Welcome to class of

Microcredit and Microfinancein Emerging Markets

Dr. Satyendra SinghUniversity of Winnipeg

Canadawww.uwinnipeg.ca/~ssingh5

Microcredit (MC) – Small loans

• Why is MC important?– 3 billion poor people need access to financial services– Social justice– Only philanthropy is not enough– Women suffering the most– Development of informal sector farmers, tailors… – Need to remove poverty in EM– ↑ Demand $50 billion per year for MC– ↑ 15-30% growth annually– Moral responsibility of businesses

Microcredit – Different from Informal $ Lenders

• MC No profit motives• NGO’s approach to poverty alleviation• Before the poor was blamed for personal failing• Now, poverty deprive the poor of access to

social resources human rights issue • Non-judgemental • MC leaders inspire social and economic

revolutions in the EM by organizing the poor under the banner of MC organization (NGOs)

Microcredit – Different from Conventional Banks

• 5 features – Loan size is small b/w $100-$500 average $100

– Customers are rural poor, particularly women

– Income activities Self-employment, non-formal sector

– No collateral required

– Must have saving account linked to MC

Debate: Microfinance

• Sustainability• ↑ interest is ok to cover admn cost and be profitable• Attract ↑ people to open MF venture• ↑ competition ↑ innovation• ↓ interest rate for clients• Able to serve the 3 b people

• Poverty alleviation• ↑ interest is NOT ok because it exploits poor• ↑ profit will attract ↑ MF investors• Growth of new and uncertain sector• Profit-making venture

Microfinance (MF) Venture

• Microfinance Profit-making venture– But serve the poor

• Self-financed Savings/borrowing > lending– Share Capital collected from the public– Equity Capital supplied by owners of the MF venture

• Owners have little equity capital• Public has little interest in investing in the business• Problem of seed capital not profitable at outset• Assistance from private firms, donors agencies for seed capital• Donors World bank, development banks, CIDA, USAID…

Justification for Assistance to MF venture

• 2 reasons for the justification– Social

• Vast differences in wealth and education among people• MF Owners are not as greedy as banks (↑ interest rate from poor)• So, MF owners are different from traditional bankers

– Economic• Need help/grants/seed ↓ interest loan• MF entrepreneurs able to deliver appropriate services & make $• Infant industries subsidize initial phase of operation• ↑ productivity ↑ $ ↑ money mgmt skills resource mgmt ↓

transaction costs ↑ MF entrepreneur’s skills to be market oriented sound business decision contributes to economy

Social Consciousness-Driven Capitalism Theory

• Psychological Component Dr. Md. Yunus– Capitalism premise we are selfish by nature ↑ $

– So, ok to develop capitalist enterprise (financial return) if fair to customers (social return/consciousness)

• This premise creates 3 types of entrepreneurs– Traditional capitalist maximize financial return/profit

– Philanthropic organisations traditional credit/NGOs

– Microfinance enterprises combine both returns while making decisions subject to financial return cannot be negative social consciousness-driven capitalist enterprise

– F

Social consciousness-driven Microfinance…

• Reasons for investing in the MF– Large market size– Unfulfilled demand– ↑ return on investment despite ↑ admin cost– ↓ default rate of borrowers 1-5%– Success or failure is not linked to world political events– Appealing due to altruism– Helping poor directly and avoiding corrupt government– Feeling good by doing good– Investors may like the reasons to invest in MF venture

Social consciousness-driven Microfinance• But investors need to see sustainability of MF

• Means of Entry Mainly motivated by ↑ rate of return• Equity stakes

– For-profit orgn buys equity in MF difficult ↓ confidence

• Securitization– Ability to securitize loans and sell access to cheaper capital for

MF venture pass on the savings to clients

• Service provision partnerships Insurance for loans• Donors self-sufficient $ should exit

– Capacity building leverage other successful MF venture– Regulatory infrastructure credit bureau, rating, legal framework– Untouched markets

Limitations of Microfinance

• Does not work if• Dealing with poorest of the poor• Conflict zones• Extremely low population density• Others