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What Is Microfinance


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What Is Microfinance

  1. 1. What is microfinance?<br />Trockman Microfinance Initiative<br />Industry Analysis Team – Economics<br />February 25, 2009<br />
  2. 2. Report Overview<br />Introduction– Why microfinance?<br />Microfinance – What is microfinance?<br />Microcredit – What is microcredit?<br />Debate– Is microfinance a viable long-term solution?<br />Conclusion – What feedback can TMI offer?<br />
  3. 3. Introduction: Diminishing Returns to Scale as Justification<br />Output<br />Marginal product of capital (mpk) decreases as capital increases<br />Returns are much greater at the low end of the scale, meaning that small amounts can be lent at high costs and still be efficient<br />y=zf(k)<br />mpk<br />mpk<br />Capital<br />
  4. 4. Introduction: Status Quo of Microcredit<br /><ul><li>Moneylenders
  5. 5. Informal arrangements
  6. 6. 1990 survey in rural Indonesia found that 70% of low income households borrowed money
  7. 7. Bangladeshi households borrow, on average, 2/3 of their income per year ($839), from an average
  8. 8. 42 households borrowed from 33 different sources</li></li></ul><li>Introduction: Goals of Microfinance<br /><ul><li>Does not seek to reinvent the wheel, merely to correct and improve issues with the status quo
  9. 9. Ideally a market based solution, not a form of charity
  10. 10. Replaces moneylenders and governments that are often unfair or inefficient in allocating capital</li></li></ul><li>Introduction: Problem with Subsidization<br />Interest Rates<br />Supply<br />Government (or other entity) allocates capital as opposed to the market, leading to bias and abuse in who receives lending, creating inefficiency and corruption<br />Government set rate<br />Shortage at price ceiling<br />Demand<br />Demand for Capital<br />
  11. 11. Introduction: Microfinance in Action<br /><ul><li>Not just microcredit, expands to other services that ensure a sustained and long term solution to fundamental problems
  12. 12. Creativity in contracts and forms of lending
  13. 13. Group lending
  14. 14. Market established rates
  15. 15. Education in household finance and health issues</li></li></ul><li>Microfinance: Financial Services Provided<br /><ul><li>Credit
  16. 16. Business development
  17. 17. Home construction
  18. 18. Major expenses
  19. 19. Savings
  20. 20. Deposit accounts
  21. 21. Client ownership
  22. 22. Insurance
  23. 23. Health policies
  24. 24. Natural disaster policies
  25. 25. Life insurance policies
  26. 26. Money transfer
  27. 27. Remittance services</li></ul>Source:<br />
  28. 28. Microfinance: Services as Solutions<br />These services replace means commonly used by the poor, freeing them from constraints that keep them in poverty.<br />Problem<br />Service<br />Solution<br />Activity<br /><ul><li>Borrowing from predatory lenders
  29. 29. Borrowing in this way often leads to abuse or being taken advantage of by lenders
  30. 30. Credit
  31. 31. The poor can “break the cycle” of poverty, eliminating their reliance on predatory lenders
  32. 32. “Saving by buying,” “putting money under the mattress”
  33. 33. Saving in these ways yields no return, is not liquid, and is prone to theft and loss of wealth
  34. 34. Savings deposits
  35. 35. The poor are able to build up wealth in a safe, liquid way</li></ul>Source:<br />
  36. 36. Microfinance: Other Services<br />Many MFIs use microfinance as a way to provide clients with other aid.<br />Source:<br />
  37. 37. Microcredit: Features of Lending<br /><ul><li>Group Lending affects risk and effectiveness
  38. 38. Stepped Lending: incentive
  39. 39. Women: 85% of microcredit borrowers</li></li></ul><li>Microcredit: Interest Rates and Cost Analysis<br /><ul><li>Risk: low information, credit history, collateral.
  40. 40. Administrative: loan officers’ time, personalized, small loans.</li></ul>Source: Brigit Helms and Xavier Reille, Interest Rate Ceilings and Microfinance, The Story So Far, based on data prepared by Sanjay Sinha.<br />
  41. 41. Debate: Milford Bateman<br /><ul><li>Hurts local economy
  42. 42. Used data from Serbia
  43. 43. 2 Results from the increase in microfinance
  44. 44. Shortage in funds for small and medium large businesses
  45. 45. Increase in microenterprises
  46. 46. Examined East Asia Growth </li></li></ul><li>Debate: AneelKarnani<br /><ul><li>Microfinance does not significantly affect poverty
  47. 47. Examines 6 countries
  48. 48. Supports notion of employment and worker productivity as key to reducing poverty
  49. 49. International Labor Organization and United Nations Development Program support this notion</li></li></ul><li>Debate: China’s Challenge<br /><ul><li>High transaction costs
  50. 50. Recipients lack literacy and education
  51. 51. Government does not allow MFI’s to collect deposits
  52. 52. Training of both management and on the ground individuals</li></li></ul><li>Debate: Inefficiencies<br /><ul><li>Place emphasis on substance activities
  53. 53. Idea of borrowing and collectivism deter economic development
  54. 54. Trade off between economic development and culture</li></li></ul><li>Debate: Long Run Sustainability<br /><ul><li>Not conclusive
  55. 55. Some success and some failure
  56. 56. Part of the solution, but not the only solution</li></li></ul><li>Questions/suggestions?<br />Look for our final report and presentation in the coming weeks!<br />18<br />