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Poverty, Development, Microfinance-an introduction to Microfinace


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Poverty, Development, Microfinance-an introduction to Microfinace

  1. 1. <ul><li>Poverty, Development & Microfinance: Nexus, Praxis and the Internet </li></ul><ul><li>An Introduction to Microfinance </li></ul><ul><li>Guy Winship </li></ul><ul><li>Global Leadership Program, Macquarie University </li></ul><ul><li>Tuesday 11 th May 2010 </li></ul>
  2. 2. OVERVIEW <ul><li>Demand side issues: who are “the poor”?; how many of them are there?; why do poor people in developing countries need financial services? And what type of financial services do they need? </li></ul><ul><li>Supply-side issues: How to best provide financial services to the poor? Who is best placed to provide these services? What are the costs and risks involved in providing such services? </li></ul><ul><li>Use of the internet (Kiva & Good Return): how it (generally) works; does this link supply & demand? What are the costs & risks? Are there any transparency issues? </li></ul><ul><li>DISCUSSION & QUESTIONS </li></ul>
  4. 4. MICROCREDIT & MICROFINANCE <ul><li>Microcredit means providing poor people with very small loans. They may use these loans to help them engage in productive activities or grow their small businesses, or they may use them for their consumption needs (such as a wedding, housing improvements, school fees or food). </li></ul><ul><li>The term microfinance is used to cover the broader range of financial services, including savings, loans, insurance and transfers of money. “Micro” simply refers to the size of the amounts involved. </li></ul>
  5. 5. HOUSE-HOLD INCOME & EXPENDITURE PATTERNS <ul><li>Typical activities in the poorest areas of Asia </li></ul><ul><li>Seasonality </li></ul><ul><li>Vulnerability to economic shocks – how to protect from these shocks? </li></ul><ul><li>Potential to raise income – how to promote livelihood development? </li></ul>
  6. 6. FINANCIAL EXPENSES Life Cycle Events <ul><li>Birth </li></ul><ul><li>Food and clothing </li></ul><ul><li>Education </li></ul><ul><li>Marriage </li></ul><ul><li>Funeral </li></ul><ul><li>Recurrent festivals </li></ul>Emergencies Investment Opportunities <ul><li>Small business investments </li></ul><ul><li>Purchasing land and other productive assets </li></ul><ul><li>Home improvement </li></ul><ul><li>Sickness </li></ul><ul><li>Injury </li></ul><ul><li>Theft </li></ul><ul><li>Natural disasters </li></ul>
  7. 7. HOW DO PEOPLE PAY FOR THESE EXPENSES? <ul><li>Through savings : </li></ul><ul><li>Money in bank </li></ul><ul><li>Money at home </li></ul><ul><li>Rotating credit </li></ul><ul><li>Animals </li></ul><ul><li>Jewelry / assets </li></ul><ul><li>Through Insurance : </li></ul><ul><li>of Life and health, of livestock and crops, </li></ul><ul><li>of home and other assets </li></ul><ul><li>Through loans </li></ul><ul><li>From banks </li></ul><ul><li>From relatives </li></ul><ul><li>From money lender </li></ul><ul><li>Through Payments: </li></ul><ul><li>Usually from relatives working ion another city or country; </li></ul><ul><li>3 main issues are: Safety; Cost; & Speed. </li></ul>
  8. 8. DIFFERENT FINANCIAL SERVICES FOR DIFFERENT RISKS Very Large Small Certain Highly Uncertain Degree of Uncertainty Relative Loss / Cost Life Cycle Events Death Disability Health Property Mass, Co-variant Source : Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part I. Flexible Savings and Credit Insurance Flexible Savings Partial protection
  9. 9. The use of microfinance as a strategy to overcome poverty Physical Capital Natural Capital Financial Capital Social Capital Human Capital Sustainable Livelihood
  10. 10. ADDRESSING FINANCIAL NEEDS: PROTECTIONAL STRATEGIES FOR THE VULNERABLE POOR <ul><li>Access to safe savings services is of prime importance - this enables consumption smoothing </li></ul><ul><li>Savings, small loans, insurance and remittance services can provide protection against financial shocks </li></ul><ul><li>Solidarity group activities increase the social capital of vulnerable people </li></ul>
