Nongluck Suphanchaimat Faculty of Agriculture Khon Kaen University

Nongluck Suphanchaimat Faculty of Agriculture

Khon Kaen University

• Landless• Not belonging/ unentitlement• Food deficit/unable to produce enough

for home consumption

• Risk averse

• Lack of capital

Characteristic of the poor

• The poor have not been served by financial institutions due to high risks, high cost of management, lack of collateral.

• The poor rely on informal sources because lack of collateral and easy access

• Existing formal lending institutions cannot reach poor people with conventional way of working

Lack of capital for investment may prevent poor people from new opportunities.

The year 2005 has been declared the International Year of Micro credit.

“Microfinance has proved its value, in many countries, as a weapon against poverty and

hunger. It really can change peoples’ lives for the better – especially the lives of those

who need it most.”

(Kofi Annan, quoted from The European Union’s Social Support Project in Thailand, Case Studies in Rural Development Banking,

Volume 2, January 2005)

4. Experience Microfinance in Thailand

3. Microfinance overview

2. Conventional finance system

1. Importance of capital in development

Factor of production

The Importance of finance

interestCapital

Labor

Example of economic condition of the poor

rice planted 10 rai@300 kg 3,000 kg

rice available for 5 members @250 kg

1,250 kg

Available for sell 1,750 kg@ 15 bht per kg

26,250 Bht

Cost of production 1,000 bht per rai 10,000 Bht

Interest 10,000* 0.12 1,200

Net income 15,050

Payback loan 10,000

Available for spending 5,050

Source of investment fund for entrepreneur

Source of investment fund for entrepreneur

1. Debt2. Equity1. Debt2. Equity

Owner’s fund(Equity)

AssetDebt

Introductory

Stage of work Source of Funds

Declining

Expansion

Own saving, bank and merging

Informal

Trading partner& bank

Source of capital

Profit and loss (P/L) Profit and loss (P/L)

Sales 20,000

cost of good sold 14,000

Earning Before Interest 6,000

Interest (10% of 10,000 Loan) 1,000

Net Profit 5,000

What we learn from P/L statement?What we learn from P/L statement?

• The investor can earn 20% of the Laon amount.

• Investor can pay interest easily from gross profit of 6,000

• Availability of loan fund enable investor to operate

• How much is the loan repayment? • How much profit is available for living

expenses.

Credit: Ability to borrow Credit consideration by 4 Cs

- Characteristic

- Collateral

- Capacity

- Condition

honest, good loan use record

Sufficient to coverrequested loan

refers to the ability of the business to

generate revenues in order to pay back

Loan fund, term of loan repayment schedule

• Collateral

• Repayment ability

• Decision is made by bank officers

• Mostly focus on business loan

• Difficult to reach grass-root level

Types of LoanTypes of Loan• Short term less than 1 year

• Medium less than 5 years

• Long term loan more than 5 years

Classified by borrowing objectives

• Production• trading, collection • services

Microfinance Services Microfinance is the provision of financial services such as 1. Deposits 2. Loans 3. Other Services

– Payment services – Money transfers– Insurance to poor and low-income households and their micro-enterprises

Microfinance services’ effect on poverty reduction


– Credit: • increase opportunity to invest in technology,

business expansion • less rely on informal sources leads to cost reduction • People empowerment through accessibility and

belonging

– Savings• Enhance people’s savings • Collective efforts to capital accumulation in local

areas

• As poverty reduction strategy:

- Improve access to investment funds among the poor

- Improve quality of life of the poor through increase consumption spending

- Improve resource allocation, markets technology, enhance economic development

Importance of Microfinance



Accumulation of the funds may lead to other financial services especially insurance services both life and crop insurances which help reduce risks

SavingsSavings• The poor can save

- Existing concept : S = I – E

- New concept : I – S = E

• Ways to achieve: - increase income or reduce expenses

Savings in kinds; water, wood, trees, draft animal

Group Savings

Individual/personal savings

Saving methodsSaving methods

Outcomes of the savingOutcomes of the savingFinancial discipline

Build social trust

Savings can be used as loan

collateral

Savings insure Loan

Micro credit Micro credit • Micro credit is part of microfinance • Extension of small loans to the poor who

lack collateral, steady employment and credit history

• It allows the poor to engage in self-employment projects that can generate income lead to some saving and exit poverty

• It gains credibility in banks, its success makes banks to recognize these micro credit borrowers

Micro creditConventional system• collateral and

repayment ability • Decision is made by

bank officers• Neglect grass-root level

Conventional system• collateral and

repayment ability • Decision is made by

bank officers• Neglect grass-root level

• Micro credit scheme

• trust and peer-pressure • Use group responsibility• decision-making can be

made by people at village-level which can take into account local needs and concerns.

• Usually target to poor people and small scale enterprises

• Micro credit scheme

• trust and peer-pressure • Use group responsibility• decision-making can be

made by people at village-level which can take into account local needs and concerns.

