WHY PRIVATE CAPITAL MATTERS: LINKING WITH BANKS TO EXPAND

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WHY PRIVATE CAPITAL MATTERSLINKING WITH BANKS
TO EXPAND ACCESS TO CAPITAL POLICY LESSONS
FROM INDIA, SO. AFRICA, AND THE U.S. John
Taylor President and CEO National Community
Reinvestment Coalition
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Title Subtitle
Presentation overview

• About NCRC (www.ncrc.org)
• Global Fair Banking Initiative
• Innovative policy in INDIA
• -- in SOUTH AFRICA
• -- in the UNITED STATES

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NCRC is the United States trade association for
over 600 local government, social community
economic development practitioners,
community-based credit unions, faith-based
institutions, non-profit housing development
organizations and others working to build wealth
for traditionally excluded populations.
Rev. Jesse Jackson
Federal Reserve Chairman Alan Greenspan -- at
NCRCs annual meeting
Americas leaders recognize and respect NCRCs
work. We now collaborate with more than 20
nations to expand planning and action toward
greater economic opportunity around the globe.
U.S. Senator Hillary Clinton
Chairman Alan Greenspan at NCRC Annual Meeting
www.ncrc.org
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• NCRCs Global Fair Banking Initiative
• AIM To provide a forum for collaboration
• on economic justice issues
• MISSION
• Influence and augment global fair banking
  patterns of the private financial sector
• Build Principles of Fair Access to Capital and
  Financial Services into national and
  international mandates for banks

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• Global Fair Banking/GFB -- ACTIVITIES
• 1. Collaborative planning
• 2. GFB listserve Sign up at
• lthttp//groups.yahoo.com/group/GlobalFairBankinggt
  
• 3. GFB conferences workshops
• 4. GFB website ltwww.globalfairbanking.orggt

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Ideal scenario for sustainable development for
excluded populations around the
globeMicrofinance PLUSGlobal Fair Banking!
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Newest challenge for MFI leaders

• Proven fact Microfinance works!
• Heavy investment already in MF Industry
• BUT Funders seek to end subsidy
• TIME OF TRANSITION Mergers, consolidations,
  even commercialization
• How can MF Industry access private capital
  without being forcedto compromise mission?

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THE CASE OF INDIA

• MFI market 260 million people
• 500 million un-banked people
• Credit need US9 billion
• Banks sanction only US400 million
• THE CHALLENGE Link with banking sector for a
  sustainable flow of credit, investment and
  financial services for excluded populations

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Microfinance benefits India

• Microfinance feeds vibrant local economies
• Government loans to MFIs and runs its own MF
  programs
• However - Government its agencies have limited
  outreach
• Innovations creative partnerships key to success

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HOW INDIAN GOVERNMENT REACHES MFIs RURAL POOR

• Cooperatives
• Rural branches of banks
• Non-banking financial institutions
• Government-funded public banks
• Differential rates of interest
• Government-issued credit cards

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LIMITATIONS OF GOVERNMENT PROGRAMS

• Government agency restrictions In order to
  make large numbers of small loans, they must be
  risk free
• Slow economy limits cash flow for loans
• Rampant corruption

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To reach massive population, COLLABORATION IS KEY

• By themselves, public banks MFIs unable to
  raise sufficient funds
• Must link to private sector banks to achieve
  sustainable finance on such a large scale

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BANK LINKAGE PROGRAM

• Successful model (small scale) now being expanded
  nationwide
• Potential MFI partners
• - 27 nationalized/public sector banks
• - 36 foreign banks in 5 largest cities
• - 1000 urban, rural cooperative banks
• - Thousands of non-banking financial institutions

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Potential constraint The limits to voluntarism

• Lack bank regulation to encourage private banks
  to invest in low-income rural communities
• Only a voluntary Fair Practices Code
• Need for legislation in India

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THE CASE OF SOUTH AFRICA
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History of limited access to finance

• In 2003, only 48 of population had a
  transactions account
• Only 49 had savings accounts
• Only 57 had a form of credit
• Only 42 had insurance

