Microfinance 1-notes


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  • Tejhari Ghimire
  • Tejhari Ghimire
  • A. Small saving helps to build assets for the poor B. Rented in money from services provider with collateral or with out collateral by the poor C. Transfer of money , skills and culture D. Protection from risks Microfinance works in solidarity group and group provides guarantee to the service providers.
  • Microfinance 1-notes

    1. 1. An Overview, FundamentalConcepts, Principlesand Characteristics, best practices of Microfinance Tejhari Ghimire
    2. 2. Resource contents• An Overview of Microfinance Sector• Fundamental Concept of Microfinance• Key Principles of microfinance• Characteristics of Microfinance• Best practices of microfinance09/16/12
    3. 3. Overview….Country Scenario• More than 31% of the Nepals population lives in extreme poverty.• Informal financial system remains dominant• The sector has experienced growth of microfinance institutions (MFIs) and significant progress in terms of clientele, outreach, savings and credit management.• Microfinance Development Banks (22) are providing microfinance services to 8,46,517 rural poor women across 57 districts through self-managed centers and groups[1]; [1] Source: NRB, Mid-July, 201109/16/12
    4. 4. Overview….Country Scenario• 10,558 Savings and Credit Cooperatives and Credit Unions provide services to 14,06,021 clients (female 651,512 and male 754,509) in 75 districts[1] ( this includes urban saving and credit cooperatives that may not represent microfinance services);• Small Farmers Cooperative Limiteds (SFCLs: 243) are providing financial services to 1,69,686 clients-SKBBL, Mid-June, 2011• 38 Financial Intermediary NGOs are providing financial services to a further 454,026 predominately poor people[2] .• This shows that 25,95, 046 of the rural population have access to microfinance services in Nepal, which contributes 10.25 % of the total population and 33.05 % of those is living below the poverty line. This is the 20% reduction in total clients of saving and credit clients. It is assumed that 20% urban population do not represent MF clients that was also included in the total clients of saving and credit coops.[1] Department of Cooperative, 2011 09/16/12[2] Compiled by CMF, 2011
    5. 5. Overview….Country Scenario• A total of 2,048,742 of the rural population have access to microfinance services in Nepal, which contributes 8.09% of the total population[1] and 26.1% of those is living below the poverty line[2],• Of which 1,233,058 are women, representing 9.73% of all Nepalese women[3]. Data shows that the majority of microfinance service recipients are women• Nevertheless, the women led MFIs are approximately 2545 saving & credit cooperatives.• [1] Total population about 25,296,537 as of 2005 Projection ( Informal Sector Research and Study Center: 2004)• [2] 31% of total population ( NLSS:2003/04)• [3]( NIDI, CMF: 2006) 09/16/12
    6. 6. Fundamental concepts • Meaning of Microfinance • Myth and Facts of Microfinance • Why microfinance • Goal of microfinance09/16/12
    7. 7. What is microfinance?
    8. 8. Definition• Microfinance is the provision of financial access to low-income people or solidarity groups including consumers and the small entrepreneurs , who traditionally lack access to banking and related services.
