Microfinance

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Microfinance

Sarinee Achavanuntakul17 September 2010

งานน้ีเผยแพร่ภายใตล้ขิสทิธิ ์Creative Commons แบบ Attribution Non-commercial Share Alike (by-nc-sa) โดยผูส้รา้งอนุญาตใหท้ าซ า้ แจกจ่าย แสดง และสรา้งงานดดัแปลงจากสว่นใดสว่นหนึ่งของงานนี้ไดโ้ดยเสร ีแต่เฉพาะในกรณีทีใ่หเ้ครดติผูส้รา้ง ไม่น าไปใชใ้นทางการคา้ และเผยแพร่งานดดัแปลงภายใตล้ขิสทิธิเ์ดยีวกนัน้ีเท่านัน้

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Topics

The concept and models of microfinance

Does microfinance really help the poor?

Microfinance in Thailand: some preliminary findings from field research

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The concept and models of microfinance

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What is microfinance?

Microfinance institutions (MFIs) provide financial services for the poor

Not ‚informal players‛ e.g. moneylenders, self-help groups

Definition of ‚the poor‛ varies People living below poverty line

People who have little access to formal banking, especially in rural areas

Two kinds of incentives ‚Social business‛ : social mission at the core, aims to be financially

sustainable -- most MFIs. This will be the subject of these slides

‚Commercial microfinance‛ : profit-oriented MFIs

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Types of microfinance products

Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007.

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Types of players

NGOs

Cooperatives

Credit unions

Nonbank financial institutions (e.g. village banks)

Microfinance banks

Commercial & state banks

Post office

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Two basic types of microfinance institutions

Lending-based Focus on lending to build capacity of micro-entrepreneurs

Develop saving products afterward (voluntary and mandatory saving)

Funding: soft loans or grants from governments or development agencies, consumer deposits, loans from commercial banks

Saving-based Focus on building long-term savings and provide welfare to those outside

formal social safety nets

Funding: consumer deposits, soft loan / grants from gov. & dev. agencies

Tend to be more conservative than lending-based MFIs

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Some typical features Typical microcredit features No collateral requirement – typically use ‚social capital‛ (e.g. group of 5,

cross-guaranteeing each other) in lieu of asset-based collateral

Flexible repayment schedule – typically no bullet repayment; small installments on a weekly/monthly basis

25%-40% effective interest rate

No accrued interest & penalty rates on overdue loans

Social commitment / mission Empowerment of borrowers through joint ownership & group decisions

Foster community business, social activities, other programs

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‚Grameen microcredit highway‛

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The microfinance universe: growing, but no consensus #

Source: The MiX Market, http://www.mixmarket.org/, data on 1,400+ MFIs

Total MFI assets approx. $30 billion, 73% serve <2,500 clients

CGAP estimates 750+ million MFI saving & loan accounts

Microcredit Summit Database includes 3,133 MFIs; MBB 1,400+

http://www.mixmarket.org/

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Growth patterns suggest a ‘maturing’ sector

Source: MicroBanking Bulletin No. 18, http://www.themix.org/

http://www.themix.org/

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Growth patterns suggest a ‘maturing’ sector (cont.)

Source: MicroBanking Bulletin No. 18, http://www.themix.org/. The data covers 487 MFIs in 78 countries, representing 82% of outstanding loans and 75% of worldwide MFI borrowers as at the end of 2007.

Growth in borrowers & portfolio Shift to commercial funding


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Forbes ranking of ‚Top 50 MFIs‛ in 2007

Source: http://www.forbes.com/2007/12/20/microfinance-philanthropy-credit-biz-cz_ms_1220microfinance_table.html

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Microfinance is still unable to meet potential demand…

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…but there is increasing diversity of funds universe…

11 funds

27 funds

12 funds

17 funds

15 funds 7 funds

Source: The MiX Market, http://www.mixmarket.org/

http://www.mixmarket.org/

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…an increasing variety of vehicles and funders...


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…and increased interest from big commercial players


Increase in local competition amongst MFIs

Increase in competition from local commercial banks

Growing interest of international banks and investors

Greater transparency, allows for measurement and benchmarking of financial performance

Increasing role played by microfinance rating agencies

Recent trends

Current issuesOn the positive side: Growing industry – number of institutions & clients. Largely survived the food (2007) financial (2008) and economic (2009) crises. But challenges remain: economic turmoil, approx. 2.5 billion people still don’t

have access.Weakness & downsides: Development impact – does it really help the poor? Excessive (or not?) profit-making behavior

Exorbitant interest rates Over-indebtedness Microfinance ‚bubbles‛?

Cull, Demirgüc-Kunt, and Morduch (2007) define mission drift as

‚… a shift in the composition of new clients, or a reorientation from poorer to wealthier clients among existing clients.‛

Armendáriz and Szafarz (2009) define mission drift as

“ … a phenomenon whereby an MFI increases its average loan size by reaching out wealthier clients neither for progressive lending nor for cross subsidization reasons.”

