New Concepts of Microfinance

PROFESSIONAL CERTIFICATE IN MICROFINANCE

MODULE 1INTRODUCTION TO

MICROFINANCE(A NEW CONCEPTION)

Fred Pokoo-Aikins, FMAFacilitator

Introductions and House Rules

Name, Education, Job profile, Experience

House rules Cell phones on silent Questions one at a time; real time No in-discussions

Instructor Profile

Instructor Profile

Frederick POKOO-AIKINS, CEO, ALTUM Training & Consulting Internal Auditor and Management

Consultant B.Com, Dip. Ed., MSc., CIA, CISA, ACFE,

MCMI, FMA Mobile: 020 813 3219 fpaikins@altumtc.com www.altumtc.com

A New Conception of Microfinance

To understand the nature of microfinance To understand the history of microfinance To develop an understanding of the

socio-economic importance of microfinance

To understand the new concept of microfinance in the contemporary context.

Module Objectives

Introduction The nature of microfinance The demand for microfinance The supply of microfinance Products and services in

microfinance A new taxonomy for microfinance Microfinance and ethical finance

Outline

Introduction

What is Microfinance? Finance Micro

Is there any such thing as Macro-finance?

By product/needs focus definition

By target market By market focus

Defining Microfinance

The provision of financial services, to the poor and low income groups who traditionally could not access these from formal financial institutions.

Defining microfinance by product/needs focus

Such services include: Micro-savings/deposits Micro-credit Payment services Remittances/money transfers Micro-insurance

Defining microfinance by product/needs focus

A microfinance institution (MFI) is an organisation that offers micro-finance services.

So then….

Defining microfinance by target

The economically active poor-micro-entrepreneurs or small localised traders: Vendors Carpenters Metal workers (e.g. repairers, sheet metal fabricators etc)

Defining microfinance by market focus

Small retail shop owners/corner shops

Small farmers Service people (e.g. plumbers, kindergarten operators, shoe repairers etc).

Defining microfinance by market focus - cont

Microfinance refers to the small-scale financial services including both credits and deposits provided to people who farm or fish or herd; operate small or microenterprises where goods are produced, recycled, repaired or traded; provide services; work for wages or commissions; gain income from renting out small amount of land, vehicles, draft animals, or machinery and tools; in both rural and urban areas.

Therefore we can conclude that…

Is financial intermediation the only objective of microfinance?

No!!! Social Intermediation

Social Mission

Question

Most MFIs have a social mission. They may be working, for example, to broaden access to financial services,

reduce poverty, empower women, build community solidarity, or promote economic development and regeneration.

Social Mission

refers to the extent of their success in meeting these goals. The concept of social performance focuses not only on the final impact, but also provides a framework to understand the process by which social objectives are achieved.

Social performance

INTENT and DESIGN: ACTIVITIES: OUTPUT: OUTCOME: IMPACT:

Social Performance framework

What does the MFI seek to achieve (its mission and social performance objectives)? How are services and performance objectives designed to this end?

Intent and Design

How are services to target clients through specific organizational structures created to reach the organization’s objectives?

Activities

What services are delivered? How good are they? To whom are they delivered? What is the breadth and depth of the outreach?

Are the services sustainable?

Output

What changes result from the use of the services provided? Do businesses expand? Incomes increase? Skills develop?

Outcome

What are the longer term, sustainable changes as a result of the outcomes, such as poverty reduction? What are the unintended consequences?

Impact

History of Microfinance

The history of microfinance can be traced back as long to the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way getting the people out of poverty. But it was at the end of World War II with the Marshall plan the concept had an big impact.

History of Microfinance

‘Microfinance’ is a new term for age-old micro-saving/credit arrangements prevalent in communities (arguably since money was invented!).

History of Microfinance

Informal programs that have operated for centuries: “Susus" and "Tontine" - West Africa “Chit funds" - India, “Tandas" - Mexico, ‘The partner’- Jamaica Savings clubs/ burial societies etc across most parts of the world.

History of Microfinance

Europe-19th century – emergence of People's Banks, Credit Unions, Housing Societies and Credit Co-operatives organised principally around on the poor rural and urban communities.

History of Microfinance

Canada-early 20th century, members of the Antigonish Movement started establishing small savings and credit cooperatives by organising a handful of acquaintances to form these. Shortly, credit union movement was well established in Canada.