  11. 11. FINANCIAL NEEDS: PROMOTIONAL STRATEGIES FOR THE ECONOMICALLY ACTIVE <ul><li>Access to appropriate financial services, together with training and business support, assists people in the transition from traditional subsistence or income-generating activities to more growth-oriented microenterprises </li></ul><ul><li>NFE approaches to financial literacy, economic awareness and social empowerment enhance the effectiveness and sustainability of MF activities </li></ul><ul><li>MFIs depend upon the health of their clients for their own viability </li></ul>
  12. 12. WHY ARE SAVINGS AS IMPORTANT AS CREDIT? <ul><li>Credit is a useful way to save but can be expensive, inflexible and inaccessible </li></ul><ul><li>Saving safely provides poor people with a cushion against shocks </li></ul><ul><li>Saving may be more important than credit in helping raise incomes and in reducing risk </li></ul>When poor people have a choice, they choose to save far more often than they choose to borrow
  13. 13. INTEGRATING MICROFINANCE AND EDUCATION <ul><li>Savings and credit group meetings provide an ideal venue for promoting educational messages because they are: </li></ul><ul><li>Regular – usually meeting weekly, fortnightly or monthly. </li></ul><ul><li>Self-forming – and therefore contain elements of trust, solidarity and social cohesiveness. </li></ul><ul><li>Sustainable – because clients attend out of self-interest. They are not dependent upon project or government funding. </li></ul>
  14. 14. HOW DO POOR PEOPLE PROTECT THEMSELVES FROM RISK? Preparation Coping Prevention and Avoidance <ul><li>Careful sanitation, for example </li></ul><ul><li>Identifying business opportunities </li></ul><ul><li>Saving </li></ul><ul><li>Accumulating assets (e.g. livestock) </li></ul><ul><li>Buying insurance </li></ul><ul><li>Educating children </li></ul><ul><li>Taking emergency loans </li></ul><ul><li>Depleting savings </li></ul><ul><li>Selling productive assets </li></ul><ul><li>Defaulting on loans </li></ul><ul><li>Reducing spending </li></ul>
  15. 15. OTHER MICROFINANCE SERVICES <ul><li>Insurance - direct provision of viable services is complex. May be better to link poor clients with existing providers. </li></ul><ul><li>Transfer payments / remittances – fast and cheap remittance services are particularly valuable for those whose family members engage in migrant labour </li></ul>Health Insurance For FINCA’s Clients FINCA, an NGO operating in Uganda, acts as an agent for a formal healthcare plan to bring health insurance to its clients.
  16. 16. WHAT FINANCIAL SERVICES POOR PEOPLE WANT (IN ORDER OF PRIORITY) <ul><li>1. Security of savings </li></ul><ul><li>2. “Good” access to savings and loans </li></ul><ul><ul><li>Convenient location </li></ul></ul><ul><ul><li>Convenient times </li></ul></ul><ul><ul><li>Minimal paperwork </li></ul></ul><ul><li>3. Appropriate design </li></ul><ul><li>Regular, small deposits / payments </li></ul><ul><li>Small variable amounts </li></ul><ul><li>Quick access </li></ul><ul><li>4. “Good” interest rates (more on this later) </li></ul>
  17. 17. <ul><li>So, what are the Problems and risks in accessing financial services for poor households? </li></ul><ul><li>Traditional financial institutions not aimed at the poor – why not? </li></ul><ul><li>Savings: </li></ul><ul><li>Money in bank – may be difficult to access </li></ul><ul><li>Money at home – risk of theft, easy to spend </li></ul><ul><li>Rotating credit – rigid amounts and timing </li></ul><ul><li>Animals – risk of death, sickness, have to convert to cash , change in value </li></ul><ul><li>Jewelry/assets – risk of theft or loss, have to convert to cash, change in value </li></ul>
  18. 18. PROBLEMS AND RISKS FOR POOR HOUSEHOLDS CONT’D <ul><li>Loans </li></ul><ul><li>From banks – can be difficult to access, difficult procedures, collateral requirements, credit history </li></ul><ul><li>From relatives – not always available </li></ul><ul><li>From money lender – expensive, not always available </li></ul><ul><li>Insurance </li></ul><ul><li>Limited availability and access </li></ul>
  19. 20. SUPPLY-SIDE ISSUES <ul><li>Why use of microfinance institutions is best: sustainability & outreach </li></ul><ul><li>Three main costs / risks faced by financial institutions: </li></ul><ul><ul><li>Cost of delinquency – losses arising from loans not being repaid </li></ul></ul><ul><ul><li>Transaction costs – the expenses incurred in providing products & services </li></ul></ul><ul><ul><li>Cost of capital – costs associated with funding (e.g. savings, wholesale finance, equity, securitisation etc) </li></ul></ul><ul><li>Each of these has implications in the microfinance context </li></ul>
