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micro finance


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micro lending & credit

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micro finance

  1. 1. Micro Finance A Report by Raymund Sanchez
  2. 2. Agenda <ul><li>Definitions </li></ul><ul><li>History </li></ul><ul><li>Purpose / Goals </li></ul><ul><li>Characteristics </li></ul><ul><li>Applying for a Micro Loan </li></ul><ul><li>Criticisms </li></ul><ul><li>Trends </li></ul>
  3. 3. Definitions <ul><li>Micro Credit / Micro Loans: </li></ul><ul><ul><li>the extension of very small loans to those in poverty design to spur entrepreneurship </li></ul></ul><ul><li>Micro Finance: </li></ul><ul><ul><li>is the provision of financial services to low-income clients, including consumers and the self-employed, who traditionally lack access to banking and related services </li></ul></ul>
  4. 4. Definitions <ul><li>Micro Finance : </li></ul><ul><ul><li>As defined by Bangko Sentral ng Pilipinas, “is the provision of a broad range of financial services such as deposit, loans, payment services, money transfers & insurance products to the poor & low income households for their micro enterprises & small businesses to enable them to raise their income levels & improve their living standards” </li></ul></ul>
  5. 5. History of Micro Finance
  6. 6. History <ul><li>Jonathan Swift inspired the Irish Loan Funds of the 18th and 19th centuries </li></ul><ul><li>Individualist anarchist Lysander Spooner wrote about the benefits of numerous small loans for entrepreneurial activities to the poor as a way to alleviate poverty </li></ul><ul><li>Muhammad Yunus founded Grameen Bank in the 1970s in Bangladesh </li></ul><ul><li>Gained popularity in the Philippines in the mid 70’s </li></ul>
  7. 7. History <ul><li>1972, Central Bank of the Philippines had jurisdiction over the entire credit system </li></ul><ul><li>BSP charter (R.A. 7653) was enacted, lending investors were removed from regulatory powers of BSP </li></ul><ul><li>Lack of regulation resulted in various unchecked, unacceptable practices </li></ul>
  8. 8. History <ul><li>2001, DOJ opinion transferred authority to SEC </li></ul><ul><li>SEC instructed financing companies to conform to Financing Company Act, increasing minimum capitalization to P10M </li></ul><ul><li>Due to high capitalization, out of 10,885 lending investors only 360 were able to register </li></ul><ul><li>Presently, micro lending institutions owe their existence to CA order prohibiting the implementation of the circular </li></ul>
  9. 9. Purpose / Goals
  10. 10. Purpose <ul><li>Differences with standard banking credit </li></ul><ul><ul><li>A tool for socio economic development </li></ul></ul><ul><ul><li>Emphasizes micro entrepreneurship, employment generation, trust building & aid to the SME in difficult times </li></ul></ul><ul><ul><li>Applicants most often lack collateral, verifiable credit history, minimal qualifications for access to traditional credit </li></ul></ul><ul><ul><li>Lending companies typically use own funds </li></ul></ul>
  11. 11. Characteristics
  12. 12. Characteristics <ul><li>Amount: P3,000 – P15,000 </li></ul><ul><li>Terms of payment: 3 – 6 months </li></ul><ul><li>Collateral: usually none </li></ul><ul><li>Interest rate: 5%-10% per month or higher </li></ul><ul><li>Manner of payment: daily, weekly, monthly </li></ul><ul><li>Beneficiary: small trading, “sari-sari store”, market stall holders, micro-businesses, etc </li></ul>
  13. 13. Who extends Micro lending? <ul><li>Informal financial service providers </li></ul><ul><ul><li>Individuals, moneylenders </li></ul></ul><ul><ul><li>Pawnbrokers </li></ul></ul><ul><ul><li>Saving collectors </li></ul></ul><ul><ul><li>Money guards </li></ul></ul><ul><li>Member owned organizations </li></ul><ul><ul><li>Credit cooperative </li></ul></ul><ul><ul><li>Credit unions </li></ul></ul><ul><li>Formal financial service providers </li></ul><ul><ul><li>Rural / Development banks </li></ul></ul><ul><ul><li>Some commercial banks </li></ul></ul><ul><li>NGO’s </li></ul>
  14. 14. How to Apply Micro Loans
  15. 15. How to Apply Micro Loans <ul><li>Prospective borrowers are required to submit basic information requirements (e.g. bio-data, business papers, financial statements, collateral offered, usage of loan) </li></ul><ul><li>Credit & background checking </li></ul><ul><li>Collaterals offered (if applicable) are appraised to determine loanable value </li></ul><ul><li>Other pertinent information are gathered about the borrower </li></ul><ul><li>If eligible, credit evaluation report is made for approval </li></ul>