History of Microfinance

In India, the legal framework for establishing the co-operative movement set up in 1904 in India

History of Microfinance

Late 1970s-1980s: microcredit movement began (and compulsory saving in some programs)

History of Microfinance

1980’s-NGOs dominant. From the late 1980’s, over two dozens NGOs – such as the Australi Agency for International Development (AUSAID), GTZ and USAID – developed micro-finance into an industry by offering capital, providing direct savings and loans, and offering guarantees to banks and creditors on behalf of beneficiaries.

History of Microfinance

1990s-Term ‘microfinance’ coined -referring to constellation of pro-poor financial services-global micro-finance movement intensifies under the banner ‘Microcredit Summit’ championed by some of the world’s leading donors

History of Microfinance

1990s Microfinance adopted as a global strategy for poverty alleviation. And now

Micro-finance Industry has been evolving over the last 3 decades and is now a global movement.

History of Microfinance

The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad Yunus, Head of the Rural Economics Program at the University  of Chittagong, launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor.

A Short History of Grameen Bank

The Grameen Bank Project (Grameen means "rural" or "village" in Bangla language) came into operation with the following objectives:

A Short History of Grameen Bank

extend banking facilities to poor men and women;

eliminate the exploitation of the poor by money lenders;

create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh;

Grameen Bank Project objectives

bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and

Grameen Bank Project objectives

reverse the age-old vicious circle of "low income, low saving & low investment", into virtuous circle of "low income, injection of credit, investment, more income, more savings, more investment, more income".

Grameen Bank Project objectives

Founded on the philosophy of credit as a basic human right.

Grameen Bank Project

Muhammad Yunus believed that poverty is caused by the system (no pro-poor banks), and that the poor are credible borrowers and small loans can make a big difference to the poor.

Grameen Bank Project

An action research demonstrated its strength in Jobra (a village adjacent to Chittagong University) and some of the neighboring villages during 1976-1979.

Grameen Bank Project Success

With the sponsorship of the central bank of the country and support of the nationalized commercial banks, the project was extended to Tangail district (a district north of Dhaka, the capital city of Bangladesh) in 1979.

Grameen Bank Project Success

With the success in Tangail, the project was extended to several other districts in  the country.

Grameen Bank Project Success

In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation.

Grameen Bank Project Success

Through replication, model has triggered a global movement in micro-finance over the last 3 decades –Arab World, Americas, Asia, Africa-with micro-finance as a tool to fight poverty.

Grameen Bank Project Success

Today Grameen Bank is owned by the rural poor whom it serves. Borrowers of the Bank own 90% of its shares, while the remaining 10% is owned by the government. 

Grameen Bank Project Success

Types of MFIs

Governments-related, Private sector-related NGOs Cooperative-type institutions Informal lenders - . money

lenders and shopkeepers, Self-Help Groups,

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Theory of Adverse Selection by Banks

Economic Growth and Employment Creation Perspective

Supply Gap Poverty Reduction Perspectives

Why Microfinance

Theory of Adverse Selection by Banks

Banks discriminate against the poor and micro-and small (MSEs) enterprises for a number of reasons: Lack collateral security Information asymmetry and moral hazard problems (Do not have a credit history, trading record, or assured employment (hence non-bankable)).

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Perceived to be high-risk. High transaction costs (vs caps

on chargeable interest rates).

Theory of Adverse Selection by Banks

Economic Growth and Employment Creation Perspective

EU based evidence: 23.2m or 99% of all businesses are SMEs.

92% of these are micro-enterprises (0-9 employees).

SMEs account 2/3 of private sector employment in EU.

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Informal sector accounts for 10 to 15% of EU GDP.

In the developing world, up to 80% earn their incomes from the informal sector.

And yetThere are not enough micro-credit providers to meet the potential loan demand by micro enterprises and SMEs

Economic Growth and Employment Creation Perspective

Supply Gap:

Demand for financial services outstrips supply, particularly for the poor and low-income groups-leading to financial exclusion.

In India MFIs play a critical role in areas under-supplied with banks.

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In Africa-banks under-supplied especially in rural where 64 % population live.

Africa-less than 10% adult population have banks accounts.

EU 2008-Estimated potential loan demand : 700 000 loans worth 6bn euro in demand but not enough micro-credit providers to meet potential demand met.

Supply Gap:

Supply Gap (..ctd):

In the U.S. approximately 40 million U.S. households – 106 million people – are either un- or under-banked.

According to the Asian Development Bank 90% of the 180 million poor households in Asia lack access to financial services from traditional financial institutions.

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Poverty Reduction Perspectives Provision of micro-finance corrects

market failure and leads to poverty reduction and economic growth by filling a huge demand gap.

Microfinance is considered a tool to fight poverty on a global scale.

2.1 billion people worldwide live on less than US per day.

