INTRODUCTION AND
OVERVIEW OF MICROFINANCE
LESSON#1
PREPARED BY: LOUI MAIE RIVERA, LPT, MBA
LEARNING OBJECTIVES
• Acquire knowledge of the notion of microfinance
•Defined and who uses the tool of microfinance
•Acquire different facts to probe how important
microfinance is
MICROFINANCE HISTORY
• Microfinance started in 1973 with very small loans.
• It started in Brazil when an antipoverty called Accion noticed that small,
informal enterprise needed fund to expand their business.
• In local history, Microfinance in the Philippines began in 1900s.
• In 1952, Rural Banks is the dominant provider of commercial micro and
small-scale financial services
• During 1980s, the number of microfinance NGOs has steadily increased
• Microfinance in the Philippines evolved in mid- 1996 and continued
until the end of 1999
BRIEF HISTORY OF FINANCIAL INCLUSION
POLICIES AND PROGRAMMES
• In 2000, the BSP (Bangko Sentral ng Pilipinas) was mandated by the
General Banking Law to recognize microfinance as a legitimate banking
activity and to set rules and regulations for its practice within the
banking sector. It was also the same year, the BSP declared microfinance
as its flagship programme for poverty alleviation.
•In 2005, the United Nations declared as International Year of Microcredit
to highlight the role of microfinance in poverty alleviation and economic
development. Through BSP’s advocacy, 2005 was also declared as the
Philippine Year for Microfinance through Presidential Proclamation 719
and Senate Resolution 124
BRIEF HISTORY OF FINANCIAL INCLUSION
POLICIES AND PROGRAMMES
• In 2006, the BSP focused its microfinance initiatives on increasing the scale and scope of
microfinance in the country, specifically within the banking sector.
• In 2007, the microfinance industry was characterised by innovation, dynamism and
continued growth. The BSP remained responsive to these changes while maintaining the
focus of its microfinance initiatives on increasing the scale and scope of microfinance in
the country, specifically within the banking sector.
• In 2008, the microfinance industry saw continuous growth and dynamism with the
backdrop of an enabling policy and regulatory environment. New players, a wider range
of products and services, technological innovations and applications have driven much of
the microfinance developments in the country.
BRIEF HISTORY OF FINANCIAL INCLUSION
POLICIES AND PROGRAMMES
• In 2009, the First Annual Global Microfinance Index and Study declared the Philippines
as the best in the world in terms of its microfinance regulatory framework. Overall, the
Philippines ranked third in the world following the microfinance leaders, Peru and
Bolivia.
• In 2010, the Economist Intelligence Unit (EIU), in its “Global Microscope on the
Microfinance Business Environment”, ranked the Philippine regulatory environment for
microfinance as the best among 54 countries in the world. In terms of overall
microfinance business environment, the Philippines moved up the rank, occupying the
number two position in 2010, from being number three in 2009. The EIU cited the BSP’s
regulations that expand the range of microfinance products that banks can offer to their
clients as the main reason for the upward ranking of the Philippines. This citation affirms
that the BSP’s regulatory approach and initiatives in microfinance and financial inclusion
are making an impact, and are truly benefiting the microfinance market.
BRIEF HISTORY OF FINANCIAL INCLUSION
POLICIES AND PROGRAMMES
• In 2011, there was mainstreaming of financial inclusion in the domestic and
international policy agendas, in light of growing recognition of the
importance of financial inclusion as a policy objective. Along with this, the
Philippine Development Plan (PDP 2011-2016) laid out its vision for the
financial sector as a “regionally responsive, development-oriented and
inclusive financial system which provides for the evolving needs of its
diverse public”.
MICROFINANCE DEFINITION
According to Investopedia, MICROFINANCE is a financial services provided
to unemployed or low-income individuals or groups who lack access to
conventional banking services.
Microfinance aims at filling this gap and give access to financial services
such as savings, credit, insurance and money transfer to people that
otherwise would remain unserved.
Microfinance institutions (MFIs) deliver basic financial services to poor and
low income people, or microentrepeneurs, with little or no access to the
formal financial system. MFIs developed specific products and
methodologies to overcome the shortfall of collaterals of clients and
therefore make them eligible to get loans and other financial services.
Who are the clients of microfinance?
MICROENTREPRENEURS
Microentrepreneurs, or economically active poor, are business people who
through microfinance take advantage of economic opportunities that
otherwise would remain unmatched due to financial constraints.
Credit is given to support “microbusinesses”, allowing low-income people
to respond to economic opportunities.
MICROFINANCE AND MONEYLENDERS
Moneylenders are the more direct competitors of MFIs. Poor people,
excluded from the formal financial system, most of the time have the only
alternative of this kind of informal sources of funds.
Positive features:
Simple procedures, clear terms, timely disbursement and loans backed by
the borrowers’ character rather than collaterals
MICROCREDIT AND MICROFINANCE
MICROCREDIT is a part of the field of microfinance. Microcredit is the
provision of credit services to low-income entrepreneurs, while
MICROFINANCE includes credit, savings and increasingly additional financial
services such as insurance and money transfer.
MICROCREDIT AND MICROFINANCE
MICROCREDIT
AND
MICROFINANC
E
FINANCIAL SUSTAINABILITY
✔ To carry on business, financial institutions and in general all corporations,
need the necessary funds. These can be raised in several different ways:
they can issue shares
✔ Debt financing
✔ Banks can then collect savings from their clients.
✔ Additional resources can come from donations, grants or soft loans
MICROFINANCE AND BANKS
The relative importance of the different sources differs between different
financial institutions. Financial NGOs typically rely on donor subsidies and
are not allowed to collect savings, while commercial banks rely on their
own sources of funds, deposits of the clients (savings) and equity capital.
Collecting savings is generally forbidden to NGOs as a special banking
license is needed in order to protect savers in case of the institution’s
default. At present, the main sources of funds for MFIs are charities,
governments and international organizations. Most MFIs rely heavily on
donor support and are not financially viable.
MICROFINANCE AND BANKS
The relative importance of the different sources differs between different
financial institutions. Financial NGOs typically rely on donor subsidies and
are not allowed to collect savings, while commercial banks rely on their
own sources of funds, deposits of the clients (savings) and equity capital.
Collecting savings is generally forbidden to NGOs as a special banking
license is needed in order to protect savers in case of the institution’s
default. At present, the main sources of funds for MFIs are charities,
governments and international organizations. Most MFIs rely heavily on
donor support and are not financially viable.
IMPORTANCE OF MICROFINANCE
1. Provides access to financial services
2. Allows people to better provide for their families
3. Provides access to credit
4. Serves groups often overlooked in society
5. Offers a better overall loan repayment model
6. Creates opportunities to end the cycle of poverty