• Usually target to poor people and small scale enterprises

Source: Amphol Unves

Micro creditMicro creditClassification of micro credit

A) Traditional informal micro credit, e.g. moneylenders, pawn shops, etc.

B) Micro credit based on traditional informal groups

C) Activity-based micro credit is provided through conventional or specialized banks, e.g. agricultural credit, etc.


Micro credit: Example

I. The Grameen Bank• Started out in 1976 .• In 1983 over 30,000 landless with repayment

rate higher than previous rural credit programs

• deals with groups of five borrowers who do not have the usual collateral

• Provided small loan $30 to $50 per case• No restriction on spending and pay back on

weekly income.

• small groups has begun to encourage them to merge together into thirty-person organizations

• Monitoring done by dedicated young bank staffs who play both motivating and service role “bankers on bikes”

• The borrowing groups serve to provide both confidence and structure. Non-payment by one member will affect the other.

• borrowers can decide for themselves

The Grameen Bank

Grameen credit’s featuresGrameen credit’s features- Promotes credit as a human right- Targets the poor, particularly poor women- Based on trust, not on legal procedures

and system- Provides service at the door-step- Borrowers must join group- Loans to be paid back in installments, e.g.

weekly, bi-weekly

- Put high priority on building social capital

- Charity not an answer to poverty

- Enable the poor to build on their skill to earn better income

Grameen credit’s featuresGrameen credit’s features

II Bank of Agriculture and Agricultural cooperatives (BAAC)

II Bank of Agriculture and Agricultural cooperatives (BAAC)

• Source of funds

- deposit of clients

- Inter-bank deposit

- Long term debt

- common stock

- preferred stock

- Retained earning

• Use of funds– Individual lending

account– Cooperative lending

account– Government project

BAAC’s Micro credit Practices and Experiences

Non-farm Microcredit • 90% of rural households earn both farm and

non-farm income.

• Micro-entrepreneurs often rely on high interest rate of moneylenders’ loan and incur rising debt

• In 1980s BAAC started credit services to SMEs covered also non-farm activities.


BAAC Micro-Finance Linkage Project


• Savings mobilization, development of savings product tailored to meet poor households’ needs

• Campaign and test non-farm micro-credit services to micro-entrepreneurs

• Enhance BAAC’s staff competency and service culture to improve financial services for rural people




• Create awareness of sustainable financial institution development pertaining to BAAC and Thailand’s micro-financing

• Support branches efficient operation based on the profit center criteria.


Project ImplementationProject Implementation• Credit services:

– Maximum short-term microcredit size: 100,000 Baht

– Loan Objectives: Primarily for working capital to maintain or expand businesses and/or to increase/diversify products

- Loan repayment: Set on regular, monthly installments basis, tailored to match small non-farm entrepreneurs’ cash flow.


Project ImplementationProject Implementation– Interest rate: 1% per month flat (on the initial

loan principal), the borrower got a remittance of one/fourth of his interest paid if his installments is on schedule

– BAAC dedicated specialized microfinance staff for this non-farm segment.

– First loan disbursed on February 1998.

Scenarios– Performance: High portfolio at risk at first

customers were unwilling to repay, lack of supervision, follow-up and enforcement

How to solve?

– Appointed Non-farm microcredit officers – PR activities to make the service known to

customers.– Monitoring system: Follow-up on regularly monthly

basis when installments got closer– Law enforcement: For willful defaulters

Project ImplementationProject Implementation


• Development• Microcredit supports economic activities, e.g.

small-scale trading, food stalls, repair shops, food production, etc.

• About 65% of borrowers were women• Portfolio management: to ensure profitable

microcredit operation• Staff trained in relevance training courses. • Improved customer information/database• Branch management information system (B-MIS) on a profit

center basis



Conclusions• Project supported BAAC for development of innovative

financial products and approaches.• Innovations replicated by BAAC branches• Impacts on BAAC outreach are service quality and

– extended BAAC depositor base– Non-farm loans gave lessons, experience resulted in

risk minimizing design of loan procedures and support measures for the new market segment

– Branch management information system (B-MIS) is a new tool to uplift financial performance

• Savings are equally important than credit• Innovations must be sustainable and benefit the target

groups & increase BAAC financial viability


BAAC Social Support Project: SSP

• The project arose in response to sufferings of rural people after 1997 financial crisis

• Aims: Help BAAC to improve microfinance services quality, strengthen rural microfinance & enterprise groups.

