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An introduction to microfinancing as a developmental tool.

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  • How many of you in here aspired to start or own your own company? Can you imagine building your company off of just $10? How about with no modern technology, capital savings, research or target markets? I know you all have seen or spent a ten dollar bill before but today I want you to look at it in a different way. What was the last thing you bought for $10? Think back to what you ate for lunch yesterday, did anything you ate cost less than $1? Everyday billions of people are doing business—roughly 154 million of them are building their business off of a $10 investment while they themselves struggle to survive off of $1 dollar a day. Welcome to Microfinancing.
  • The act of loaning to the poorest people in the world just $10-$50 so they can begin to build a business.
  • Founded by Muhammad Yunus Donation of $27 to 42 poor female bamboo stool makers
  • * Define normal financial institutions: large and small government lending agencies and commercial banks.
  • The dreams of the poor. The poor have dreams too Unsafe walking to school Had to care for a siblings
  • Small loans do not allow MFIs to return a large enough profit to sustain their company Low interest rates are required to service the poor but again does not allow a large enough profit for the MFI to work efficiently As discussed previously, there are extremely high accessibility costs which raise the cost of operating an MFI even more Loan risks are higher because there is really no way of screening an individual therefore defaults on loans harm MFIs just like regular banks MFIs must take time to establish a relationship with the poor so they will trust them If an MFI moves to a ‘for profit’ establishment, they lost much credibility and trust with the community which causes them to lose clients Solutions: Most MFI’s main goal is on returning a profit Without a return in profit the money cannot be re-invested and used to help more clients Most MFIs rely on grants from supporting organizations, government subsidies, grants from the government and support from organization such as the World Bank and the IMF (FDI)
  • The sheer numbers of the microfinancing world exemplify its success but how does microfinance work as a poverty alleviation tool? Yes, microfinance increases capital which increases labor and inturn increases capital in the community. Specifically, and most importantly, microfinance allows individuals and families alike to become self-sufficient, independent, proud working individuals who together create cash flow in their economy and cause their communities to be lifted out of poverty.
  • Microfinance

    1. 1. By Emily Zender & Suhn Lee “ G ive a man a fish, he eats for a day. Teach a man to fish, he eats for a lifetime.” Chinese Proverb
    2. 2. Microfinancing <ul><li>The act of providing loans to the poorest people in the world typically $10-$50 </li></ul><ul><ul><li>Lending </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Savings Accounts </li></ul></ul><ul><ul><li>Leadership Training </li></ul></ul>
    3. 3. History of Microfinance <ul><li>First Microfinance Institution (MFI) </li></ul><ul><ul><li>Grameen Bank 1976 </li></ul></ul><ul><ul><li>Founded by Muhammad Yunus </li></ul></ul><ul><ul><li>Today—Total Number of Branches: 2481 </li></ul></ul><ul><ul><li>Today—Number of members: 7,970,616 </li></ul></ul>
    4. 4. Abandoned By Normal Financial Institutions <ul><li>Economic Scholar Jeffery Sachs: </li></ul><ul><li>“ The extreme poor are chronically hungry, unable to access health care, lack the amenities of safe drinking water and sanitation, cannot afford education…and perhaps lack rudimentary shelter…and basic articles of clothing, such as shoes.”’ </li></ul>1billion people live in extreme poverty, struggling to survive every day. An additional 1.5 billion people are classified as “poor” lacking the basic necessities to live Over 1/6 of humanity currently lives in extreme poor
    5. 5. The Extreme Poor The extreme poor are considered “unbankable” and left to survive in the slums
    6. 6. Barriers to Entry <ul><li>Lack of Research </li></ul><ul><li>High interest rates </li></ul><ul><li>Market Sector Divide </li></ul><ul><li>Credit Limitability </li></ul><ul><li>Screening Loan Applicants </li></ul><ul><li>Monitoring Borrowers </li></ul><ul><li>Writing/Enforcing contracts </li></ul><ul><li>Poor Infrastructure </li></ul><ul><li>Transportation/Communication Obstacles </li></ul><ul><li>High Literacy Levels </li></ul>Microfinancing vs. Normal Financial Institutions Accessibility. Credibility. Sustainability .
