Microfinance
DR. AMALIA G. DELA CRUZ
University of Luzon College of Business Administration 1st Semester 2011-2012
Case study
CASE STUDY
Mrs. Israel, 48 years old Unemployed husband 4 children No savings Good cook Mrs. Israel decides to start a small catering service at home Mrs. Israel goes to the bank and makes a demand for a loan at her bank MRS. ISRAELS DEMAND IS REJECTED
Justification andand definition of Justification definition of microfinance
microfinance
Why are people excluded from certain financial services?
Lack collateral or guarantors A bad credit history Gap in the communication / lack of confidence in the Banks Doubt of the bank of the repayment capacity Lack of access to financial infrastructure and services in remoted areas
WHAT IS THE ALTERNATIVE? MICROFINANCE
Justification andand definition of Justification definition of microfinance
microfinance
MICRO FINANCE
Micro-entrepreneurs Self-employed Low income populations Excluded populations
Business & educational loans Savings Micro-insurances Remittances
Micro-entrepreneur training Coaching & workshops on health, hygiene, etc.
What is Microfinance?
It is a provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low income households and their microenterprises
-the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. -a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. -Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients.
Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity are engaged in microfinance.
Important Features of the Definition
It is not just credit It has a target market - the poor and low
income households It is linked to the microenterprise
Principles in microfinance
1. Poor people need not just loans but also savings, insurance and money transfer services. 2. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. 3. Microfinance can pay for itself. Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 4. Microfinance means building permanent local institutions. 5. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. 6. The job of government is to enable financial services, not to provide them. 7. Donor funds should complement private capital, not compete with it.
8. The key bottleneck is the shortage of strong institutions and managers. Donors should focus on capacity building. 9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. 10. Microfinance institutions should measure and disclose their performance both financially and socially. Microfinance is considered as a tool for socio-economic development and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions.
Invigorating MICROENTERPRISES through access to MICROFINANCE can lead to economic growth and development on the local and national level.
What Microfinance is NOT
Subsidized Credit
Dole-out Consumption/ Salary Loan Cure-all for poverty
Who are the Clients?
Near Poor
E-poor
Laboring Ultra Poor
Features of Microfinance Loans
Fit for those who can not access
traditional sources of financing Innovative Product Designs
Use of collateral substitutes Short term loans Frequent amortizations Inclusion of savings Enterprise lending Simple Documentation Requirements
Benefits of Microfinance for Microenterprises
Increase economic activity and income Generate employment Save and invest in the future Guard against emergencies and shocks Better invest in health, nutrition and
education
Myths, Misconceptions and Barriers
Poor people can not pay market interest
rates and can not save Microfinance institutions are primarily civicoriented, non-profit organizations that can not be sustainable and viable Microfinance institutions can not access commercial funds
Myths, Misconceptions and Barriers
High transaction costs of serving the poor Regulatory barriers Implementation of government directed credit
programs
Poor are intimidated by formal institutions Lack of infrastructure and physical access to
formal institutions
New Paradigm of Microfinance
From beneficiaries to clients From directed credit to market
approach From evolving programs to evolving institutions From donor dependence to financially self sufficient institutions with access to commercial funding
Key Success Factors for Microfinance 4 Cs
Clearly identified market Capable and committed staff Creative methodologies and technologies Commitment to standards and best
practices
Best Practices for Microfinance
Appropriate Products for Clients
(flexible, accessible, simple in process and documentation, appropriately priced, and permanent) Appropriate Delivery Clear Organizational/ Institutional Structure (Governance) Adequate Risk Management (Use of Portfolio-at-Risk, Zero Tolerance for Delinquency) Subscription to Performance Standards
Leading Microfinance Methodologies
Group Methodology -
Microfinance services are provided in the context of a group.
Some Examples of Group Methodolgy
Grameen Methodology
7-8 groups of 5 women forming 1 center Disbursement and collection through center Loans are provided on a rotation basis (2-2-1) Collateral substitute (i.e. JSS, peer
support/pressure)
ASA (Association for Social Advancement)
7-8 groups of 5 women forming 1 center Disbursement and collection through center Simultaneous disbursement of loans Collateral substitute (i.e. peer
support/pressure)
Leading Microfinance Methodologies
Individual Methodology - single
client lending where repayment and schedules rely solely on the individual (cash-flow, character based lending)
Some Examples of Individual Methodology
MABS approach (Microenterprise Access to
Banking Service)
USAID funded technical assistance to rural
banks that want to engage in microfinance Individual loans are granted based on the character and household cashflow Culture of zero tolerance for delinquency
Where Can I Access Microfinance?
Banks (Rural, Thrift, Some Commercial NGOs Cooperatives
BSP Initiatives
Anchored on the General Banking Law of
2000, Sections 40, 43 and 44 Recognizes the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations.
Three-Pronged Approach
and banking sector
Promotion and Advocacy
Microfinance Friendly Policy and Regulatory Environment
Training and Capacity Building within BSP
Policy and Regulatory Environment
Issuance of 13 Circulars governing the
practice of microfinance in the banking sector provides incentives like rediscounting, recognize microfinance loans (no collateral, loan documentations, etc), allow for branching, promote best practices include microfinance operations
Modification of Manual of Examination to
Member of the Technical Working Group
that established the regulatory framework and performance standards for all types of
Ways How a Bank can Engage in Microfinance
Establishment of a microfinance-oriented
bank Establishment of a microfinance-oriented branch Establishment of a microfinance unit within an existing bank
Training And Capacity Building
Creation of a Microfinance Committee
and Microfinance Unit Establishment of a Core Group of BSP Microfinance Examiners Inclusion of microfinance in the Basic Rural and Thrift Banking Courses Conduct of training for banks on microfinance best practices
Promotion And Advocacy
Regional tour to promote microfinance
best practices to practitioners and potential players
BSP as Chair of the Philippine
Celebration of the UN International Year of Microcredit
Microentrepreneur of the Year Awards
Banking Sector Exposure to Microfinance
As of March 31, 2006 (in millions)
Micro Loans Portfolio
Amount Microfinance-oriented Banks: Thrift Banks (5 banks) 212.400 Rural Banks (4 banks) 230.992 Traditional Banks: Thrift Banks (9 banks) 144.666 Rural Banks (159 banks) 2,373.291 410,110 Cooperative Banks (27 banks) Total (204 banks) 696.803 97,899 593.180 No. of Borrowers 50,187 34,984
3,658.052
Thank you.
DR. AMALIA G. DELA CRUZ