  20. 21. INTEREST RATES <ul><li>Sustainability in the provision of services to large numbers of poor only possible if income covers costs </li></ul><ul><li>Equity in access also an issue </li></ul><ul><li>Costs for microfinance institutions are based on same three legs as other financial institutions, but MFIs costs differ from those of commercial banks, especially with regard transaction costs </li></ul><ul><li>Access main issue, so usually need to compare with rates of village money-lenders </li></ul><ul><li>Affordability & rates of return on SMMEs </li></ul><ul><li>Institutional efficiencies and interest rates </li></ul>
  21. 22. USING ITS CAPITAL, A BANKING INSTITUTION CAN BORROW TO ACQUIRE ASSETS, INCLUDING LOANS TO CLIENTS. THE BALANCE SHEET SHOWS HOW THIS IS DONE… Savings Debt Other people’s money “ Our” money Performing assets Other Assets Assets = Liabilities + Net worth (Capital)
  22. 23. EXAMPLE OF INTEREST SENSITIVITY Balance Sheet: ASSETS Loans $1,000,000 LIABILITIES Savings $ 600,000 EQUITY Owners/members shares $ 400,000
  25. 26. SUPPLY-SIDE ISSUES: INSTITUTIONAL ASPECTS <ul><li>Understanding the country context: </li></ul><ul><ul><li>Legal: mainly interest rate restrictions, government support, and contractual enforcement </li></ul></ul><ul><ul><li>Financial sector regulation and supervision: </li></ul></ul><ul><ul><ul><li>Need for regulation </li></ul></ul></ul><ul><ul><ul><li>Costs of supervision & being supervised </li></ul></ul></ul><ul><ul><li>Economic and social environment: </li></ul></ul><ul><ul><ul><li>Economic stability </li></ul></ul></ul><ul><ul><ul><li>Poverty levels </li></ul></ul></ul><ul><ul><ul><li>Government policies </li></ul></ul></ul>
  26. 27. INSTITUTIONAL ASPECTS CONT’D <ul><li>Client tracking and Impact assessment: </li></ul><ul><ul><li>Quantitative & qualitative approaches </li></ul></ul><ul><ul><li>Need to ensure positive change in lives of beneficiaries </li></ul></ul><ul><ul><li>Ensure targeting poorest – danger of “Mission drift” </li></ul></ul><ul><ul><li>“ Double” & “triple” bottom line reporting </li></ul></ul><ul><li>Risks facing MFIs: </li></ul><ul><ul><li>Delinquency risks </li></ul></ul><ul><ul><li>Management / governance & operational risks </li></ul></ul><ul><ul><li>Liquidity risks </li></ul></ul><ul><ul><li>Interest rate & foreign exchange risks </li></ul></ul><ul><ul><li>Environmental risks, some common with clients </li></ul></ul>
  27. 28. WHAT CAN MICROFINANCE OFFER? <ul><li>Sustainable services </li></ul><ul><li>Products that are appropriate to the needs of clients </li></ul><ul><li>Flexible responses </li></ul><ul><li>Local ownership and/or control of resources </li></ul><ul><li>How? </li></ul><ul><li>Usually through mobilization of savings and credit groups whose members guarantee each other’s loans. This reduces costs and risk to the lender. </li></ul><ul><li>A range of models exist </li></ul>
  28. 29. MICROFINANCE MODELS <ul><li>Main distinction in approaches is between minimalist versus integrated models; should the agency provide financial services only, or should these provided together with other services? </li></ul><ul><li>Minimalist models: </li></ul><ul><ul><li>Main advantages are: </li></ul></ul><ul><ul><ul><li>Increased efficiencies (viz lower cost to income ratio) </li></ul></ul></ul><ul><ul><ul><li>Improved effectiveness (greater & longer-lasting impacts on client beneficiaries) </li></ul></ul></ul><ul><ul><ul><li>Better risk management </li></ul></ul></ul><ul><ul><ul><li>Often a requirement by regulatory authority </li></ul></ul></ul><ul><ul><li>Main disadvantages: </li></ul></ul><ul><ul><ul><li>Ignores other needs of clients </li></ul></ul></ul>
  29. 30. <ul><li>Integrated models: </li></ul><ul><ul><li>Main advantages: </li></ul></ul><ul><ul><ul><li>More holistic developmental approach, recognises diverse needs of clients </li></ul></ul></ul><ul><ul><li>Main disadvantages: </li></ul></ul><ul><ul><ul><li>Often has negative affects on delinquency </li></ul></ul></ul><ul><li>Which approach works better depends on context & situation </li></ul><ul><li>Within minimalist approach there are various models that are typical… </li></ul>
  30. 31. TYPICAL MICROFINANCE MODELS <ul><li>Microfinance institution model </li></ul><ul><li>A credit officer from the institution visits a village, collects individual’s savings and distributes their loans through solidarity groups, mutual guarantees apply. </li></ul><ul><li>+ good management systems </li></ul><ul><li>+ can leverage external resources </li></ul><ul><li>requires suitable regulatory environment </li></ul><ul><li>not usually owned by clients </li></ul>
