient and easy transfer of money for Migrant Worker Remittances,” he said.

It was emphasized that banks need to look beyond the money transfer to involve migrant workers on more sustainable banking programmes, firstly, creation of savings and services products which would attract migrant workers to save while employed as well as families of migrant workers who could save a portion of their money received for consumption.

“This involves awareness creation to the migrant workers, their families, continuous updates and the benefits of legal money transfer through the banks for the benefit of migrant workers (large number of Migrant Workers still remit money through illegal means without going through banks),” he pointed out.

The banks need to take the initiative to link Migrant Workers to sustainable micro finance programmes to provide micro loans for Micro Enterprises Development, Housing Construction loan schemes, Educational Loan Schemes for migrant workers’ children’s education.
“Yet in Sri Lanka we have failed to see this initiative either by the state banks or the private banks. This is an important area of financial inclusion which can create a very significant impact on the returning migrant workers or their families to sustainable economic activity for income generation,” opined Mr. Abeywickrema.
There are nearly over 1.5 Million Migrant Workers employed overseas, while this percentage is ever increasing, minimum by 10% annually, around 10% to 15% return back to the country. This group constitute a very good segment for Commercial Banks to include in their financial services, since they have already enjoyed a relationship with banks by virtue of money transfer. One of the significant qualities that you would see in Migrant Workers is that they are hard working, understands the benefit of economic success and they could be easily included in the financial services who in turn become loyal customers of the banks.
The role of technology to reach more people in more places was also highlighted by Mr. Abeywickrema. “Key challenges in extending financial services to under-served rural market is the high cost. Increasingly, technology is being viewed as key to a low-cost banking strategy for the rural market,” he said.

In rural areas, the transactions between various parties are predominantly cash based and are very low in value. If the current structure of the bank branches were to be used to cater to the need and requirement of the rural population, it would mean setting up a bank branch virtually in every village, Mr. Abeywickrema said.
The cost of such a large network would not justify the revenues generated from it. The challenge for banks is to innovate a low-cost delivery channel with a high outreach with flexibility. Technology can address these challenges and would be the main strategy in providing access to basic financial services for the rural community, he added.
It was pointed out that electronic commerce has its genesis in the banking sector. Among options to service the rural micro finance customers via through technology include Card based loan delivery system (Debit card, Credit card, Smart card), Smart Cards and Mobile phone based loan management system. “Micro credit card based microfinance could be a cost effective solution,” he said.
Millions for Millions

Mr. Abeywickrema said the unprecedented interest created globally for micro finance in the last decade, particularly in the last 7 years, is very significant. Major leadership initiatives in this direction has been taken by the world’s largest Commercial Bank, the Citi Bank. Citi Bank together with the Citi Group foundation have now taken major steps in developing micro finance as a commercial bank activity on a more sustainable and profitable way. They have not only confined their drive in North & South America but also in Asia & Africa and particularly in South East Asia.
One of the Institutions which has the exclusive franchise, particularly in Asia, is the Banking with the Poor Network, Asian Micro Finance Network representing 15 Asian Countries for which I am currently the Chairman of this organisation.

A wider focus of commitment in the last 7 years has seen global business magnets like Bill Gates & Bill & Melinda Gates Foundation allocating billions in capacity building, technology enhancement and funding in micro finance.

Micheal & Susan Dell Foundation established by founder of the largest computer manufacturer has allocated US$ 1.2 billion for capacity building and micro finance funding on a commercial platform. Pierre Omidyar founder of the eBAY, allocated billions from the foundation which he has created exclusively for micro finance funding and capacity building.
“With more and more global co-operation we begin to see that the lives of the people at the bottom of the pyramid can be economically strengthened and the quality of their lives can be enhanced through successful and an innovative micro finance programmes, if driven by the Commercial Banks. While banks feel the impact when competing for corporate and commercial customers, with the resources at their disposal, if they have the right vision and genuine interest in triple bottom line, by downscaling, the banks can on the long term upscale themselves with new frontiers in commercial banking,” Mr. Abeywickrama said.