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Microfinance

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Microfinance basics, discussion of social business modelling

Microfinance basics, discussion of social business modelling

Published in: Economy & Finance, Business

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  • 1. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Fundamental concepts in microfinance Theory and Practice
  • 2. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Review Session 4 • Fair Trade – Theory of Change – Grounded to bring about social and environmental impact – Labeling, branding : Creating a sense of exclusivity – Business Model – Consumers and market
  • 3. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Review Session 5 : Performance of Social Enterprise
  • 4. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Review Session 5 • SROI – Measuring the Theory of Change (social, public and financial returns) – Best when few KPIs – Lack of structure/template/ high subjectivity (--) – Managing stakeholders (++) – Gaining legitimacy
  • 5. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 SKS Microfinance Case • Discuss the role and compatibility of founders and professional CEO in this case? • Discuss the organizational stigma associated with SKS Microfinance? • Is for profit social business an Oxymoron? • Discuss the role of regulators when suicides were reported, what happened? • Should social business go for IPO?
  • 6. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013
  • 7. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013
  • 8. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Financial Services Pyramid
  • 9. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Poverty Pyramid
  • 10. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 What Is Microfinance? • Microfinance is the offer of financial & non-financial services to people excluded from the traditional banking system. The services are adapted to the needs of the target populations. FINANCEMICRO • Micro-entrepreneurs • Self-employed • Low income populations • Excluded populations • Business & educational loans • Savings • Micro-insurances • Remittances • Micro-entrepreneur training • Coaching & workshops on health, hygiene, etc.
  • 11. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Microfinance Theory of Change • Financial Inclusion – Provide Financial services to the marginalised – Protect the marginalised from loan sharks • Ethical Financial Practices – Low or zero collateral – Low interest rates • Additional services – Entrepreneurship training and consulting – Housing loan – Insurance services at low cost
  • 12. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Types of Financing • Debt Financing • Equity Financing
  • 13. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Why high interest rate? • Moral Hazard • Information Asymmetry
  • 14. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Different Microfinance Products • Cost of burial replacement costs, natural calamity …. (MF : Insurance) • Retirement plans, Health care plan..(MF…Pension plan, health insurance) • Equipment for agriculture activities, livestock, home upgrade.. (MF: Medium term) • Social obligations like Marriage, Festivals.. (MF: Short term) • Housings, Wells, Capital intensive enterprise (MF: Long term Loans) • Emergency loans like family disaster, natural calamity • Short term loans to meet daily/weekly needs Source: Insead case study 2009 (Santos and Anne Claire)
  • 15. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Activity 1 • In groups of 3-4, discuss the target segment for microfinance in Scandinavia? – Think about the background and the strata of people that are financially excluded in Scandinavia – Who do you think can be benefited from microfinance in Scandinavia? – What are their needs and how much microfinance loans can they have? Hint (Immigrants with no financial history)
  • 16. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Business Basics at the Base of the Pyramid… Akula (2008) • Scaling • Standardization of products and services • Adopt a profit oriented approach to signal commercial capital • Use of technology • Focus on volume
  • 17. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Building Social Business Models: Lessons from the Grameen Experience • Social Business Model – How products can be ‘servitised’ to serve the poor – Grameen Phone, Grameen Veolia, Grameen Danone (each using their own innovative ways to reach out to the poor)
  • 18. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Building Sustainable Hybrid Organizations : The Case Of Commercial Microfinance Organizations • How organizations can navigate competing logics?
  • 19. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Design a Microfinance Business Model • In a group of 3-4, discuss to design a microfinance business model? – Define the target customer/region – Target loan / person – Profit/Social business – Interest rate
  • 20. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Difference Traditional banking industry and Microfinance • Location • Salary • Stress • Interest Rate • Certainty about the future • Purpose, goals and values • Working hours, motivation • Outdoor time, real world impact • Working environment • Friends and Family Source: Kiva
  • 21. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Principles of Microfinance • Poor people need a variety of financial services, not just loans. • Microfinance is a powerful tool to fight poverty. • Microfinance means building financial systems that serve the poor. • Microfinance must pay for itself to reach large numbers of poor people. • Microfinance is about building permanent local financial institutions. • Microcredit is not the best tool for everyone or every situation. • Interest rate ceilings making it harder for poor people to get credit. • The role of government is to enable financial services, not to provide them. • Donor funds should complement private capital, not compete with it. • The key bottleneck is the shortage of strong institutions and managers. • Microfinance works best when it measures and discloses its performance.
  • 22. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Points Against Microfinance • High interest rates – How to decide the optimum interest rate? • Lack of legal protection for the borrowers and for the lenders • High operating costs and low margins • Lack of institutional structures, business framework, data, operating procedures
  • 23. 7th October 2013 S-ENT, Session 6, Anirudh Agrawal CBS 7th October 2013 Way Forward in Microfinance Study Fundamentals • Describe fundamental concepts in microfinance • Design client-focused services • Apply effective microcredit methodologies • Describe the effects of the local environment on microfinance Financial analysis and Risk Analysis • Read financial statements • Measure delinquency • Identify key financial factors • Identify effective interest rate practices • Measure financial viability Institutional Analysis • Gauge institutional viability • Strengthen relations between donors and microfinance institutions