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"Microfinance: international experience and some preliminary findings from field research in Thailand" - updated 17 September 2010

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  1. 1. Microfinance Sarinee Achavanuntakul 8 October 2009 งานนีเผยแพร่ภายใต้ลขสิทธิ Creative Commons แบบ Attribution Non-commercial Share Alike (by-nc-sa) โดย ิ 1 ผูสร้างอนุญาตให้ทาซํา แจกจ่าย แสดง และสร้างงานดัดแปลงจากส่วนใดส่วนหนึงของงานนีได้โดยเสรี แต่เฉพาะใน ้ ํ กรณีทให้เครดิตผูสร้าง ไม่นําไปใช้ในทางการค้า และเผยแพร่งานดัดแปลงภายใต้ลขสิทธิเดียวกันนีเท่านัน ี ้ ิ
  2. 2. Topics The concept and models of microfinance Does microfinance really help the poor? Microfinance in Thailand: some preliminary findings from field research 2
  3. 3. The concept and models of microfinance 3
  4. 4. What is microfinance? Microfinance institutions (MFIs) provide financial services for the poor Not “informal players” e.g. moneylenders, self-help groups Definition of “the poor” varies People living below poverty line People who have little access to formal banking, especially in rural areas Two kinds of incentives “Social business” : social mission at the core, aims to be financially sustainable -- most MFIs. This will be the subject of these slides “Commercial microfinance” : subsidiaries of private commercial banks 4
  5. 5. Types of microfinance products Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007. 5
  6. 6. Types of players NGOs Cooperatives Credit unions Nonbank financial institutions (e.g. village banks) Microfinance banks Commercial & state banks Post office 6
  7. 7. Two basic types of microfinance institutions Lending-based Focus on lending to build capacity of micro-entrepreneurs Develop saving products afterward (voluntary and mandatory saving) Funding: soft loans or grants from governments or development agencies, consumer deposits, loans from commercial banks Saving-based Focus on building long-term savings and provide welfare to those outside formal social safety nets Funding: consumer deposits, soft loan / grants from gov. & dev. agencies Tend to be more conservative than lending-based MFIs 7
  8. 8. Some typical features Typical microcredit features No collateral requirement – typically use “social capital” (e.g. group of 5, cross-guaranteeing each other) in lieu of asset-based collateral Flexible repayment schedule – typically no bullet repayment; small installments on a weekly/monthly basis 25%-40% effective interest rate No accrued interest & penalty rates on overdue loans Social commitment / mission Empowerment of borrowers through joint ownership & group decisions Foster community business, social activities, other programs 8
  9. 9. “Grameen microcredit highway” 9
  10. 10. The microfinance universe: growing, but no consensus # Total MFI assets approx. $30 billion, 73% serve <2,500 clients CGAP estimates 750+ million MFI saving & loan accounts Microcredit Summit Database includes 3,133 MFIs; MBB 1,400+ Source: The MiX Market, http://www.mixmarket.org/, data on 1,400+ MFIs 10
  11. 11. Growth patterns suggest a ‘maturing’ sector Source: MicroBanking Bulletin No. 18, http://www.themix.org/ 11
  12. 12. Growth patterns suggest a ‘maturing’ sector (cont.) Growth in borrowers & portfolio Shift to commercial funding Source: MicroBanking Bulletin No. 18, http://www.themix.org/. The data covers 487 MFIs in 78 countries, representing 82% of outstanding loans and 75% of worldwide MFI borrowers as at the end of 2007. 12
  13. 13. Source: MicroBanking Bulletin No. 18, http://www.themix.org/ 13
  14. 14. Source: MicroBanking Bulletin No. 18, http://www.themix.org/ 14
  15. 15. Source: MicroBanking Bulletin No. 18, http://www.themix.org/ 15
  16. 16. #1 in Forbes ranking of “Top 50 MFIs” in 2007 Source: http://www.forbes.com/2007/12/20/microfinance-philanthropy-credit-biz-cz_ms_1220microfinance_table.html 16
  17. 17. Microfinance is still unable to meet potential demand… 17
  18. 18. …but there is increasing diversity of funds universe… 27 funds 11 funds 12 funds 17 funds 7 funds 15 funds Source: The MiX Market, http://www.mixmarket.org/ 18
  19. 19. …an increasing variety of vehicles and funders... Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007. 19
  20. 20. …and increased interest from big commercial players Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007. 20
  21. 21. Does microfinance really help the poor? 21
