Microfinance

MICROFINANCE BY : FARIHA & ARSALAN

Microfinance objective Microfinance Features Microfinance Clients List of Microfinance Institutions MFI and Commercial banks Microfinance Globally and in Recession Funding of Microfinance Shortcoming of Microfinance SBP initiatives for Pakistani MFI Actions for Pakistani MFI

Microfinance 0bjectives…
low-income households‘: permanent access high quality financial services
to finance their income-producing activities, build assets
stabilize consumption
protect against risks
not limited to credit, but include savings, insurance, and money transfers.

Microfinance Features…
financial services : poor & low-income clients.
very small loan : unsalaried borrowers-collateral
include group lending and liability
pre-loan savings requirements
gradually increasing loan sizes

Examples OF Microfinance Features…
Micro Business Loan
Micro Agri Loan
Micro Assets Loan
Livestock Loan
New Micro Business Loan
Loan Amount : 10,000 - 40,000
Loan Tenure :3 – 24 Months
Loan Amount3, 000 – 5,000 Loan Tenure3 – 6 Months
PAK OMAN MICROFINANCE BANK

Microfinance clients…
Poor & low-income people
usually self-employed
Micro-entrepreneurs
near the poverty line, both above and below
Women : majority of clients.

Example of Microfinance clients TAMEER MICROFINANCE BANK

Institutions delivering microfinance?
MFIs started as not-for-profit organizations
MFIs are now organized as for-profit entities
Because: license from banking authorities to offer savings services.

Examples of Institutions delivering microfinance ?
Pakistan : Khushali Bank
India : SEWA Bank
Chile : BancoEstado
Mexico : CompartamosBanco

MFIs, Interest rates are highest?
administrative cost : making tiny loans is much higher in percentage terms than the cost of making a large loan.
Credit decisions for borrowers who have neither collateral nor a salary cannot be based on automated scoring
Microcredit market matures in a given country, administrative costs usually drop

Recession hits Microfinance GLOBAL FACTS, 20 TH MARCH 09
25% MFIs decreased lending
20% MFI reduced staff
37% MFI have reduced their growth plans
41% MFI have began charging higher interest rates
Cambodia, loan growth from 61% to 10%

Recession hits Microfinance
East Asia and the Pacific
KOREA
US$73 million in direct loans and guarantees to MFIs
MFIs in Korea should experience relatively lower liquidity

Eastern Europe and Central Asia
Mongolia
larger MFIs, successfully met the new requirements
less well-established MFIs may find this challenging

Latin America and the Caribbean
Colombia
region lags in terms of deposit-taking
removing restrictions on foreign lending and lowering interest rates

Middle East and North Africa
operate in highly regulated & insulated financial markets
we can expect less of an impact from the global financial crisis

South Asia
India
MFI , foreign lending restrictions to non-bank financial companies
Rupee depreciate to slow the outflow of capital

Recession hits Microfinance South Asia India

MFI funded by?
Debt
Deposits,
Equity

MFI funded by?
DEBT based:
depend upon fixed-income investment - greatest risk
less available debt capital & offered at higher interest rates
Foreign loans, requiring repayment in hard currency at a moment of devalued domestic currencies
leaving MFIs to bear the foreign exchange risk

MFI funded by?
DEPOSIT based:
Challenged by inflation, food and fuel price volatility
decrease in remittance flows
local currencies in developing countries lose value, clients will find it increasingly difficult to maintain savings levels
Deposits declines and non-performing loans increases - clients require additional capital to cover basic needs.

MFI funded by?
Equity-based
Initially , low default rates and strong profit margins
MFIs enjoyed higher net interest margins
Now , compressed NIMs & higher lending rates
Impact - pressure on profit margins and make microfinance less attractive to equity investors

Shortcomings of Micro financing
# 1
move toward deposit mobilization to increase funds for on-lending MFIs On donor assistance to grow, which though necessary at infancy stage is an unsustainable approach to long-term development. Dependent Is still young industry

# 2
will eventually impact cost of lending for MFIs and MFBs as they move towards commercial funding cost of borrowing is especially important in the current environment of the global financial crisis cost-efficiency

# 2

# 3
must also be strengthened to provide quality microfinance services. Human resource capacity deficiency exists for microfinance not only in the form offunding Resource

# 3

# 4
will have to be critically examined and addressed in order to make microfinance’s ability to fight poverty more meaningful. concerns over gender

# 5
Mexican banks are charging anyway from 50% to 120% annual interest on loans. lack of regulations

# 6
due to limited infrastructure and the complications of religious and political pressure; reaching remote areas

Facts about Pakistan till december 2008
MFI has 1.8 million customers
microfinance borrowers: 3 million by 2010 & 10 million by 2015.
Pakistan , leader in the Asian region in commercialized microfinance
first country - to introduce a comprehensive legal, regulatory, and supervisory framework for formal microfinance in Asia.

SBP initiatives for the Promotion of Microfinance
Sustainable cost-covering operating/business model;
2) Mobilize private domestic capital;
3) Build human resource systems.

4)
Financial Inclusion Program
aimed at eliminating market failures.
A £50 million program funded by the UK
for financial services for poor ,marginalized groups and for small enterprises

5 ) Branchless Banking Regulations -promote banking in remote areas using technology.
6 ) SBP encouraged microfinance institutions to transform into regulated entities

7)
SBP encouraged partnerships between the post office (PO) network and MFI
Post Offices, manages 4 million savings accounts
small accounts below Rs 10,000, through more than 12,000 branches.
There is scope for the Post Office and MF providers to join forces
with the MFI acting as intermediaries for funds raised by POs

8) International players including BRAC and ASA who have already started microfinance operations in Pakistan
9) Micro finance focal group - with an independent head and qualified staff

SBP ACTIONS FOR Microfinance
SBP in December’08 launched :
1) The Microfinance Credit Guarantee Facility
2) The Institutional Strengthening Fund; and
3) The Improving Access to Finance Services Fund

The Microfinance Credit Guarantee Facility
expected to increase the flow of credit to microfinance sector
Commercial banks are allowed options to undertake microfinance business directly and in partnership with MFIs by providing wholesale funds to them

The Microfinance Credit Guarantee Facility
standalone MF Branches, establishment of independent subsidiary MFB &linkage with NGO
build links between micro borrowers and formal financial institutions.
provide partial Guarantee to minimize the perceived risk premium by covering part of the losses incurred on funds made available to MFIs

The Institutional Strengthening Fund
build capacity of the microfinance sector
improving human resource quality, service delivery and increasing service availability to potential microfinance clients.
fund is established at the State Bank under the UK Government’s Financial Inclusion Program

The Institutional Strengthening Fund
generate on-lending resources through commercial sources, equity investments or deposit mobilization strategy
provide grants for employing cost reduction mechanisms

Improving Access to Financial Services
promote financial literacy
Capacity building and training of Government and regulatory authorities
training of financial services providers to promote expansion into rural areas; product and service innovation

Globally , according to a survey, still 80% of the investors have their money in MFIs.
Finally…
In Pakistan , SBP initiatives have strong
support of the industry simply because of the partnership we have with the Pakistan Micro Finance industry and network .

Microfinance

by arsal87

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