  31. 32. TYPICAL MICROFINANCE MODELS <ul><li>Village bank model </li></ul><ul><li>A microfinance institution lends to a village bank. The village bank on-lends to individuals in the village according to its own rules and regulations. </li></ul><ul><li>+ lower costs than MFI model </li></ul><ul><li>+ can leverage external resources </li></ul><ul><li>+ local ownership and control (with support) </li></ul><ul><li>- Requires regulatory framework for MFI and village bank regulation </li></ul>
  32. 33. TYPICAL MICROFINANCE MODELS <ul><li>Cooperative or self-help group model </li></ul><ul><li>A local organisation is formed around savings and credit, it collects savings from its members and on-lends to its members. It may or may not have solidarity groups and mutual guarantees. </li></ul><ul><li>+ local ownership and control </li></ul><ul><li>+ all profits stay in the group </li></ul><ul><li>management capacity a big problem </li></ul><ul><li>May not be able to access external resources </li></ul>
  33. 34. CLIENT EMPOWERMENT & DISCIPLINE & RELATIONSHIP WITH NGO <ul><li>Whichever model is used Client discipline is important…simply in that poor people must take responsibility for their decisions, agreeing to and making on-time payment of principal and interest sufficient to cover the full cost of service. Without client discipline no microfinance program will be sustainable. </li></ul><ul><li>In practice this also means that clients are treated with respect, and often changes the relationship between the development agency and the client different from that in other developmental sectors: “client” versus “beneficiary” </li></ul>
  34. 35. 5 PRINCIPLES OF SUSTAINABLE MICROFINANCE <ul><li>Products and services must fit the needs and preferences of the clients </li></ul><ul><li>Streamline operations to reduce costs </li></ul><ul><li>Interest rates and fees must be able to cover all of your costs </li></ul><ul><li>Structure the program so that clients are motivated to repay loans </li></ul><ul><li>Promote institutional sustainability through capacity building </li></ul>
  35. 36. SELECTED ISSUES IN MICROFINANCE <ul><li>Funding: use of the internet in providing capital for micro-credit – examples of and . </li></ul><ul><ul><li>What do you think of these programs? </li></ul></ul><ul><ul><li>What do lenders think of these programs? Why? </li></ul></ul><ul><ul><li>What do borrowers think of these programs? Why? </li></ul></ul><ul><li>If time, can also discuss: </li></ul><ul><li>Over-indebtedness: what level of indebtedness is appropriate? How much debt is too much? Why? </li></ul><ul><li>Interest rates: what level of interest rates is appropriate for low income borrowers? Why? </li></ul><ul><li>Savings: do you agree poor people can save? Should they? Why? </li></ul>
  36. 37. SUMMARY <ul><li>Everyone needs access to financial services – even the very poor. </li></ul><ul><li>Savings are the most important service for most low income people. </li></ul><ul><li>Credit is not for everyone. People must be able to repay. </li></ul><ul><li>There are a range of MF models that can be used to provide these services, but need a supportive regulatory environment </li></ul><ul><li>Microfinance alone is not enough, the poor need a range of support services. </li></ul><ul><li>Internet provides opportunities to raise capital and to educate people on poverty issues </li></ul>
  37. 38. READINGS & REFERENCES: <ul><li>The Poor And Their Money by Stuart Rutherford, Oxford University Press, 2000 </li></ul><ul><ul><li>A good introduction to microfinance & an easy read. </li></ul></ul><ul><li>Sustainable Banking With The Poor: Microfinance Handbook by Joanna Ledgerwood, The World Bank, 1999 </li></ul><ul><ul><ul><li>A more detailed overview of the operation, methodologies, costs, risks and issues in providing microfinance services and products. </li></ul></ul></ul><ul><li>The Challenges of Market–led Microfinance by Guy Winship, Practical Action Publishing, 2007 </li></ul><ul><li>Written as a conversation with practitioners, this book discusses the issues facing microfinance institutions from an organisational and practitioner perspective. </li></ul><ul><li>Various websites: list at and </li></ul>