  22. 22. CGAP: Principles of microfinance The poor need a variety of financial services, not just loans. Just like everyone else, poor people need a wide range of financial services that are convenient, flexible, and reasonably priced. Depending on their circumstances, poor people need not only credit, but also savings, cash transfers, and insurance. Microfinance is a powerful instrument against poverty. Access to sustainable financial services enables the poor to increase incomes, build assets, and reduce their vulnerability to external shocks. Microfinance allows poor households to move from everyday survival to planning for the future. 22
  23. 23. CGAP: Principles of microfinance (cont.) Microfinance means building financial systems that serve the poor. Poor people constitute the vast majority of the population in most developing countries. Yet, an overwhelming number of the poor continue to lack access to basic financial services. Financial sustainability is necessary to reach significant numbers of poor people. Most poor people are not able to access financial services because of the lack of strong retail financial intermediaries. Building financially sustainable institutions is not an end in itself. It is the only way to reach significant scale and impact far beyond what donor agencies can fund. 23
  24. 24. CGAP: Principles of microfinance (cont.) Microfinance is about building permanent local financial institutions. Building financial systems for the poor means building sound domestic financial intermediaries that can provide financial services to poor people on a permanent basis. Such institutions should be able to mobilize and recycle domestic savings, extend credit, and provide a range of services. Microcredit is not always the answer. Microcredit is not appropriate for everyone or every situation. The destitute and hungry who have no income or means of repayment need other forms of support before they can make use of loans. 24
  25. 25. CGAP: Principles of microfinance (cont.) Interest rate ceilings can damage poor people’s access to financial services. It costs much more to make many small loans than a few large loans. Unless microlenders can charge interest rates that are well above average bank loan rates, they cannot cover their costs, and their growth and sustainability will be limited by the scarce and uncertain supply of subsidized funding. The government’s role is as an enabler, not as a direct provider of financial services. National governments play an important role in setting a supportive policy environment that stimulates the development of financial services while protecting poor people’s savings. 25
  26. 26. CGAP: Principles of microfinance (cont.) Donor subsidies should complement, not compete with private sector capital. Donors should use appropriate grant, loan, and equity instruments on a temporary basis to build the institutional capacity of financial providers, develop supporting infrastructure (like rating agencies, credit bureaus, audit capacity, etc.), and support experimental services and products. The lack of institutional and human capacity is the key constraint. Microfinance is a specialized field that combines banking with social goals, and capacity needs to be built at all levels. Most investments in the sector, both public and private, should focus on this capacity building. 26
  27. 27. CGAP: Principles of microfinance (cont.) The importance of financial and outreach transparency. Accurate, standardized, and comparable information on the financial and social performance of financial institutions providing services to the poor is imperative. Bank supervisors and regulators, donors, investors, and more importantly, the poor who are clients of microfinance need this information to adequately assess risk and returns. 27
  28. 28. Some latest findings: the story vs. the reality The story: “Microfinance funds creation and expansion of microenterprises, producing additional income that lifts the borrowers’ households out of poverty.” The truth, naturally, is more complicated. One problem is the complex issue of causality – Randomized Controlled Trials (RCTs) is still new to this field. The verdict is still out on whether microfinance reduces poverty on average (i.e. not making some poor worse off the way credit cards made some middle income consumers worse off). Income may not increase, but “consumption smoothing” is a benefit. 28
  29. 29. The real benefit of microfinance The problem with being poor is not just that income is low, but also that it tends to be uneven and vulnerable to disruption. Given the variability and vulnerability of their income, poor households have to save and borrow constantly in order to put food on the table and meet other consumption needs. Since informal credit and savings mechanisms tend to be unreliable, microfinance customers value formal microfinance highly because it is more reliable, even if it is often less flexible than their other tools to manage their cash flow. Millions of microfinance customers are “voting with their feet.” 29
