Poverty, Development, Microfinance-an introduction to Microfinace
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Poverty, Development, Microfinance-an introduction to Microfinace
- 3. THE WORLD IS POORER THAN WE THOUGHT – THE WORLD BANK
- 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. The use of microfinance as a strategy to overcome poverty Physical Capital Natural Capital Financial Capital Social Capital Human Capital Sustainable Livelihood
- 19. Â
- 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)
- 23. EXAMPLE OF INTEREST SENSITIVITY Balance Sheet: ASSETS Loans $1,000,000 LIABILITIES Savings $ 600,000 EQUITY Owners/members shares $ 400,000
- 24. EXAMPLE OF INTEREST SENSITIVITY CONT’D
- 25. EXAMPLE OF INTEREST SENSITIVITY CONT’D
- 39. THANK YOU! DISCUSSION – Q & A
Editor's Notes
- DEMAND-SIDE ISSUES: Who are the poor? People world-wide living on less than US$2/day (using 2005 PPP), with the very poor being taken as those living on less than US$1/day (2005 PPP). South Asia, East Asia and Pacific – over 932 million living under $1.25 a day (US purchasing power parity in 2005) So 66%- 2/3rds of the worlds poor live in our backyard.
- Outline cash flow patterns amongst rural farming folk – show on white board
- Poor people save all the time. Savings are often the only way poor people can manage to pay for a major life event, survive a natural disaster, or take advantage of a business opportunity. Life-cycle events (Predictable events) Life cycle events such as childbirth, marriage, and death cause poor people to require larger amounts of cash than are usually available in the household. Many of these needs can be anticipated, but can cause great anxiety. In Bangladesh and India, the dowry system makes marrying daughters an expensive business; in parts of Africa, funerals can be very costly; in many countries, recurrent festivals like Eid, Christmas, or Diwali can also be expensive. Emergencies (Unpredictable events) Emergencies create a sudden and unanticipated need for a larger sum of money than can normally be found at home. Personal emergencies include sickness or injury, the death of a bread-winner or the loss of employment, and theft or harassment; non-personal emergencies include events such as war, floods, fires, and cyclones or hurricanes. Opportunities As well as needs for spending large sums of cash, there are opportunities to do so, such as investing in an existing or new business, or buying land or other productive assets. Source: Stuart Rutherford, “The Poor and Their Money: An Essay about Financial Services for Poor People” (Institute for Development Policy and Management, University of Manchester, January 1999).
- Poor people save all the time. Savings are often the only way poor people can manage to pay for a major life event, survive a natural disaster, or take advantage of a business opportunity. Life-cycle events (Predictable events) Life cycle events such as childbirth, marriage, and death cause poor people to require larger amounts of cash than are usually available in the household. Many of these needs can be anticipated, but can cause great anxiety. In Bangladesh and India, the dowry system makes marrying daughters an expensive business; in parts of Africa, funerals can be very costly; in many countries, recurrent festivals like Eid, Christmas, or Diwali can also be expensive. Emergencies (Unpredictable events) Emergencies create a sudden and unanticipated need for a larger sum of money than can normally be found at home. Personal emergencies include sickness or injury, the death of a bread-winner or the loss of employment, and theft or harassment; non-personal emergencies include events such as war, floods, fires, and cyclones or hurricanes. Opportunities As well as needs for spending large sums of cash, there are opportunities to do so, such as investing in an existing or new business, or buying land or other productive assets. Source: Stuart Rutherford, “The Poor and Their Money: An Essay about Financial Services for Poor People” (Institute for Development Policy and Management, University of Manchester, January 1999).
