Microfinanceuniversity of Luzon

7/31/2019 Microfinanceuniversity of Luzon

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DR. AMALIA G. DELA CRUZUniversity of Luzon

College of Business Administration1stSemester2011-2012

Microfinance


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Mrs. Israel, 48 years old

Unemployed husband

4 children

No savings

Good cook

Mrs. Israel decides to start a small catering service athome

Mrs. Israel goes to the bank and makes a demand for aloan at her bank

MRS. ISRAELS DEMAND IS REJECTED

Case study

CASE STUDY


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Why are people excluded from certain financial

services?

Justification and definition of microfinance

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 inremoted areas

WHAT IS THE ALTERNATIVE?

MICROFINANCE

Justification and definition ofmicrofinance


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Justification and definition of microfinance

FINANCEMICRO

Micro-entrepreneurs

Self-employed Low income populations Excluded populations

Business & educational loans

Savings Micro-insurances Remittances

Micro-entrepreneur training Coaching & workshops onhealth, hygiene, etc.

Justification and definition ofmicrofinance


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What is Microfinance?

It is a provision of a broad range of financialservices such as deposits, loans, paymentservices, money transfers and insurance

products to the poor and low incomehouseholds and their microenterprises


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-the provision of financial services to low-income clients orsolidarity lending groups including consumers and the self-employed, who traditionally lack access to banking andrelated services.

-a world in which as many poor and near-poor householdsas possible have permanent access to an appropriaterange of high quality financial services, including not justcredit but also savings, insurance, and fund transfers.

-Microfinance is a broad category of services, whichincludes microcredit. Microcredit is provision of creditservices to poor clients.
http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Solidarity_lendinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Solidarity_lendinghttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Financial_services


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Poor people borrow from informal moneylendersand save with informal collectors. They receiveloans and grants from charities. They buy insurancefrom state-owned companies. They receive funds

transfers through formal or informal remittancenetworks. It is not easy to distinguish microfinancefrom similar activities. It could be claimed that agovernment that orders state banks to open depositaccounts for poor consumers, or a moneylenderthat engages in usury, or a charity are engaged inmicrofinance.
http://en.wikipedia.org/wiki/Informal_economyhttp://en.wikipedia.org/wiki/Grantshttp://en.wikipedia.org/wiki/Charitieshttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Charitieshttp://en.wikipedia.org/wiki/Grantshttp://en.wikipedia.org/wiki/Informal_economy


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Important Features of the Definition

It is not just credit

It has a target market - the poor and lowincome households

It is linked to the microenterprise


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Principles in microfinance


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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 raiseincome, build up assets and/or cushion themselves against external shocks.3. Microfinance can pay for itself. Subsidies from donors and government arescarce 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 intoa 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.
http://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Insurance


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8. The key bottleneck is the shortage of strong institutions andmanagers. Donors should focus on capacity building.

9. Interest rate ceilings hurt poor people by preventing microfinanceinstitutions from covering their costs, which chokes off the supply ofcredit.10. Microfinance institutions should measure and disclose theirperformance both financially and socially.

Microfinance is considered as a tool for socio-economic developmentand can be clearly distinguished from charity. Families who aredestitute, or so poor they are unlikely to be able to generate the cashflow required to repay a loan, should be recipients of charity. Others

are best served by financial institutions.
http://en.wikipedia.org/wiki/Bottleneckhttp://en.wikipedia.org/wiki/Bottleneck


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Invigorating MICROENTERPRISES through

access to MICROFINANCE can lead to

economic growth and development on the

local and national level.


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What Microfinance is NOT Subsidized Credit Dole-out

Consumption/ Salary Loan Cure-all for poverty


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Who are the Clients?

Near PoorE-poor

Laboring

Ultra Poor


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Features of Microfinance Loans

Fit for those who can not accesstraditional sources of financing

Innovative Product Designs Use of collateral substitutes Short term loans

Frequent amortizations

Inclusion of savings Enterprise lending

Simple Documentation Requirements


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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 andeducation


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Myths, Misconceptions and

Barriers

Poor people can not pay market interestrates and can not save

Microfinance institutions are primarily civic-

oriented, non-profit organizations that cannot be sustainable and viable

Microfinance institutions can not access

commercial funds


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Myths, Misconceptions and

Barriers

High transaction costs of serving the poor

Regulatory barriers

Implementation of government directed creditprograms

Poor are intimidated by formal institutions

Lack of infrastructure and physical access toformal institutions


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New Paradigm of Microfinance

From beneficiaries to clients

From directed credit to market

approach From evolving programs to evolving

institutions

From donor dependence to financiallyself sufficient institutions with access tocommercial funding

K S F f


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Key Success Factors forMicrofinance 4 Cs

Clearly identified market

Capable and committed staff

Creative methodologies and technologies Commitment to standards and best practices


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Best Practices for Microfinance

Appropriate Products for Clients (flexible,accessible, simple in process anddocumentation, appropriately priced, andpermanent)

Appropriate Delivery Clear Organizational/ Institutional

Structure (Governance)

Adequate Risk Management (Use ofPortfolio-at-Risk, Zero Tolerance forDelinquency)

Subscription to Performance Standards

L di Mi fi


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Leading MicrofinanceMethodologies

Group Methodology -

Microfinance services areprovided in the context of agroup.

S E l f G


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Some Examples of GroupMethodolgy

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, peersupport/pressure)

ASA (A i ti f S i l


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ASA (Association for SocialAdvancement)

7-8 groups of 5 women forming 1 center

Disbursement and collection through center

Simultaneous disbursement of loans

Collateral substitute (i.e. peersupport/pressure)

L di Mi fi


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Leading MicrofinanceMethodologies

Individual Methodology - single

client lending where repaymentand schedules rely solely on theindividual (cash-flow, character

based lending)

S E l f I di id l


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Some Examples of IndividualMethodology

MABS approach (Microenterprise Access toBanking 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

Wh C I A


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Where Can I AccessMicrofinance?

Banks (Rural, Thrift, Some Commercial

NGOs

Cooperatives


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BSP Initiatives

Anchored on the General Banking Law of2000, Sections 40, 43 and 44

Recognizes the peculiar characteristics ofmicrofinance in the requirements, termsand amortization of loans and other creditaccommodations.


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Policy and RegulatoryEnvironment

Issuance of 13 Circulars governing thepractice of microfinance in the bankingsector provides incentives like

rediscounting, recognize microfinanceloans (no collateral, loan documentations,etc), allow for branching, promote bestpractices

Modification of Manual of Examination toinclude microfinance operations

Member of the Technical Workin Grou


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Training And Capacity Building

Creation of a Microfinance Committeeand Microfinance Unit

Establishment of a Core Group of BSPMicrofinance Examiners

Inclusion of microfinance in the Basic

Rural and Thrift Banking Courses Conduct of training for banks on

microfinance best practices


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Promotion And Advocacy

Regional tour to promote microfinancebest practices to practitioners and

potential players

BSP as Chair of the PhilippineCelebration of the UN International Yearof Microcredit

Microentrepreneur of the Year Awards


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DR. AMALIA G. DELA CRUZ

Thank you.

Microfinanceuniversity of Luzon

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