    9. 9. Meaning of Microfinance• "Microfinance is the supply of loans, savings, and other basic financial services to the poor." (CGAP).• A microfinance institution (MFI) is defined as an organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks.• CGAP broadly defines MFI as any organization—credit union, downscaled commercial bank, financial NGO, or credit cooperative that provides financial services for the poor.09/16/12
    10. 10. Myth and Facts • Poor people do not repay loan – Myth or Fact • Poor people can not pay the interest rates necessary to cover the cost of delivering the services – Myth or Fact09/16/12
    11. 11. Myth and Facts• MFIs cannot access commercial sources of funding – Myth or Fact09/16/12
    12. 12. Myth and Facts• MFIs cannot reach the very poorest of the poor only through credit – Myth or Fact• Financial sustainability is necessary for an MFI to reach large number of people – Myth or Fact09/16/12
    13. 13. Myth and Facts• MFIs only extend services to the very poor – Myth or Fact• Microfinance alone does not alleviate poverty – Myth or Fact09/16/12
    14. 14. Myth and Facts• The Goal of microfinance is institutional sustainability – Myth or Fact• Many microfinance operation will not become sustainable – Myth or Fact09/16/12
    15. 15. Myth and Facts• A solid understanding of the facts about microfinance is critical to making good investment decision09/16/12
    16. 16. Why Microfinance• Development of micro-enterprise – Microenterprise creates job• Supply of goods and services to low- income population is increased• Increase the productive use of capital09/16/12
    17. 17. Goal of Microfinance• Viability – Sustained long – Retained term viability earnings through profit, – Commercial not donor capital deposits funding• Outreach – Reach more people with quality services09/16/12
    18. 18. Goal of ….Qualities of outreach• Depth of • Quality of outreach services – MFIs with deep – Liquidity outreach reach – Convenience very poor or hard to reach clients – Availability – Flexibility of purposes – Freedom to borrow• Scale or save – The number of people with • Indicators of access to MFI quality services services – Demand – Large scale outreach is necessary to reach the majority of potential clients09/16/12
    19. 19. Viability Financial Institutiona l The basic Organizatio cost of ns that are operation well are covered managed by MFI and staffed revenue, for long- not term subsidies success Both financial and institutional viability are necessary to support the goal of extending services to the large number of people over time09/16/12
    20. 20. Benefits of financial viability• Services can be maintained in the future without being subject to unpredictable fluctuations in donor funding• Access to commercial sources of funding09/16/12
    21. 21. Self-sufficiencyOperational Self Financial SelfSufficiency Sufficiency Depreciation, loan loss All expenses provision expenses and cash operating covered by income expenses from operations•Loan loss reserves •Loan loss reserves•Salaries •Salaries•Rent •Rent•Depreciation of •Depreciation of FixedFixed Assets Assets•Cash cost of funds •Cash cost of funds •Inflation on equity •Value of subsidies •Cost of capitalization 09/16/12
    22. 22. Level of Financial Viability• Level I: Characteristics – MFIs that have not achieved operational self sufficiency – They rely on outside donation for continued operation – Revenues fall short of operating expenses – Inflation will erode the loan fund – Poor performers are subject to erosion of loan fund through delinquency and default – Many have high operating costs, are reluctant to charge sustainable interest rates, and have high delinquency and default rates, especially older organization• It is estimated that 90% MFIs operate at level I09/16/12
    23. 23. Level of Financial Viability• Level II: Characteristics – MFIs that are operationally, but not financially, self-reliant – They apply proven principles, are generally efficient, have higher client to staff ratios, an increasing scale of operation, and good control of delinquency and default – Interest and fee income cover operating expenses, but inflation can erode equity – Funds are borrowed on terms near, but still below, market rates• Level II organizations can vary widely from those that rely on soft money.09/16/12
    24. 24. Level of Financial Viability• Level III: Characteristics – MFIs that are financially self- sufficient – Operation is fully financed from retained earnings, client savings, or commercial funds – Interest rates and fees cover the full cost of service delivery and return on savings – Interest rates and fees cover the real cost of funds – MFIs can increase their equity base through profits and attract outside equity participation• So far only a few MFIs have reached at Level III, but many poised to do so.09/16/12
    25. 25. Institutional Viability• Capacity• Governance• Types – Specialized financial institutions – Specialized services within commercial financial institutions – Non-governmental organization (NGOs) – Credit unions or other member owned institutions09/16/12