- Two variables can be useful to identify and classify the risks households face: (1) the degree of uncertainty caused by the risk, and (2) the relative size of the loss. The uncertainty of a risk can be thought of in terms of three elements: if the risky event will occur, when it will occur, and how often it might occur. The loss or cost of a risky event can be one-time or ongoing. By positioning the risks faced by households along these two dimensions, it is possible to assess how well various risk management options protect low-income households against each type of risk. Credit and savings products offer low-income households a method for converting a series of small contributions into a large sum of money. Emergency loan funds offered by institutions, such as the Grameen Bank, Shakti Foundation, and Action Aid in Bangladesh, are good examples of providers reducing typical restrictions on credit products to provide more effective risk protection. Flexibility in the loan size and the repayment terms make these institutions’ products responsive to the risk management needs of their clients. However, credit and savings products cannot provide complete protection against risks resulting in a loss greater than what a household can save or repay. As the size of loss increases relative to a household’s expected future income, credit products become increasingly ineffective risk-management tools. Similarly, savings products offer only partial protection against risks causing large losses relative to household income. At this point, insurance becomes a more effective method of risk management. Insurance products aim to protect people from a low probability of catastrophic loss. By pooling the risks of many households, insurance products can potentially offer more complete protection against property, health, death, and disability risks at an annual cost that is within the household’s budget. However, insurance becomes a less effective risk management response as the degree of uncertainty and relative cost associated with a risk reach extreme levels. As a result, most mass, covariant risks, such as epidemics and natural disasters, are difficult to insure. This is especially true if an insurance provider has a relatively small customer base and operates in a contained geographic area. Some mass, co-variant risks can be insured if an insurer spreads the risk among a sufficiently large group of policyholders. By directly offering policies to people over a large, dispersed geographic area , insurers have successfully developed products that protect against natural disasters, such as hurricanes and earthquakes. However, where the expected frequency of occurrence of a mass, covariant risk cannot be reasonably predicted from historical records, or where a risk occurs often in the same region, such as flooding in Bangladesh, insurance will not be an economically viable solution for low-income households. Access to liquid savings deposits and aid from the international relief community are alternative sources for partial coverage against these risks. Source : Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part I, Primer on Insurance Principles and Products (Toronto: Calmeadow, 1999).
- How can access to financial services help the poor? An understanding of the livelihood context, the resources available, the demands on people’s lives and the strategies they use to manage these, are an important prerequisite that should inform the design of activities that seek to improve livelihoods. It may not always be possible, or appropriate, to attempt to provide the full range of support services required by a community, however it is important to be cognizant of the broader picture to ensure that a key ingredient of the recipe is not being neglected. If we fail to address to a key constraint then the impact of other interventions will be limited. World Ed programs typically have a focus on the human and social dimensions of the livelihoods framework, and to a lesser degree the natural/environmental aspects as well. What this thematic session is presenting are some strategies that can be used to address the financial, and the broader economic needs of the poor together with these other essential ingredients. Ultimately any holistic initiative that seeks to reduce poverty levels should recognize, and if necessary address, the financial and economic needs and goals of the poor. The needs often involve access to appropriate financial services The goals usually revolve around improvement of incomes
- If we are dealing with the poorest, who are highly vulnerable to periodic financial shocks, such as lack of food, the costs of illness, or an inability to meet other expenditure requirements, then protectional strategies are required. This involves assisting them to develop the assets required to achieve sustainable livelihoods. For these people, access to savings services is most important. Savings, and in some cases small loans that are within the capacity of the borrower to repay, can be used to smooth consumption patterns, in particular during the lean periods experienced by those dependent on seasonal or periodic incomes. Traditional forms of savings such as livestock and grain are useful -but are also highly vulnerable to loss or changes in price. Micro-insurance, be it of health, life or assets, can also protect the poor against sudden loss or misfortune. Money transfer services that are cheap and accessible are particularly useful to poor families who engage in itinerant labour.
- Promotional strategies, on the other hand, are focused upon increasing incomes. For those who have the skills, confidence, awareness and networks required to engage in productive enterprise, then loans - together with other inputs such as skills training and business support - can enable productive investments that result in increased incomes. This helps people to move along the path from subsistence or income-generating activities to more growth-oriented microenterprises that can lead them out of poverty. This then leads us into thinking about the integration of microfinance with other nonformal education activities in ways that are mutually reinforcing. NFE approaches used to promote financial literacy, economic awareness, social empowerment and health enhance the effectiveness and sustainability of microfinance interventions. Microfinance institutions increasingly recognize their dependence on the health of their clients and their clients’ families, indicating the benefits to MFIs of providing education in nutrition, HIV/AIDS and family planning.