‚Mission Drift‛ in microfinance

http://www.microfinancegateway.org/gm/document-1.9.26346/31219_file_23.pdf





http://www.microfinancegateway.org/gm/document-1.9.34306/56836.pdf



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Does microfinance really help the poor?

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CGAP: Principles of microfinance

The poor need a variety of financial services, not just loans. Just like everyone else, poor people need a wide range of financial services that are convenient, flexible, and reasonably priced. Depending on their circumstances, poor people need not only credit, but also savings, cash transfers, and insurance.

Microfinance is a powerful instrument against poverty. Access to sustainable financial services enables the poor to increase incomes, build assets, and reduce their vulnerability to external shocks. Microfinance allows poor households to move from everyday survival to planning for the future.

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CGAP: Principles of microfinance (cont.)

Microfinance means building financial systems that serve the poor. Poor people constitute the vast majority of the population in most developing countries. Yet, an overwhelming number of the poor continue to lack access to basic financial services.

Financial sustainability is necessary to reach significant numbers of poor people. Most poor people are not able to access financial services because of the lack of strong retail financial intermediaries. Building financially sustainable institutions is not an end in itself. It is the only way to reach significant scale and impact far beyond what donor agencies can fund.

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Microfinance is about building permanent local financial institutions. Building financial systems for the poor means building sound domestic financial intermediaries that can provide financial services to poor people on a permanent basis. Such institutions should be able to mobilize and recycle domestic savings, extend credit, and provide a range of services.

Microcredit is not always the answer. Microcredit is not appropriate for everyone or every situation. The destitute and hungry who have no income or means of repayment need other forms of support before they can make use of loans.

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Interest rate ceilings can damage poor people’s access to financial services. It costs much more to make many small loans than a few large loans. Unless microlenders can charge interest rates that are well above average bank loan rates, they cannot cover their costs, and their growth and sustainability will be limited by the scarce and uncertain supply of subsidized funding.

The government’s role is as an enabler, not as a direct provider of financial services. National governments play an important role in setting a supportive policy environment that stimulates the development of financial services while protecting poor people’s savings.

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Donor subsidies should complement, not compete with private sector capital. Donors should use appropriate grant, loan, and equity instruments on a temporary basis to build the institutional capacity of financial providers, develop supporting infrastructure (like rating agencies, credit bureaus, audit capacity, etc.), and support experimental services and products.

The lack of institutional and human capacity is the key constraint. Microfinance is a specialized field that combines banking with social goals, and capacity needs to be built at all levels. Most investments in the sector, both public and private, should focus on this capacity building.

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The importance of financial and outreach transparency. Accurate, standardized, and comparable information on the financial and social performance of financial institutions providing services to the poor is imperative. Bank supervisors and regulators, donors, investors, and more importantly, the poor who are clients of microfinance need this information to adequately assess risk and returns.

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Some latest findings: the story vs. the reality

The story: ‚Microfinance funds creation and expansion of microenterprises, producing additional income that lifts the borrowers’ households out of poverty.‛

The truth, naturally, is more complicated. One problem is the complex issue of causality – Randomized Controlled Trials (RCTs) is still new to this field.

The verdict is still out on whether microfinance reduces poverty on average (i.e. not making some poor worse off the way credit cards made some middle income consumers worse off).

Income may not increase, but ‚consumption smoothing‛ is a benefit.

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The real benefit of microfinance

The problem with being poor is not just that income is low, but also that it tends to be uneven and vulnerable to disruption. Given the variability and vulnerability of their income, poor households have to save and borrow constantly in order to put food on the table and meet other consumption needs.

Since informal credit and savings mechanisms tend to be unreliable, microfinance customers value formal microfinance highly because it is more reliable, even if it is often less flexible than their other tools to manage their cash flow.

Millions of microfinance customers are ‚voting with their feet.‛

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Looking at microfinance from ‚capabilities approach‛

Applying Amartya Sen’s capabilities approach as described in ‚Development as Freedom‛ to microfinance leads to some interesting issues:

Good research question: when does microfinance gives people more control over their lives and when less?

Also, from the perspective that development is a tool for institution-building, one important contribution of microfinance is the enrichment of important institutions: enhancing social cohesion, encouraging civic participation, etc.

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Microfinance in Thailand: some preliminary findings from field research

‚Grassroots finance‛ in ThailandThere are 3 kinds of players in Thailand’s ‚grassroots finance‛ space

1. State-owned banks: Bank for Agriculture and Agricultural Cooperatives (BAAC), Krung Thai Bank, Government Savings Bank, Government Housing Bank

2. Semi-formal groups (set up as government’s initiatives): 78,013 Baht 1 million village funds (some upgraded to ‚community banks‛), 1,227 saving cooperatives, credit unions, and saving-for-production groups. The assets of these groups total approx. Baht 900 billion.

3. Informal groups (set up as villagers’ own initiatives): one-Baht savings groups, one-Baht expense reduction groups, etc. Total assets approx. Baht 30 billion.