In the EU alone 28 million of the active population live below the poverty datum line.

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A closer look at the Case of India: Market Failure...Demand Gap (..ctd)

Over 40% live below PDL 56% of the poor continue to

borrow from informal sources Of the rural poor, 70% do not

have a bank account 87 % lack access to credit from

the formal financial system.

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March 2004 annual figures show that annual disbursements to poor=5000 core vs est. annual demand of 60 000 core.

Less than 5% of the rural poor enjoy access to microfinance services

(Yet India is a country where microfinance is fairly better developed!!).

A closer look at the Case of India: Market Failure...Demand Gap

New concept of micro-finance: An Overview of MDGs

Goal 1 Eradicate extreme poverty and hunger Goal 2 Achieve universal primary education Goal 3 Promote gender equality and empower

women Goal 4 Reduce child mortality Goal 5 Improve maternal health Goal 6 Combat HIV/AIDS, malaria and other

diseases Goal 7 Ensure environmental Goal 8 Develop a global partnership for

development61

Evidence from Centre for Financial Services Innovation, 2009

Poverty eradication effect confirmed:

low-income households with bank accounts are 43 percent more likely to possess other financial assets than those without bank accounts.

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New Concept of Microfinance: ...much more than microcredit

Product boundaries being redefined: Savings products Micro-insurance products Health savings products –in response to Aids

impact(e.g. Russia, the Baltic states and Central Asia, Philippines, Tanzania, Indonesia, Uganda-see annexure).

Loans/savings for education, health,, housing Mortgage finance (e.g. Kenya, Ghana)

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Micro-leasing finance and hire purchase. Venture capital Loans, Guarantees Agricultural finance Enterprise development services (e.g.

training) High-tech products revolutionising the

industry? (e.g. mobile phone banking).

New Concept of Microfinance: ...much more than microcredit

New Concept of Micro-finance…Operationalisation

Project model now being replaced by critical mass for-profit banking model-large numbers of small customers 1976 Grameen began as a pilot

project..chartered as a bank in 1983. K-Rep Kenya began in 1984 in Kenya as an

umbrella programme (APEX) channel funds to and monitor NGOs 990 K-Rep became an NGO to customers… 1997... Kenya's first commercial microfinance

bank, accepting deposits and giving loans.

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New Concept of Microfinance ….A Disaster Mitigation Tool

Governments and development agencies often now employ microfinance as a tool to address socio-economic problems such as relocation of refugees from civil conflict, creating jobs for demilitarized soldiers, or relief after a natural disaster.

….Tsunami., Sudan, DRC, Somalia, Afghanistan etc.

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New Concept of Micro-finance: new market segments emerging (...ctd)

Target market for micro-finance now being re-defined to include: The economically active poor (micro-

entrepreneurs). SME’s (Small to medium size enterprises) Midwives, nurses, doctors, drug shops (e.g.

Uganda) Micro and small farmers Salaried people and pensioners.

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New concept of microfinance - Example of role in a new market segment-the health sector

Indonesia: BRI offers loans to village midwives

Philippines: loan company offers loans to physicians

Tanzania: MEDA loans to drug shops

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The Nature of Microfinance

Traditionally, microfinance is associated with programmes that benefit clients with serious subsistence problems in developing countries.

The Nature of Microfinance

For many years microfinance overlapped with microcredit – small loans, often without traditional guarantees, aimed at improving the lives of clients and their families or at sustaining small-scale economic activities.

The Nature of Microfinance

The resources, which came mainly from funds donated by states and supranational organizations, were channeled to their recipients most often through nongovernmental organizations (NGOs) and local partners.

The Nature of Microfinance

The Nature of Microfinance

Standard Microcredit Structure

Donor

Local Partner

NGO

Beneficiary

Credit Officer

Socio-demographic changes over the last few decades have significantly altered the world economic scene. For microfinance, the new situation has meant potential new beneficiaries, new products and a greater involvement of financial intermediaries.

The Nature of Microfinance

Exclusion from the traditional financial system, seen as the inability to access basic financial services, includes millions of people today, both in developing countries and industrialized countries

The Nature of Microfinance

Traditional poverty thresholds have shifted and new categories of ‘poor’ people have appeared, even outwith developing countries.

The Nature of Microfinance

New beneficiaries have brought new financial needs with them. Over the past decade, new microfinance services have developed alongside microcredit.

The Nature of Microfinance

This development has also gained momentum from the observation that structured financial assistance increases the efficacy of the programmes, while at the same time improving the level of sustainability.

