Fundamentals of Microfinance

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Presentation by: Maria Kristina S. Galvez Project Manager – Social Enterprise Unit Punla sa Tao Foundation

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Fundamentals of Microfinance. Presentation by: Maria Kristina S. Galvez Project Manager – Social Enterprise Unit Punla sa Tao Foundation. Presentation Outline. Where Did It All Began: The Grameen Bank The Philippine Financial System Philippine Microfinance Profile - PowerPoint PPT Presentation

Transcript of Fundamentals of Microfinance

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Presentation by:

Maria Kristina S. GalvezProject Manager – Social Enterprise UnitPunla sa Tao Foundation

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Where Did It All Began: The Grameen BankThe Philippine Financial SystemPhilippine Microfinance ProfileProcess and Procedure: How Does Microfinance Work?Impact Assessment: Does Microfinance Really Work?Microfinance and the Financial Crisis

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Why the poor cannot borrow from other formal financial institutions?

Can the poor really pay or save?

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Dr. Mohammad YunusFounder, Grameen BankNoble Peace Prize Winner, 2006

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Grameen means “village” – thus, Village BankingEnvisioned as the “biggest development wonder”Extended banking facilities to poor men and womenAimed to create opportunities for self-employment in rural Bangladesh

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From “low income, low saving & low investment“ into "low income, injection of

credit, investment, more income, more savings, more investment, more income".

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Defined as provision of financial services, savings and credit to the poor on a sustainable basis.

CreditSavings

Other Financial Services (ex. Insurance)

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Serve the poor or reduce poverty

while at the same time

Pursue the business to maximize return on investments

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NGOs – 500Rural Banks – 195Savings and Credit Cooperatives – 4,579

Source: GTZ-PhilHealth Orientation for Microfinance

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Near Poor

E-Poor

Laboring

Ultra-

Poor

Entrepreneurial Poor or “e-poor”

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17 million people still do not have access to financing services

Source: National Anti-Poverty Commission, 2005

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Process, Approach and Methodologies

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Group Lending

• Around 5-30 members per group• Members guarantee each other’s loan

Example: Grameen methodology

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Individual Lending

• Loans are given based on the capacity to pay (Household or Business Cash Flow)

• With collateral or co-maker• Clients are screened for credit checks or

character references• Loan size are tailored to business needs.

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CreditSavings

Compulsory SavingsVoluntary Savings

InsuranceDeath InsuranceHealth Insurance

Payment ServicesAgricultural Microfinance

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Client Orientation Credit/Background Investigation 1

Loan Documentation

Loan Review and Approval

Processing DisbursementCollection

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Small loans granted to borrowers based on cash flowGiven to increase income levels, for small enterprises

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Amount starts from Php 2,000 to Php 5,000 and maximum principal amount pegged at Php150,000

Equivalent to the maximum capitalization of a microenterprise (under RA 8425)

Source: Bangko Sentral ng Pilipinas

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Direct Costs1. Costs of Funds for lending2. Cost of Risk (Loan Loss)3. Administrative Costs4. Expand Capital Base

Indirect Costs1. Staff Salaries2. Other Operating

expenses

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Old Approach – subsidized interest ratesNew Approach – market-based interest rates

The new approach permits the microfinance institution to cover the costs in lending a loan,

thus making it sustainable.

Interests at MFIs are currently at 2% - 3% per month

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Commercial banks deal with large loans therefore their transaction costs are lower.Government-owned MFIs are also lower because of political considerations.Some MFIs charge very low rates (ex. 20% per annum), but incur losses. Losses are recovered through subsidies.

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A “win-win” proposition: more microcredit lent and gross returns to lenders.

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Government should continually seek consultation with MFIs to understand better the

infrastructure bottlenecks they face.

The government should not lend, rather make an enabling environment for lending.

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Studies and Evidences

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Majority of existing clients and new clients are not poor according to the official definition.No significant impact on household assets and human capital investments.For microfinance to be an effective poverty-alleviation tool, beneficiaries must be identified correctly.

Source: Kondo, Toshio (2007) Impact of Microfinance on Rural Household in the Philippines, ADB

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Asian Financial Crisis : Banking and currency crises had little relevance to subsistence-based economies in closed ecosystem marketsMoney will become more scarce, more conservative, and more costly.Financial pressures on families may lead to less savings and more withdrawals.

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Risk Management, Good Governance and Shift to

More Enterprising Environment for Clients!

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Maybe necessary, but not sufficient as a poverty-alleviation tool.Microfinance should pay for itself to reach more poor people.The role of the government is to enable financial services, not to provide them.

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