Semi-formal groups and informal groups serve approx. 12 million people.

Some preliminary findings from field research Very few grassroots finance groups in Thailand aim to make financial

profits. Most only want to ‚safeguard‛ their capital and fulfill social mission. Therefore, financial stability remains more important than profitability.

Many of the groups’ concerns are governance issues, e.g. the difficulty of finding ‚new blood‛ to succeed directors, lack of accounting training.

Benefits to clients from savings-based groups seem to be more tangible in the form of welfare (e.g. childbirth stipend, sickness allowance, funeral rites allowance) paid from clients’ collective savings. Operational sufficiency is major risk.

Benefits to clients from loan-based groups are less clear. Major risk lies in the inability of clients to use loans to raise living standards. Delinquency is not so much a problem since most clients ‘refinance’ from other groups.

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Key characteristic, by grade

Greatly increases financial

and/or quality of life of clients

Strongly sustainable financiallyA

B

C

D

Reasonably increases financial

and/or quality of life of clients

Reasonably sustainable

financially

Increases financial and/or

quality of life of clients

Financial sustainability

doubtful

Cannot gain trust from members

High risk of financial

unsustainability

Creates solid linkages of finance-employment-welfare

Efficient and transparent financial management

Enables members to have working capital

Has member information, guarantor system, audit system

No non-performing loans

Enables members to have working capital

Unsound/unclear accounting

Expands too aggressively

Has non-performing loans

Excludes villagers, not transparent

Borrowers and guarantors do not repay

Major results

Has member information, guarantor system, audit system

Characteristics of Thai grassroots finance groups

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Village A village fund

Village B village fund

Village bank

Village C village fund

Women lending group

Savings group

Islamic savings group

District financial institution

Money lender

BAAC branchGSB branch

Rubber plantation

Fruit plantation

crops

Shops

Local ‚wall street‛ in Nakon Si Thammarat

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Village A

Village

Bank

Village A

Savings Group

Village A

Village

Fund

200 clients from

outside Village A

300 members

vouch

money

voucher,

guarantor

Community financial group A

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Group 1

Group 2

Group 3

Group 4

Financial

groups in

network

Village B

Village Fund

money

Community financial group B

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Saving Group Dmember

membermember

member

group

directors

money

knowledge,

audit

Village A

Saving group

member

membermember

member

group

directors

member

membermembergroup

directors

community

business

Saving group network in Nakon Si ThammaratVillage B

Saving group

Village C

Saving group

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1 3 6 9 12 3

Baht

1

Loans from

village fund

Loans from

another

source

Crop income

Cash inflow Cash outflow

Expenses: household

expenditures & agri investment

20,000

Assuming normal crop year without

natural disaster, monocrop plantation

5 rounds of rice farming in 2 years, 30

rais of land

Month

Savings

Farmer’s cash flow example: Chainat province

Case study: comparison of financial performance

Financial Performance Indicators 2007Savings Group

Lending Group 1

Lending Group 2

Net profits / Assets 4.0% 0.9% 3.3%

Dividends / (Equity + Deposits) 7.0% 0.0% 3.3%

Outstanding Loans / (Equity + Deposits) 107.1% 75.1% 70.9%

Interest Revenues / Total Loans 4.9% 11.9% 6.3%

Operating Expense / Revenues 32.5% 53.1% 20.0%

Total Loans per Borrower (Baht) 24,586 7,845 5,392

Welfare Expense per Borrower (Baht) 308 23 18

Net Profits before Welfare / Welfare Expense 0.87 14.60 13.00

Welfare Expense / (Welfare Funds & Deposits) 8.4% 0.6% 0.7%

Preliminary field research findings Few village banks are focused on generating profits. Most aim to

financially break even (‚safeguard funds‛) and focus more on social performance. Financial stability is more important than profitability.

Many concerns/risks are management issues: difficulty to find new directors, some groups don’t have enough knowledge of accounting, resulting in accounting numbers not reflecting real performance.

Key risk of savings-focused groups: insufficiency of funds to provide welfare esp. funeral payouts in light of annual dividends & aging pop.

Key risk of lending-focused groups: inability to use microcredit as leverage out of poverty, resulting in no reduction in debt burden (low NPL figure due to constant refinance e.g. from informal loans).

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Members’ quality of life

Financial sustainability

low

Highly accessible for poor people – High risk of NPLs & low financial sustainability

High refinance rate & low NPL ratio - Group is financially sustainable, but members’ quality of life hasn’t much improved

High interest rate - Group is financially sustainable w/ enough profits for dividend/welfare payout, but very hard to access for poor people

Low loan/deposits ratio - Group is highly financially sustainable, but members’ quality of life hasn’t much improved

Highly accessible for poor people - welfare expense rises faster than deposits, low financial sustainability

high

low

high

Financial sustainability vs. members’ quality of life

Microfinance

Education

Transcript of Microfinance