  30. 30. Looking at microfinance from “capabilities approach” Applying Amartya Sen’s capabilities approach as described in “Development as Freedom” to microfinance leads to some interesting issues: Good research question: when does microfinance gives people more control over their lives and when less? Also, from the perspective that development is a tool for institution- building, one important contribution of microfinance is the enrichment of important institutions: enhancing social cohesion, encouraging civic participation, etc. 30
  31. 31. Microfinance in Thailand: some preliminary findings from field research 31
  32. 32. “Grassroots finance” in Thailand There are 3 kinds of players in Thailand’s “grassroots finance” space 1. State-owned banks: Bank for Agriculture and Agricultural Cooperatives (BAAC), Krung Thai Bank, Government Savings Bank, Government Housing Bank 2. Semi-formal groups (set up as government’s initiatives): 78,013 Baht 1 million village funds (some upgraded to “community banks”), 1,227 saving cooperatives, credit unions, and saving-for-production groups. The assets of these groups total approx. Baht 900 billion. 3. Informal groups (set up as villagers’ own initiatives): one-Baht savings groups, one-Baht expense reduction groups, etc. Total assets approx. Baht 30 billion. Semi-formal groups and informal groups serve approx. 12 million people.
  33. 33. Some preliminary findings from field research Very few grassroots finance groups in Thailand aim to make financial profits. Most only want to “safeguard” their capital and fulfill social mission. Therefore, financial stability remains more important than profitability. Many of the groups’ concerns are governance issues, e.g. the difficulty of finding “new blood” to succeed directors, lack of accounting training. Benefits to clients from savings-based groups seem to be more tangible in the form of welfare (e.g. childbirth stipend, sickness allowance, funeral rites allowance) paid from clients’ collective savings. Operational sufficiency is major risk. Benefits to clients from lend-based groups are less clear. Major risk lies in the inability of clients to use loans to raise living standards. Delinquency is not so much a problem since most clients ‘refinance’ from other groups.
  34. 34. Characteristics of Thai grassroots finance groups Key characteristic, by grade Major results Greatly increases financial Creates solid linkages of finance-employment-welfare and/or quality of life of clients Efficient and transparent financial management A Strongly sustainable financially Has member information, guarantor system, audit system Reasonably increases financial Enables members to have working capital B and/or quality of life of clients Has member information, guarantor system, audit system Reasonably sustainable No non-performing loans financially Increases financial and/or Enables members to have working capital C quality of life of clients Unsound/unclear accounting Expands too aggressively Financial sustainability Has non-performing loans doubtful Cannot gain trust from members Excludes villagers, not transparent D High risk of financial Borrowers and guarantors do not repay unsustainability 34
  35. 35. Local “wall street” in Nakon Si Thammarat District financial institution GSB branch BAAC branch Village A village fund Money lender Shops Village B village fund crops Women lending group Savings group Village bank Islamic savings group Rubber Fruit plantation Village C village fund plantation 35
  36. 36. Community financial group A Village A Savings Group 200 clients from Village A outside Village A Village Bank Village A Village 300 members Fund vouch money voucher, guarantor 36
  37. 37. Community financial group B Group 2 Group 1 Village B Financial Village Fund groups in network Group 3 money Group 4 37
  38. 38. Saving group network in Nakon Si Thammarat member member Village A Village B Saving group Saving group group group member member member member directors directors member Saving Group D member Village C Saving group money group member member knowledge, directors audit member community business 38
  39. 39. Farmer’s cash flow example: Chainat province Baht 20,000 Month 1 3 6 9 12 1 3 Cash inflow Cash outflow Loans from Expenses: household village fund expenditures & agri investment Loans from Savings another source Assuming normal crop year without natural disaster, monocrop plantation Crop income 5 rounds of rice farming in 2 years, 30 rais of land 39