The Nature of Microfinance

The widening of the services on offer has taken five directions: credit products, which provide alternatives to loans, savings, insurance services, structured finance and technical assistance.

The Nature of Microfinance

It is not surprising, therefore, that in the last few years financial intermediaries in industrialized countries have been taking greater notice of microfinance.

The Nature of Microfinance

It represents a way of reaching and gaining loyalty from new groups of clients and helps to improve corporate social responsibility.

The Nature of Microfinance

Thus, at present, it is economic reasons, as well as concern for their public image, that spur financial intermediaries to become more involved in microfinance.

The Nature of Microfinance

All of which poses an unavoidable question: Is it still possible to go back to a microfinance model that resembles the first, traditional microcredit initiatives?

The Nature of Microfinance

Do the new demographic, social and economic trends, combined with the emerging involvement of financial intermediaries, perhaps call for a review of the traditional microfinance model?

The Nature of Microfinance

The Demand for Microfinance

Traditionally, those people who benefit from microfinance are citizens of developing countries who struggle to provide for themselves, known unfortunately as ‘the poorest of the poor’.

The Demand for Microfinance

Within this category, women are of particular significance since they constitute the group that is most affected by financial exclusion in many developing countries

The Demand for Microfinance

Moreover, numerous studies have shown that women are generally more capable of paying back microcredit than men and manage to invest the funding received in more profitable initiatives.

The Demand for Microfinance

More recently, microfinance has turned its attention to self-employed workers and individuals in charge of small, often family-owned businesses, which are unable to obtain bank credit.

The Demand for Microfinance

For micro-entrepreneurs, microfinance represents an alternative to credit given by lenders, and often constitutes a way out of the money-lending system.

The Demand for Microfinance

Thus, in the last few years microfinance has served a group of beneficiaries largely distinct from the one normally associated with microcredit.

The Demand for Microfinance

Currently, potential microfinance beneficiaries could also include individuals who, although not living in poverty, have general difficulty in gaining access to the financial system.

The Demand for Microfinance

In this way, modern microfinance is broadening its target from ‘the poorest of the poor’ to all victims of financial exclusion.

The Demand for Microfinance

The phenomenon of financial exclusion has been defined in the literature as ‘the inability to access financial services in an appropriate way’ (Carbo et al., 2005).

Financial Exclusion

Exclusion from the financial system may concern different products and services and can be due to a number of reasons.

Financial Exclusion

This stems, in principle, from an individual’s feeling of inadequacy with regard to the conditions required by financial intermediaries; ‘the poorest of the poor’ come under this category.

Self-exclusion

This is exclusion following a risk assessment process carried out on clients by the financial intermediaries; Failure of potential clients to meet creditworthiness requirements in this category we find ‘the poor’.

Access exclusion

The victims of this are, for example, immigrants or ex-convicts and those who are ‘unregistered’ and are, therefore, not ‘bankable’.

Political and Social exclusion

This affects individuals who cannot gain access to the financial system because they are unable to bear the costs and conditions of financial products offered.

In this case, they are ‘disadvantaged’ individuals.

Condition exclusion

This affects customers (mainly small-scale entrepreneurs) considered ‘marginal’ by the intermediaries since they represent a low-value target compared with the traditional customer evaluation models.

Marketing exclusion

The ‘unregistered’, the ‘disadvantaged’ and the ‘marginalized’, despite their common distance from the credit system, are characterized, by increasing levels of professional and managerial ability, and respective increasing levels of creditworthiness.

However………

From a regulatory perspective, microfinance institutions (MFIs) can be classified into three main categories, depending on the regulatory thresholds of their activities: informal, semiformal and formal.

The Supply of Microfinance

Informal institutions (self-help groups, credit associations, families, individual money lenders) do not have the status of an institution. They are providers of microfinance services on a voluntary basis and are not subject to any kind of control or regulation.

The Supply of Microfinance

Semiformal institutions are registered entities, subject to all

relevant general laws. They can be defined as microfinance financial intermediaries (MFFIs) in fact, they provide various financial services but, generally, they are not deposit-taking institutions or, if they are, they cannot grant credit.

The Supply of Microfinance

Formal institutions Can be classified into three main

categories: microfinance banks (MFBs), microfinance oriented banks (MFOBs) and microfinance sensitive banks (MFSBs). They can all offer credit and they are all deposit-taking institutions: for these reasons, they are all under banking regulation.

The Supply of Microfinance

Informal suppliers such as susu collectors and clubs, rotating and accumulating savings and credit associations (ROSCAs and ASCAs), traders, moneylenders and other individuals.