- Credit often serves the same purposes as savings for poor people, but it is riskier, usually more expensive, and often as unavailable as appropriate deposit services. Poor people often prefer to save and are even willing to pay to do so. Saving money in a safe place provides poor people with a cushion against sudden shocks, such as illness or a bad harvest, which could easily push them into destitution. Savings may in fact be more important than credit in helping the poor to raise incomes and reduce risk, although the impact on income may take longer to realize with savings. Some financial institutions have discovered ways to offer savings products appropriate to the needs of poor people. These institutions have found that demand for savings deposit services far exceeds demand for credit if offered without restrictions or credit-biased incentives. The World Council of Credit Unions (WOCCU) reports that in 2001, 146 popular banks in Rwanda had 274,350 savings accounts and 43,216 borrowers. Approximately two-thirds of its savings accounts were under US$ 22. In many credit unions that have mature savings offerings, net savers outnumber net borrowers by seven to one. (Source: www.woccu.org/development/msb/msb.htm – January 20, 2003). Bank Rakyat Indonesia (BRI) , a profitable financial institution, has shown that rural microfinance can be profitable with attractive savings and credit products, appropriate staff incentives, and an effective system of internal regulation and supervision. As of January 2003, the unit desa system of BRI reported 27.3 million active savings accounts compared to 2.8 million borrowers - net savers outnumber net borrowers by ten to one. (Source: www.bellanet.org/partners/mfn/memberBRI.html, February 2003 )
- The real beauty of an integrated microfinance plus education approach lies in the mechanism of the savings and credit group meetings. These meetings provide an ideal forum for the promotion of a whole range of NFE messages because: 1. They are regular and intensive 2. They are self-forming, and therefore socially cohesive, providing an ideal learning environment 3. They are sustainable. They are already there and they are not dependent upon project or government funding. This concept is not new, in fact the Grameen Bank pioneered this method with its 16 social messages, and others such as Freedom From Hunger have successfully integrated Microfinance + Education approaches into their programs worldwide. But the fact remains that every day in Cambodia, and almost every other country we are working in, there are hundreds if not thousands of small groups of poor people meeting around savings and credit, and who could also benefit from health and other educational messages. So why not make use of this?
- Most poor people manage risk with their own means. Many depend on multiple informal mechanisms (e.g., cash savings, asset ownership, rotating savings and credit associations, moneylenders) to prepare for and cope with such risks as the death of a family breadwinner, severe illness, or loss of livestock. Very few low-income households have access to formal insurance for such risks. Prevention and avoidance. When possible, poor people avoid and/or actively work to reduce risk, often through non-financial methods. Careful sanitation, for example, is a non-financial way to reduce the risk of infectious illness, particularly among young children. Using family networks to identify business opportunities is another such mechanism. The imperative to avoid risk often leads to conservative decision making by poor people, especially in business considerations. Preparation . Poor people save, accumulate assets (such as livestock), buy insurance, and educate their children to handle future risks. For certain risks, informal community systems (e.g., Ghanaian burial societies) offer protection. However, such systems generally do not adequately protect against costly and unpredictable risks, such as the debilitating illness of a family income earner. Formal insurance products are beginning to be offered to low-income markets, such as simple credit life insurance (which covers an outstanding loan balance in the event of a borrower’s death), but these insurance products sometimes appear to be designed to protect the lending institution rather than its clients. Coping . Ex post coping can result in desperate measures that leave poor households even more vulnerable to future risks. In the face of severe economic stress, poor people may take out emergency loans from moneylenders, microfinance institutions (MFIs), and/or banks. They may also deplete savings, sell productive assets, default on loans, and/or reduce spending on food and schooling. In general, prevention and planning are far less costly than coping strategies for the individual.
- Like savings, direct provision of insurance services requires significant skills and systems, as well as institutional permanence. For this reason, NGOs may best serve poor households by helping them gain access to the services of strong and established insurance companies. Donors may be able to play a brokering role in linking insurance companies to MFIs. For example, FINCA, an NGO operating in Uganda, acts as an agent for a formal healthcare plan in order to bring health insurance to FINCA’s clients. Insurance is a weak instrument for addressing community-wide risks (such as areas of high risk of natural disasters) or predicted outcomes (populations suffering from HIV and AIDS) Insurance [1] involves pooling risk (uncertain and expensive losses) over a large number of similar units, such as households, persons or businesses. It means exchanging the uncertain prospect of large losses for the certainty of small regular premium payments. In doing so, policyholders pay for the losses incurred by others (through pooling risk) and for the costs and risk assumed by the insurer. [1] From: “Providing Insurance to Low-Income Households, Part I: A primer on Insurance Principles and Products”, by Warren Brown and Craig Churchill, Calmeadow-USAID Microenterprise Best Practices, November 1999. MicroSave Africa Case Studies on Micro-Insurance, http://www.microinsurancecentre.org/
- Based on both empirical studies & client satisfaction surveys, and on personal experience.
- Separate media file
- Interest rate restrictions: will it be possible to operate sustainably? Why are these restrictions in place? How are they calculated? Are they enforced? Poverty levels includes understanding capacity for debt by target clients. This is not the same as the need (often from the stated desire) for credit, and must take into account the ability of clients to repay loans, as well as the timing and cyclical nature of income and expenditure patterns, which should be assessed on the basis of cash flows.
- Typi