    7. 7. Accessibility: Geographical <ul><li>Poor Infrastructure </li></ul><ul><li>Little-No Technology </li></ul><ul><li>Frail Electricity </li></ul><ul><li>Lack of Research </li></ul><ul><li>Little Transportation </li></ul><ul><li>Lack of Education </li></ul><ul><li>Low Literacy Rates </li></ul><ul><li>Government Corruption </li></ul><ul><li>Disease </li></ul><ul><li>Number of MFIs by Country </li></ul><ul><li>Asia: 1,727 </li></ul><ul><li>Africa: 935 </li></ul><ul><li>Latin America/ </li></ul><ul><li>Caribbean: 614 </li></ul>Largest Amount of MFIs
    8. 8. Credibility MFI collective default rates are approximately 3% beating out default rates of the United States <ul><li>Obstacles: </li></ul><ul><ul><li>No past credit history </li></ul></ul><ul><ul><li>Risky borrowers </li></ul></ul><ul><ul><li>High Interest Rates </li></ul></ul><ul><ul><li>No borrowing experience </li></ul></ul><ul><ul><li>Solutions: </li></ul></ul><ul><ul><li>Group Lending </li></ul></ul><ul><ul><li>Individual Lending </li></ul></ul>
    9. 9. <ul><li>Group lending </li></ul><ul><ul><li>Groups consist of 3-8 members </li></ul></ul><ul><ul><li>8-20 groups per community </li></ul></ul><ul><ul><li>Each member runs a microenter pr ise </li></ul></ul><ul><li>Individual Lending </li></ul><ul><ul><li>Lending directly to an client </li></ul></ul><ul><ul><li>Must have credit history </li></ul></ul><ul><ul><li>Not all MFIs have individual lending </li></ul></ul><ul><ul><li>Collateral </li></ul></ul><ul><ul><li>Incentives to repayment </li></ul></ul>Lending to the Poor <ul><ul><li>MFI Success: </li></ul></ul><ul><ul><li>Lowers interest Rates </li></ul></ul><ul><ul><li>Increases credibility </li></ul></ul><ul><ul><li>Increases payback returns </li></ul></ul><ul><ul><li>Encourages responsible borrowing </li></ul></ul>“ Safe customers will more likely group together with other safe customers, leaving the risky types to form groups by themselves” (Sengupta and Aubuchon 2006, 12).
    10. 10. Business Sustainability <ul><li>Problems : </li></ul><ul><li>Small loans </li></ul><ul><li>Low interest rates </li></ul><ul><li>High accessibility costs </li></ul><ul><li>Credibility Costs </li></ul><ul><li>Client relations </li></ul><ul><li>Solutions: </li></ul><ul><li>Emphasis on returning a profit </li></ul><ul><li>Grants </li></ul><ul><li>Subsidies </li></ul><ul><li>Other government support </li></ul><ul><li>FDI </li></ul>“ philanthropy is not a requirement of microfinance—not all MFIs are non-profit organizations” (Sengupta and Acubuchon 2008, 15)
    11. 11. Microfinance: Poverty Alleviation Tool? <ul><li>Quick Facts </li></ul><ul><li>There are approx. 3,552 MFIs worldwide </li></ul><ul><li>There are currently154,825,825 serviced clients </li></ul><ul><li>68% of clients are classified as extreme poor </li></ul>Helping the poor, help themselves Impact: Microfinance loans increase capital which increases labor for themselves and sometimes others and gives them the opportunity to access technology
    12. 12. <ul><li>Accion. “Meet Microentrepreneurs from Africa.” Accion International.2007. http://www.accion.org/Page.aspx?pid=1373 </li></ul><ul><li>Ghatak, Maitreesh. “Group Lending, Local Information and Peer Selection .” Journal of Development Economics. Chicago, IL. 1999. </li></ul><ul><li>Daley-Harris, Sam. “State of the Microcredit Summit Campaign Report 2009.” 2009 Microcredit Summit Campaign. Washington, DC. 2009. </li></ul><ul><li>Leonard, Herman & Epstein, Marc & Tritter, Melissa. “Opportunity International: Measurement and Mission.” President and Fellows of Harvard College. Boston, MA. 2006. </li></ul><ul><li>Sachs, Jeffery. “The End of Poverty: Economic Possibilities for Our Time.” Penguin Press. (2005) </li></ul><ul><li>Sengupta, Rajdeep & Aubuchon, Craig. “Microfinance Revolution: An Overview.” The Federal Reserve Bank of St. Louis. 2008. </li></ul><ul><li>Young, Robin & Drake, Deborah. “Banking at the Base of the Pyramid: A Microfinance Primer for Commercial Banks.” Development Alternatives, Inc. 2005. </li></ul>Further Reading and References :
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