In Ghana

Semi-formal suppliers such as credit unions, financial non-governmental organizations (FNGOs), and cooperatives;

In Ghana

Formal suppliers such as savings and loans companies, rural and community banks, as well as some development and commercial banks;

In Ghana

Public sector programmes that have developed financial and nonfinancial services for their clients.

In Ghana

Products and services in microfinance

Credits Savings Insurance Other Financial Services Other Technical Services

Products and services in microfinance

A Taxonomy of Microfinance

Microfinance and Ethical Finance

Does operating in microfinance mean operating in the field of ethical finance?

Question

Ethical finance may be referred to as a philosophy of investing based on a combination of financial, social, environmental and sustainability criteria.

Ethical Finance

"This is a concept that continues to evolve. Nevertheless, the constant within this area is that sustainable and responsible investors are concerned with long-term investment; and environmental, social and governance (ESG) issues are important criteria to determining long-term investment performance."

EUROSIF (www.eurosif.org)

Turning point from traditional banking to disintermediation and innovative finance may have occurred in 1971 with the end of the dollar’s convertibility into gold..

Ethical finance

In the following years corporations expanded their businesses internationally and looked for new ways of funding, including the issuance of bonds sold on the capital markets to individuals and institutional investors.

Ethical finance

With disintermediation banks have transferred some of their traditional risks - such as credit and market risks – to other economic agents and have engaged in a fierce competition for the development of innovative products that generate new sources of non-interest income to offset the declining intermediation margin from traditional lending activities.

Ethical finance

increasing size, diversification, and especially profitability –

increasing focus on immediate or short term profits, high levels of executive compensation, blind acceptance of higher risks, and

a parallel erosion in trust and confidence in the institutions, in the products and services, and in the individuals involved.

Focus 1

Strive to prove that finance is on its way to re-discover its instrumental function in support of the economy

increasing consideration of environmental, social and governance issues in investment decisions and services being offered.

Focus 2

Ethical finance responds to specific criteria regarding: the characteristics of intermediaries and beneficiaries,

the behaviour and processes adopted,

the products and the economic conditions applied.

So…….

If an intermediary labels itself as ethical, but does not operate ethically, it carries out a process of unfair competition, and may be / could be liable to prosecution by national and community authorities.

Therefore….

Does operating in microfinance mean operating in the field of ethical finance?

It is necessary, in that case, to establish the ethical parameters to be respected.

To answer the question……

Finance supporting the fight against poverty and financial exclusion

Inclusive Finance

We are in the field of finance that sets itself social and humanitarian goals, and that concerns national and international, donors, development banks, national governmental bodies, non-profit organizations and, in a lesser way, financial intermediaries oriented to credit.

In this case

The technical form of financial support comes mainly from donations and soft loans. Microfinance comes into this category.

In short..

Finance that supports some sectors commonly considered ethical by collective social awareness

Selective Finance

Financial support is given only to sectors judged ethical by the lender, based on subjective criteria that represent a common sense of good.

In the second case

With this approach, for example, industries such as arms, alcohol, tobacco, gambling, pornography are not financed, while investments for the environment, culture, art and social ends are supported.

Selective Finance

Finance that is in compliance with company regulations and associated rules which govern issues related to diligence, fairness and transparency of adopted behaviour.

Compliant Finance

Ethics means adopting behaviour that reduces the risk of conflicts of interest between the company and the stakeholders.

In the third case

This approach is followed by both enterprises and financial intermediaries and non-profit organizations.

Compliant Finance

Types of Ethical Finance

Ethical finance

Selective Finance

Support of selected sectors of production

Inclusive Finance

fight against financial exclusion and

poverty

Rules and codes of conduct

Social and humanitarian

aims

Exclusion Criteria

Inclusion Criteria

Compliant Finance Respect of

stakeholder interest

Activities/Agents of Ethical Finance

Ethical finance

fight against financial exclusion and

poverty

Collective savingsmanagement

Credit Activity: Micro credit and micro - insurance

Support of sectors ofproduction

Donors, NGOs/nonprofitMFIs, Banks, FoundationsLocal bodies, Cooperatives

Investment fundsPension funds

Financing poor women in developing world.

How about if it is laundered money?

But consider the following

How ethical is a bank that excludes its own customers from the sectors of arms or alcohol?

Or

If the management of a bank is against conflicts, does it mean that it must not finance the production of arms designated for the police forces?

And, moreover, does fighting alcoholism mean not financing efficient winemakers and giving up our glass of wine with dinner?

A bank that finances the production of land mines but that respects all the rules in matters of transparency could hardly describe itself as ethical.