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Week two presentation

  1. 1. Microfinance 101: Week Two<br />Introduction to Microfinance Institutions<br />Robert Gailey, Point Loma Nazarene University<br />WELCOME!<br />
  2. 2. Outline for Tonight <br />Introduction of Mr. Rivera – learning about his business<br />Introduction of new participants<br />Review from last week<br />How are MFIs different from other traditional financial services available to poor people?<br />How are MFIs different from traditional relief?<br />How are MFIs different from traditional banking? Inspiration from Sam Daley-Harris<br />Exploring interest rates and key financial metrics for MFIs<br />Scope of impact - Microcredit Summit Report and Mix Market<br />A few important debates in the industry<br />Important books and websites<br />Outline of remaining weeks of class<br />Question Time<br />2<br />
  3. 3. Introductions – Any New People? <br />State your name<br />Your institutional affiliation if you have one<br />Your first exposure to microfinance<br />What you hope to get out of the course<br />3<br />
  4. 4. Review from last week<br />4<br />Why do people need financing?<br />What things/events do people finance?<br />What mechanisms exist for people to access financing?<br />
  5. 5. How is an mfi different from: <br />Traditional banking?<br />5<br /><ul><li>Typical financial services available to poor
  6. 6. Traditional Relief?</li></li></ul><li>6<br />How Microfinance Is Different: Formal Banks vs MFIs<br />Formal banks<br /><ul><li>Offer financial services to non-poor people
  7. 7. Make large capital loans
  8. 8. Requires significant physical collateral
  9. 9. Expect clients to come to them
  10. 10. Wealthy, literate men gain greatest access
  11. 11. Clients are viewed in profit terms mostly</li></ul>Microfinance institutions (MFIs)<br /><ul><li>Offer financial services to poor people excluded from banks
  12. 12. Make small capital loans
  13. 13. Leverage social guarantees instead of physical collateral
  14. 14. Bring the bank to the clients
  15. 15. Poor, illiterate women are primary targets for services
  16. 16. Focus is on building the dignity and success of clients</li></li></ul><li>7<br />How Microfinance Is Different: Gifts vs Loans<br />Grant Programs<br /><ul><li>Funds used once
  17. 17. Projects rely on continued giving
  18. 18. Often discourages savings and business planning
  19. 19. Reaches few poor people
  20. 20. Activities are limited by donations
  21. 21. Fosters dependency</li></ul>Microfinance Institutions<br /><ul><li>Funds recycled to help multiple times
  22. 22. Builds a sustainable institution
  23. 23. Rewards savings and business planning
  24. 24. Reaches many poor people
  25. 25. Can be financed by loans and client savings
  26. 26. Rewards initiative to work</li></li></ul><li>Key terms and definitions<br />Financial<br />Interest rate (flat or declining):Flat – same amount is paid each period. Declining –amount paid in interest decreases as amount owed (principle) decreases.<br />Operational Expenses: Salaries, electricity, vehicles, equipment, etc.<br />Costs of capital: Currency devaluation, inflation, loan default, & interest paid on borrowed funds.<br />Savings Balance: Total amount clients have in savings – what is owed back to clients by the MFI.<br />Portfolio Outstanding: Amount of money out in loans that is not yet repaid.<br />
  27. 27. Key terms and definitions<br />Financial<br />Income: What comes in for products or services.<br />Profit: Generating something above what it costs you. Revenue exceeds expenses.<br />Subsidy: Anything which doesn’t cover its costs and must be covered by other sources (grants, donations, free labor, etc.)<br />
  28. 28. Key terms and definitions<br />Institutional Health<br />Repayment Rate (on-time and overall): How much is paid on-time and eventually.<br />Arrears: How much is due but has not yet been paid.<br />Portfolio at Risk: Value of portfolio outstanding that is in arrears.<br />Loan Loss (Default rate)/[Loan loss reserve]: How much of the loan portfolio is written off or how much is set aside to write off <br />
  29. 29. Key terms and definitions<br />Institutional Health<br />Operational Self-Sufficiency: Income/Operating expenses (+ costs of capital)<br />Financial Self-Sufficiency: Income/Operating expenses + costs of capital (+ implicit subsidies).<br />Efficiency: Income up and/or expenses down<br />
  30. 30. Setting the Interest Rate<br />Here is a formula that can be used by an MFI in order to determine the appropriate interest rate:<br /> <br />R = AE + LL + CF + K –II<br /> 1-LL<br />Where R is the interest rate, AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization rate, and II is investment income.<br />12<br />Or, use my friend’s back-of-the-napkin excel program:<br />
  31. 31. Setting the Interest Rate <br />However, in practice, MFIs usually do not set their rates based on this formula, but rather based on what the interest rates of other MFIs and lenders in an area are charging and what the operational expenses of the MFI are.<br /> <br />MFIs charge interest for at least five reasons:<br />To cover operating costs of administering loans (salaries, rent, etc.).<br />To cover financial costs of the cash used for lending if borrowed by the MFI from an interest-charging resource or from another currency.<br />To cover the risk of loans not being repaid.<br />To cover the time-value of the money lent (inflation).<br />To grow their program/portfolio.<br />13<br />
  32. 32. Useful Websites<br /> Microfinance Gateway: http://www.microfinancegateway.org/p/site/m/<br /> Microcredit Summit: http://www.microcreditsummit.org/<br />MixMarket: http://www.mixmarket.org/<br /> Microfinance Focus: http://www.microfinancefocus.com/<br /> Microfinance Transparency: http://www.mftransparency.org/<br /> PLNU Microfinance Club Blog: http://plnumicrofinanceclub.blogspot.com/<br />14<br />
  33. 33. Important debates<br />Savings-led versus credit-led<br />Financial services only or combining with health/education services?<br />Who owns the bank – organizations or clients?<br />Whether to become a formalized, regulated institution or stay informal<br />To stay non-profit or turn into a for-profit<br />How transparent to make one’s interest rates<br />15<br />
  34. 34. Rutherford (2000 + Summer 2009)The Poor and Their Money<br />16<br />
  35. 35. Armendariz and Morduch (2007)<br />17<br />
  36. 36. Collins, et al. (2009) Portfolios of the Poor<br />18<br />
  37. 37. Milway (2008) One Hen<br />19<br />
  38. 38. Outline for Rest of Course <br />Week 3: Focus on local microfinance institutions – International Rescue Committee, Accion, CDC Finance – introduction and information<br />Week 4: Hearing from the clients, clubs, and investors – meet staff and clients from La Maestra, college clubs, and San Diego Microfinance Alliance, and local individuals who are invested in microfinance<br />20<br />
  39. 39. Concluding Remarks<br />Questions/Remarks<br />Please turn in your tags<br />Come hungry next week – Two clients of CDC – El Pollo Grill for dinner and Sweet Dreams for interview<br />21<br />