  16. 16. Sample Micro Loan Requirements <ul><li>Stall holder </li></ul><ul><ul><li>Stall permit </li></ul></ul><ul><ul><li>Promissory note </li></ul></ul><ul><ul><li>Co-maker statement </li></ul></ul><ul><ul><li>Application form </li></ul></ul><ul><ul><li>Picture </li></ul></ul><ul><ul><li>Valid ID </li></ul></ul><ul><li>Pension </li></ul><ul><ul><li>ATM card </li></ul></ul><ul><ul><li>Passbook </li></ul></ul><ul><ul><li>Promissory note </li></ul></ul><ul><ul><li>Application form </li></ul></ul><ul><ul><li>Picture </li></ul></ul><ul><ul><li>Valid ID </li></ul></ul><ul><ul><li>Co-maker statement </li></ul></ul><ul><li>Salary </li></ul><ul><ul><li>Pay slip </li></ul></ul><ul><ul><li>Employee authorization </li></ul></ul><ul><ul><li>Personnel dept authorization </li></ul></ul><ul><ul><li>Application form </li></ul></ul><ul><ul><li>Picture </li></ul></ul><ul><ul><li>Valid ID </li></ul></ul><ul><li>Car </li></ul><ul><ul><li>LTO registration </li></ul></ul><ul><ul><li>Promissory note </li></ul></ul><ul><ul><li>Chattel Mortgage </li></ul></ul><ul><ul><li>Application form </li></ul></ul><ul><ul><li>Picture </li></ul></ul><ul><ul><li>Valid ID </li></ul></ul><ul><ul><li>Deed of sale </li></ul></ul>
  17. 17. Credit Investigation <ul><li>The process of gathering data on a certain entity in relation to its credit standing / reputation </li></ul><ul><li>Basic components: </li></ul><ul><ul><li>Bank checkings </li></ul></ul><ul><ul><li>Trade checkings </li></ul></ul><ul><ul><li>Verification of SEC & BDT records </li></ul></ul><ul><ul><li>Neighborhood / Background investigation </li></ul></ul><ul><ul><li>Address verification </li></ul></ul><ul><ul><li>Court case verification </li></ul></ul>
  18. 18. Credit Investigation <ul><li>Bank checkings </li></ul><ul><ul><li>Name of banks / FI’s with present or past dealings </li></ul></ul><ul><ul><li>Type of credit facility granted </li></ul></ul><ul><ul><li>Amount approved </li></ul></ul><ul><ul><li>Outstanding balances </li></ul></ul><ul><ul><li>Security / collateral offered </li></ul></ul><ul><ul><li>Date loan was granted </li></ul></ul><ul><ul><li>Maturity / expiry dates of accommodation </li></ul></ul><ul><ul><li>Credit experience </li></ul></ul>
  19. 19. Credit Investigation <ul><li>Trade checkings </li></ul><ul><ul><li>Past & present suppliers </li></ul></ul><ul><ul><li>Products / services supplied </li></ul></ul><ul><ul><li>Volume of purchases </li></ul></ul><ul><ul><li>Amount of accommodation </li></ul></ul><ul><ul><li>Manner / terms of payments </li></ul></ul><ul><ul><li>Collateral used </li></ul></ul><ul><ul><li>Length of business relationship </li></ul></ul>Community based business funded by local banks in Cambodia
  20. 20. Credit Investigation <ul><li>Capital :borrower should have more at stake than the creditor </li></ul><ul><li>Condition </li></ul><ul><ul><li>Economic :economic condition in the area </li></ul></ul><ul><ul><li>Industry :sunrise / sunset industries </li></ul></ul><ul><ul><li>Political / social :government / community constraints </li></ul></ul><ul><ul><li>Source of information :economic reports, newspapers, TV </li></ul></ul><ul><li>Collateral :property mortgages </li></ul>
  21. 21. Regulations <ul><li>Organizational requirements </li></ul><ul><li>Citizenship requirements </li></ul><ul><li>Amount & charges on loans </li></ul><ul><li>Maintenance of books & records </li></ul><ul><li>Reportorial requirements </li></ul><ul><li>Capital requirements </li></ul>
  22. 22. Criticisms
  23. 23. Criticisms <ul><li>Lack of data to quantitatively prove that micro finance can alleviate poverty </li></ul><ul><li>High interest rates charged to borrowers </li></ul><ul><li>Questionable role of donors </li></ul><ul><li>Micro lenders for not taking more responsibility for the working conditions of poor households </li></ul><ul><li>Loans borrowed by the poor are not used for the intended purpose </li></ul>
  24. 24. Trends
  25. 25. Trends <ul><li>Many traditional large finance organizations are contemplating micro credit projects as a source of future growth </li></ul><ul><li>peer-to-peer platforms </li></ul>
  26. 26. References <ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>Mr. Edgardo Tipa, “How to organize a micro lending business”, seminar handouts </li></ul>
  27. 27. -END-