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Microfinance 101 Session 2 - Professor Rob Gailey


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Microfinance 101 Session 2 - Professor Rob Gailey

  1. 1. Measuring Success: Breadth, Depth, Length, and Positive Impact MICROFINANCE 101: WEEK TWO Robert Gailey, Point Loma Nazarene University WELCOME!
  2. 2. Brief Outline for Tonight <ul><li>How Financing Works </li></ul><ul><li>Different Approaches to Financing </li></ul><ul><li>Primary Goals of Microfinance Institutions </li></ul><ul><li>Key Terms and Definitions </li></ul><ul><li>Why Interest Rates are so Important </li></ul><ul><li>Important Books </li></ul><ul><li>Some useful websites </li></ul><ul><li>Question Time </li></ul>
  3. 3. Opening Questions - Why do people need financing? - What do people finance? - What mechanisms exist for people to access financing?
  4. 4. Old Chinese Proverb: A Fishing Analogy Give a man a fish (Traditional relief) or Teach a man to fish? (more progressive development) but He still needs the TOOLS to fish and ACCESS to the water
  5. 5. Difference between MED and MF <ul><li>What is the economic objective of an MED/MF Intervention? </li></ul><ul><ul><li>To build a business/enterprise: For start-up, expansion, or transformation. </li></ul></ul><ul><ul><li>To provide lump sums of money: For people to use for a variety of needs/wants </li></ul></ul><ul><li>Which tools are available to meet the economic objective of the MED/MF intervention </li></ul><ul><ul><li>Financial Tools: Involve some form of cash transaction </li></ul></ul><ul><ul><li>Non-financial Tools: Do not primarily involve a cash transaction </li></ul></ul>
  6. 6. Typology of Financial Services Group Lending Village Banking (e.g FINCA) ASCAs ROSCAs Loan fund provided from outside source Loan fund generated within group Grameen Model Non-time-bound ASCA Time-bound ASCA Latin America Model Solidarity Group Lending Individual Lending Financial Services Methodologies Grouping Source of funding Size of groups Accumulation Time Ownership Major Distinction
  7. 7. MF and MED Tool Matrix Economic Objective Non-Financial Tools Financial Tools Helping a Business/Enterprise start, expand, or be transformed (from micro to small-scale or small-scale to medium-scale). Helping an individual or family meet their needs/wants for Lump Sums of Money for use in emergencies, life-cycle needs, opportunities, and cultural obligations. Emergency, cultural, and life-cycle ROSCAs and ASCAs, MFIs, Insurance, Deposit Collectors, Money Lenders, Post Office Savings accounts, IDAs for education. Health education, literacy education, and other non-financial forms of information dissemination. Microfinance Institutions (MFIs), Business ROSCAs and ASCAs, Small Micro-Credit Programs, Business Insurance, Moneylenders, Venture Capital Investments, Loan Guarantees, Pre-Entrepreneurial Business Grants (such as Trickle Up Program). Business Development Services (BDS ) , Livelihood and Vocational Training, Networking/Mentoring.
  8. 8. Primary Goals of Microfinance Institutions (MFI) <ul><li>Breadth of Outreach (how many people served) </li></ul><ul><li>Depth of Outreach (how poor are people served) </li></ul><ul><li>Length of Outreach (serving people for many years) </li></ul><ul><li>Positive Impact (long-lasting and substantive) </li></ul>
  9. 9. Vision of many MFIs <ul><li>Providing many poor families with access to affordable financial services. </li></ul><ul><li>Creating indigenous sustainable institutions that can meet the long-term financial needs of their communities. </li></ul><ul><li>Improving social conditions—better health, sanitation, nutrition, education. </li></ul>
  10. 10. Key terms and definitions <ul><li>Interest rate (flat or declining): Flat – same amount is paid each period. Declining –amount paid in interest decreases as amount owed (principle) decreases. </li></ul><ul><li>Operational Expenses: Salaries, electricity, vehicles, equipment, etc. </li></ul><ul><li>Costs of capital: Currency devaluation, inflation, loan default, & interest paid on borrowed funds. </li></ul><ul><li>Savings Balance: Total amount clients have in savings – what is owed back to clients by the MFI. </li></ul><ul><li>Portfolio Outstanding: Amount of money out in loans that is not yet repaid. </li></ul>Financial
  11. 11. Key terms and definitions <ul><li>Income: What comes in for products or services. </li></ul><ul><li>Profit: Generating something above what it costs you. Revenue exceeds expenses. </li></ul><ul><li>Subsidy: Anything which doesn’t cover its costs and must be covered by other sources (grants, donations, free labor, etc.) </li></ul>Financial
  12. 12. <ul><li>Repayment Rate (on-time and overall): How much is paid on-time and eventually. </li></ul><ul><li>Arrears: How much is due but has not yet been paid. </li></ul><ul><li>Portfolio at Risk: Value of portfolio outstanding that is in arrears. </li></ul><ul><li>Loan Loss (Default rate)/[Loan loss reserve]: How much of the loan portfolio is written off or how much is set aside to write off </li></ul>Key terms and definitions Institutional Health
  13. 13. <ul><li>Operational Self-Sufficiency: Income/Operating expenses (+ costs of capital) </li></ul><ul><li>Financial Self-Sufficiency: Income/Operating expenses + costs of capital (+ implicit subsidies). </li></ul><ul><li>Efficiency: Income up and/or expenses down </li></ul>Key terms and definitions Institutional Health
  14. 14. Setting the Interest Rate <ul><li>Here is a formula that can be used by an MFI in order to determine the appropriate interest rate: </li></ul><ul><li>  </li></ul><ul><li>R = AE + LL + CF + K –II </li></ul><ul><li>1-LL </li></ul><ul><li>Where R is the interest rate, AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization rate, and II is investment income. </li></ul>Or, use my friend’s back-of-the-napkin excel program:
  15. 15. Setting the Interest Rate <ul><li>However, in practice, MFIs usually do not set their rates based on this formula, but rather based on what the interest rates of other MFIs and lenders in an area are and what the operational expenses of the MFI are. </li></ul><ul><li>  </li></ul><ul><li>MFIs charge interest for at least five reasons: </li></ul><ul><li>To cover operating costs of administering loans (salaries, rent, etc.). </li></ul><ul><li>To cover financial costs of the cash used for lending if borrowed by the MFI from an interest-charging resource or from another currency. </li></ul><ul><li>To cover the risk of loans not being repaid. </li></ul><ul><li>To cover the time-value of the money lent (inflation). </li></ul><ul><li>To grow their program/portfolio. </li></ul>
  16. 16. Rutherford (2000 + Summer 2009) The Poor and Their Money
  17. 17. Collins, et al. (2009) Portfolios of the Poor
  18. 18. Milway (2008) One Hen
  19. 19. Useful Websites <ul><li>Microfinance Gateway: </li></ul><ul><li>Microcredit Summit: </li></ul><ul><li>MixMarket: </li></ul><ul><li>Microfinance Focus: </li></ul><ul><li>Microfinance Transparency: </li></ul><ul><li>PLNU Microfinance Club Blog: </li></ul>