    26. 26. Principles of Microfinance• Consultative Group for Assistance to the Poorest (CGAP)- 2004 (Principles)• Key operating principles of microfinance• International Credit Union Operating Principles-198409/16/12
    27. 27. Consultative Group for Assistance to the Poorest (CGAP)- 2004• Poor people need a variety of financial services, not just loans.• Microfinance is a powerful tool to fight poverty.• Microfinance means building financial systems that serve the poor.• Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people.• Microfinance is about building permanent local financial institutions.09/16/12
    28. 28. Consultative Group for Assistance to the Poorest (CGAP)- 2004• Micro-credit is not always the answer.• Interest rate ceilings hurt poor people by making it harder for them to get credit.• The role of government is to enable financial services, not to provide them directly.• Donor funds should complement private capital, not compete with it.• The key bottleneck is the shortage of strong institutions and managers.• Microfinance works best when it measures—and discloses—its performance.09/16/12
    29. 29. Key operating principles of microfinance• Understanding the Market – A successful MFI understands its market and designs products that serve its clients• Streamlined Operations – Streamlined operations help MFIs make efficient use of resources and keep cost low• Informal Sector Practices – This practices help an MFI manage risk, motivate repayment, and lower administrative costs.09/16/12
    30. 30. Key operating principles of microfinance• Repayment Incentives – The ability to get another loan when it is needed is a powerful incentive for the clients to repay current loan.• Saving Services – Saving services should be liquid, secure, convenient, offer competitive returns, and not to be limited to borrowers.• Viability and Growth – MFI staff should be focused on achieving efficiency, financial productivity, and financial viability.09/16/12
    31. 31. Key operating principles of microfinance• No Delinquency tolerated – Successful MFIs do not tolerate delinquency• Sustainable Interest Rates – Interest must be set high enough to cover all costs of delivering services• Linkage to Financial Market – Leveraging resources from commercial markets is essential to achieving significant outreach09/16/12
    32. 32. International Credit Union Operating Principles-1984• Democratic Structure – Open and volunteer membership – Democratic control – Non-discrimination• Service to Members – Service to members – Distribution to members – Building financial stability09/16/12
    33. 33. International Credit Union Operating Principles-1984• Social Goals – Ongoing education – Cooperation among cooperatives – Social Responsibility09/16/12
    34. 34. Characteristics of Microfinance• Mostly it is collateral free• MFIs go to clients rather than clients go to MFIs• Simplified savings and loan procedures• Small sizes of loans and savings• Repeat Loans• Loan size increases in the repeated loans or subsequent cycles09/16/12
    35. 35. Characteristics of Microfinance• Interest rate is usually in between money lenders and formal banks• Free use of loans (no restrictions on specified purpose)• Repayment considers incomes from business as well as other sources• Loan and savings products within manageable numbers09/16/12
    36. 36. Bestpractices ofMicrofinance09/16/12
    37. 37. Best practices of MFIs• Build effective Management Information System (MIS)• Reach large number of clients (Vision of growth)• Promote savings services, diversify savings products09/16/12
    38. 38. Best practices of MFIs• Offer services that fit the clients’ needs, diversify loan products• Simplify loan products to reduce operational costs• Motivate clients to repay loans, focus on high repayments09/16/12
    39. 39. Best practices of MFIs• Attain financial sustainability by charging sufficient (above market) interest rates and fees• Involve clients when designing services• Promote effective governance, characterized by democratic and transparent decision- making09/16/12
    40. 40. Best practices of MFIs• Target clients properly• Focus on financial services only• Develop institutional linkages.09/16/12
    41. 41. Lessons learned from Women managed Savings and Credit Cooperative• Lesson -1 Women managed saving and credit cooperatives are the best microfinance institutions that can exist even in an insurgency situations• Lesson -2 Adaptive mix of training and technical assistance can ensure capacity building even in case of uneducated/rural women owned institutions:09/16/12
    42. 42. Lessons learned from Women managed Savings and Credit Cooperatives • Lesson-3 Participatory monitoring helps MFIs to develop need based products and services • Lesson-4 Enhanced capacity of MFIs creates demand for enterprise development services and entrepreneurs09/16/12
    43. 43. Lessons learned from Women managed Savings and Credit Cooperatives• Lesson-5 Installment repayment system helped to reduce delinquency rate• Lesson-6 Healthy competition among MFIs encourages self-regulation in the market• Lesson-7 Rural and only literate women managed saving and credit cooperatives are able to attain OSS 108% and FSS 92%.09/16/12