Week two presentation

Microfinance 101: Week Two
Introduction to Microfinance Institutions
Robert Gailey, Point Loma Nazarene University
WELCOME!

Outline for Tonight
Introduction of Mr. Rivera – learning about his business
Introduction of new participants
Review from last week
How are MFIs different from other traditional financial services available to poor people?
How are MFIs different from traditional relief?
How are MFIs different from traditional banking? Inspiration from Sam Daley-Harris
Exploring interest rates and key financial metrics for MFIs
Scope of impact - Microcredit Summit Report and Mix Market
A few important debates in the industry
Important books and websites
Outline of remaining weeks of class
Question Time
2

Introductions – Any New People?
State your name
Your institutional affiliation if you have one
Your first exposure to microfinance
What you hope to get out of the course
3

Review from last week
4
Why do people need financing?
What things/events do people finance?
What mechanisms exist for people to access financing?

How is an mfi different from:
Traditional banking?
5
Typical financial services available to poor
Traditional Relief?

6
How Microfinance Is Different: Formal Banks vs MFIs
Formal banks
Offer financial services to non-poor people
Make large capital loans
Requires significant physical collateral
Expect clients to come to them
Wealthy, literate men gain greatest access
Clients are viewed in profit terms mostly
Microfinance institutions (MFIs)
Offer financial services to poor people excluded from banks
Make small capital loans
Leverage social guarantees instead of physical collateral
Bring the bank to the clients
Poor, illiterate women are primary targets for services
Focus is on building the dignity and success of clients

7
How Microfinance Is Different: Gifts vs Loans
Grant Programs
Funds used once
Projects rely on continued giving
Often discourages savings and business planning
Reaches few poor people
Activities are limited by donations
Fosters dependency
Microfinance Institutions
Funds recycled to help multiple times
Builds a sustainable institution
Rewards savings and business planning
Reaches many poor people
Can be financed by loans and client savings
Rewards initiative to work

Key terms and definitions
Financial
Interest rate (flat or declining):Flat – same amount is paid each period. Declining –amount paid in interest decreases as amount owed (principle) decreases.
Operational Expenses: Salaries, electricity, vehicles, equipment, etc.
Costs of capital: Currency devaluation, inflation, loan default, & interest paid on borrowed funds.
Savings Balance: Total amount clients have in savings – what is owed back to clients by the MFI.
Portfolio Outstanding: Amount of money out in loans that is not yet repaid.

Financial
Income: What comes in for products or services.
Profit: Generating something above what it costs you. Revenue exceeds expenses.
Subsidy: Anything which doesn’t cover its costs and must be covered by other sources (grants, donations, free labor, etc.)

Institutional Health
Repayment Rate (on-time and overall): How much is paid on-time and eventually.
Arrears: How much is due but has not yet been paid.
Portfolio at Risk: Value of portfolio outstanding that is in arrears.
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

Institutional Health
Operational Self-Sufficiency: Income/Operating expenses (+ costs of capital)
Financial Self-Sufficiency: Income/Operating expenses + costs of capital (+ implicit subsidies).
Efficiency: Income up and/or expenses down

Setting the Interest Rate
Here is a formula that can be used by an MFI in order to determine the appropriate interest rate:

R = AE + LL + CF + K –II
1-LL
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.
12
Or, use my friend’s back-of-the-napkin excel program:

Setting the Interest Rate
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.

MFIs charge interest for at least five reasons:
To cover operating costs of administering loans (salaries, rent, etc.).
To cover financial costs of the cash used for lending if borrowed by the MFI from an interest-charging resource or from another currency.
To cover the risk of loans not being repaid.
To cover the time-value of the money lent (inflation).
To grow their program/portfolio.
13

Useful Websites
Microfinance Gateway: http://www.microfinancegateway.org/p/site/m/
Microcredit Summit: http://www.microcreditsummit.org/
MixMarket: http://www.mixmarket.org/
Microfinance Focus: http://www.microfinancefocus.com/
Microfinance Transparency: http://www.mftransparency.org/
PLNU Microfinance Club Blog: http://plnumicrofinanceclub.blogspot.com/
14

Important debates
Savings-led versus credit-led
Financial services only or combining with health/education services?
Who owns the bank – organizations or clients?
Whether to become a formalized, regulated institution or stay informal
To stay non-profit or turn into a for-profit
How transparent to make one’s interest rates
15

Rutherford (2000 + Summer 2009)The Poor and Their Money
16

Armendariz and Morduch (2007)
17

Collins, et al. (2009) Portfolios of the Poor
18

Milway (2008) One Hen
19

Outline for Rest of Course
Week 3: Focus on local microfinance institutions – International Rescue Committee, Accion, CDC Finance – introduction and information
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
20

Concluding Remarks
Questions/Remarks
Please turn in your tags
Come hungry next week – Two clients of CDC – El Pollo Grill for dinner and Sweet Dreams for interview
21

Week two presentation

by San Diego Microfinance Alliance on Oct 13, 2010

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Week two presentation — Presentation Transcript