• Core concept: Provide knowledge/skills on production to target groups first then provide to operation unit for expansion

• In some case market facilitation is undertaken


3. BAAC: Entrepreneur and General People Loan • Customers: Individuals (generally group-

based) and Legal person

• Loan Types: Working capital, investment loan

• Loan Objectives: Promote and support– Customers’ product development in

investment, production, processing, marketing– Strengthening community economy aim at

creation of industrial, commercial and service enterprises to increase income, reduce costs

– Community savings and self-reliance

BAAC: Entrepreneur and General People Loan

• Credit Worthiness Analysis:– Customer: honest, good loan use record,

knowledge & experience, financial status– Loan needs: Needs from business, work, project

plan with fact & information from customers, comparison, general standard information

– Income: Ability to generate income, sources of income to set appropriate installments repayment in line with cash flow

– Repay ability: Income after costs (operation cost, household spending) (generally repayment amount not set more than 40% of income)

– Repayment history– Collateral: stability, sufficiently covering requested

loan

BAAC Entrepreneur and General People Loan

• Loan term: not more than 18 month (on monthly repayment basis) for working capital loans, 15 years for investment loans

• Interest rate: – Minimum Retail Rate (7.5%/year) for individuals

differentiation is based on customers’ performance

– Minimum Lending Rate MLR (5.5%/year) for legal persons (differentiation in rate is based on customers’ performance)

Microfinance Challenges• Banks incur high overhead cost, they incline to

deal with better-off borrowers.

• How to lower transaction costs to operate profitably?

• The poor can save and repay debts. How can they be successful in their business?

• Microfinance needs more than lending and savings? new services, e.g. insurance, housing loan are necessary.

III. Village Fund in Thailand

Structure of village Fund operation in Thailand

Inform

Bank of Agriculture

Village fund committee

Committee (15) lending

Money

Villagers Saving monthly basis

Gov’t

Money

contract

Apply fo

r loan

Work formatWork format2/3 villagers elect VF committee

Villagers buy shares to set up village fund account

Each member can apply for one year loan maximum amount 20,000 bht.

Villagers apply loan to committee

Open account at the Bank

Gov’t transfer grant to the account

BAAC officer pay loan amount directly to villager

Committee screen applications

Register village fund unit the district office

Work formatWork format

Eligible applicants

• Reside in the village no less than 6 months

• Be member of the saving fund

• Have bought share with the village Fund

Government committee

National Village Fund committee

Office of the National Fund

Supporting Sub- committee

National Village Fund

Province and district branches

Village Fund Village Fund Urban

Community Fund

Source : Bulman (2007)

Microfinance for village and urban

Total 79,092 Funds

- village 74,874

- urban 3,486

- military community 738

Net work

Region 4

Province 76

District 928

Sub-district 7,412

Village & urban (79,098)

EvaluationAAA 33%

AA 63%

A 3%

Have not been evaluation 1%

(Need improvement)

Working Capital

1. Government endowment 81,423 65

2. People contribution 5,370 4

3. Saving 19,401 16

4. Borrow from financial 18,375 15

institute

Item Mill. baht Percent

Use of borrowing fund

- Agriculture 164,658 71

- Trading 38,734 17

- Cottage industry 9,140 4

- Services 7,622 3

- Emergency spending 6,476 3

- Other 4,685 2

Mill. baht Percent

Allocation of profit from village fund

Retained earning 3,693 30

Reserve 1,676 14

Pay back to borrowers 1,567 13

Social welfare 2,950 24

Management 2,441 20

Mill. baht Percent

Example of a village fund in Khon Kaen

- Stared VF in 2001 - All 130 households bought share in the VF 10

baht per share not more than 100 share for each villager.

- The VF could raise 70,000 baht.- Selected 15 committee member. (7 Female)

- Each member can borrow up to 20,000 baht at 5 % interest per year

- An individual cannot borrow more than 2 year in a row.

- In 2010, the VF manage 1.4 million baht including 200,000 baht grant of this year.

Allocation of the profit of VF

30 % allowance to committee member

30 % contribute to community

35 % return back to member

5 % reserve

VF Operation in 2001.

t1

Share 70,000

Grant 1 million

VF 1,070,000

Earning 5 %

Contribute to community 16,050

Administrative 16,050

Return to borrow 18,725

Reserve 2,675

53,500

t2 Initial fund 1,070,000

Reserve 2,675

Saving (130x360) 46,800

Tatal VF fund 1,119,475

Benefit• Low cost of finance

• Significant growth in saving

• Decentralization

• Strengthen community and human resource development

• Low default rate

Evaluation

EvaluationDrawback- VF is less effective in area where

finance is not a major problem

- Shortage of funds may occur if default debt is high and many villagers drop out from saving

- Problems of corruption

Microfinance…“This is not charity. This is business: business with a social objective, which is to keep

people get out of poverty.”

Muhammad YunusThe Nobel Peace Prize for 2006 , quoted from APRACA, Journal of Rural Finance, July-Sept. 2007

Group work1. Analyze case of community

enterprise for micro finance support.

• Cost and benefit• Sustainability

2. Present your country microfinance program to tackle poverty.

Nongluck Suphanchaimat Faculty of Agriculture Khon Kaen University

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