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• Virtual monopoly in the
• South African banking system
• Government limits banks to 4 pillars
• 1. Amalgamated Banks of South Africa/ABSA
• 2. Nedbank
• 3. First National Bank
• 4. Standard Bank

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Post-Apartheid Financial Sector

• Recent pending legislation to increase access
  open opportunities for the poor
• Financial Advisory Intermediary Services Act of
  2002
• Home Loan Mortgage Disclosure Act of 2000
• Banks Act of 1990 Amendment of 2000
• Mutual Banks Act of 1993 Amendment of 1999
• Dedicated Banks Bill of 2003
• Community Reinvestment Bill
• Financial Services Act

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CASE OF THE UNITED STATES
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Before effective law was created

• Despite existing law, lenders avoided whole
  communities
• Evidence became clear Access to credit key to
  renewing economies in low-wealth neighborhoods
• Government lacked resources to solve it all
• Consensus grew that private financial
  institutions must become partners for a fair
  economy

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In 1977, U.S. Congress passed the Community
Reinvestment Act

• Made illegal the practice of discrimination by
  banks on a neighborhood or geographic basis
• Required that safe sound credit be made
  available in a fair manner, regardless of
  class/class/gender

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The Mechanics of CRA

• Lending Test
• Investment Test
• Financial Services TestRating Scale
• 1. Outstanding
• 2. Satisfactory3. Needs to Improve
• 4. Substantial Non-Compliance

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Big Bank test(for banks with assets over 250
million)

• PERFORMANCE INDICATORS
• Lending activity
• Geographic activity
• Borrower characteristics
• Community Development Lending
• Innovative or flexible lending practices

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THE INVESTMENT TEST Banks With Assets gt 250
Million
PERFORMANCE INDICATORS
PERFORMANCE CONTEXT
The dollar amount of qualified investments
1. Demographic data on median income levels,
distribution of household income, nature of
housing stock, housing costs, and other data. 2.
Lending, investment, and service opportunities in
the banks assessment area(s). 3. The banks
product offerings and business strategy. 4. The
institutional capacity and constraints, including
the size and financial condition of the bank, the
economic climate (national, regional, and local),
safety and soundness limitations, and other
considerations. 5. The banks past performance
and the performance of similarly situated
lenders. 6. The banks public file.
The innovativeness or complexity of the qualified
investments
CRA RATING ON INVESTMENT TEST Outstanding
High Satisfactory Low Satisfactory Needs to
Improve Substantial Noncompliance
The responsiveness of the qualified investments
to credit and community development needs
The degree to which the qualified investments are
not routinely provided by private investors
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More Mechanics of CRA

• CRA Public Evaluations
• Lending Data
• Public Hearings on Mergers

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CRAs Impact
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Measuring CRA SUCCESS

• CRA has encouraged collaboration between banks
  community groups (NGOs) across the U.S. CRA
  Agreements
• Lending to low/moderate-income borrowers way up
• Minority homeownership rose over 200 in 10 years
• Huge growth in of NGOs funded by banks to serve
  low-wealth populations

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Measuring CRA SUCCESScontinued

• Small business micro-loans to woman
  minorities is up across the U.S.
• Investments now in the 10s of billions of U.S.
  dollars
• Traditionally poor neighborhoods recovering
  rapidly in some instances with unwanted
  gentrification
• Multiple studies confirm CRA benefits
• CRA lending has proven to be safe, sound and
  profitable

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Steady Increase in CRA Commitments (in
millions)
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Distribution of bank commitments by category
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CRA Challenges
Globalization of banking can result in safety
soundness issues, as well as less bank loyalty to
local communities Hybrid financial
institutions, with predatory or extortionist
lending practices strip assets Financial
education is also key to success in helping poor
people build wealth
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In conclusion

1. Critical importance of understanding the role of
   private sector capital in building communities
2. Need laws regulations that encourage and
   support banks to collaborate with MFIs and other
   NGOs to achieve outreach
3. As finance goes global, NGOs must also organize
   across borders to achieve innovative and
   collaborative strategies for combating poverty
   and exclusion
4. WE INVITE YOU TO JOIN US to help get the
   framework right for the global financial sector

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Thank youPlease contact me at
ltjtaylor_at_ncrc.orggt