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Breaking News
Foreclosure on a Goat
SAN FRANCISCO—Representatives from One World Finance, a U.S.-based microcredit provider, confirmed Monday that they had initiated foreclosure proceedings on a goat in southern India following a borrower's repeated failure to make her $2.20 monthly loan payments.
"I tried to work with Ms. [Subha] Thangam on this, but once she fell a full $6.10 behind, I had to repossess the goat," said loan officer Michael Conrad, who stated that he was just doing his job and that it was "not [his] fault" if certain subsistence farmers were living beyond their means.
"I'd love to recoup the entire $22 loan at auction, but given the glut of foreclosed and abandoned goats in the area, I'd be lucky to get even half that." Conrad also acknowledged that the owner had left the goat in "pretty bad shape“ and had even stripped it of its hair for potential resale on the paintbrush market.
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The Blame Game
So Mrs Thangam and her goat are in bad shape. The loan did not work out well for them. Who is to be blamed for that?
Is it the MFI: lending too easily, charging excessively?Is it the customer: overstretching herself?Is it the investor: demanding too high a return?Is it the regulator: not installing price controls?Is it the market: allowing for exploiting vulnerabilities? Or is it just tough luck: collateral damage?
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Basically a Good Mix
Microfinance applies both market and social objectives
From the market approach we take Laissez fair market development Limited regulation Insistence on full commercial prizing
And from the social approach we adopt The poverty alleviation drive The “access for all” paradigm: inclusive finance
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Convincingly Applied?
The market and social mix shows various inconveniences
Development grants do not directly benefit end-usersRarely factored into retail pricesRather benefit supply side players
The development notion applied is restrainedDevelopment impacts are not convincingly proven
Resulting in growing disconnectsSocially with civil societyPolitically with local governments
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A Creative Approach
Modifies the mix and creates equitability
Borrowers need protection against Over-indebtedness Usurious and unsustainable interest rates Harsh or semi-illegal repossession practices
Practitioners need to be able To sustain and grow their institutions
And investors need to be able to Earn a decent return on investment
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Equitability Explained
Markets need full regulation
Which goes beyond self-regulation Or principles of client protection And is to be installed and enforced by governments
Borrowers have a right to be protected By their own governments Not to be left at the goodwill of supply side players As the only way to create a level playing field Need for access not to overrule client rights
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Full Regulation
Unavoidable and necessary to deal with the main evils
That will damage the industry if not controlled Lending beyond borrower’s handling capacity Charging usurious or unaffordable rates Multiple lending to the same borrower
There is growing need for industry consolidation Entirely focusing on quality of service delivery Putting quantitative goals on the backburner And full acceptance of governments as stakeholders
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Market Segmentation
This requires carving up the market in segments
What can be left to the market, leave to the market Withdrawal of development aid from that segment Autonomous growth, local capitalization Regulation driving innovation and price reduction
For the unfeasible segments, alternative concepts apply Using public and donor support Creating client and system sustainability over time As legitimate proxies for ‘inclusiveness’
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Creating Feasibility
How to make unfeasible market segments feasible?
Taking into account Borrowers’ limited earning capacity Investors’ need for decent return on investment And practitioners’ need for sustainability
The answer is in strengthening earning capacity By dedicated BDS, VCF and other interventions
And in wholesale risk deduction Allowing for modest but adequate returns
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Earning Capacity
Essentially to be achieved by moving beyond microfinance
Microloans do no trigger rural development What does is rural enterprise development In combination with infrastructure development Removal of institutional barriers And adequate (long-term, affordable) finance
Microloans do not trigger urban development What does is formalizing the urban economy With job creation through SME development
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Risk Reduction
To be achieved at both the supply and demand side
By offering local investors near risk-free returns As alternative to massive T-bill buying And tapping into liquidity of domestic markets Thus lowering cost of capital for (M)FIs
Clients can be offered much lower rates By offering longer-term, larger business loans And business support reducing project risk Through (M)FIs, reducing operational costs
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Basic Risk Matrix
RISK AREA
RETURN DEMAND
COUNTRY RISK
SECTOR RISK
PROJECT RISK
RISK-FREE RATE
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Basic Risk Matrix
RISK AREA MARK-UP
RETURN DEMAND = B%
COUNTRY RISK + Z%
SECTOR RISK + Y%
PROJECT RISK + X%
RISK-FREE RATE = A%
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Basic Risk Matrix
RISK AREA MARK-UP RISK REDUCTION AREAS INTERVENTIONS
RETURN DEMAND = B%
COUNTRY RISK +Z%
SECTOR RISK + Y%
PROJECT RISK + X%
RISK-FREE RATE = A% OFFERING NEAR RISK-FREE RETURNS
RETURNGUARANTEES
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Basic Risk Matrix
RISK AREA MARK-UP RISK REDUCTION AREAS INTERVENTIONS
RETURN DEMAND = B%
COUNTRY RISK +Z%
SECTOR RISK + Y%
PROJECT RISK + X% OFFERING CLIENTS BDS,MARKET LINKAGES, ETC.
DIRECT SUBSIDIES
RISK-FREE RATE = A% OFFERING NEAR RISK-FREE RETURNS
RETURNGUARANTEES
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Basic Risk Matrix
RISK AREA MARK-UP RISK REDUCTION AREAS INTERVENTIONS
RETURN DEMAND = B%
COUNTRY RISK +Z%
SECTOR RISK + Y% PARTNERING WITH PRIVATESECTOR PLAYERS
RISK SHARING
PROJECT RISK + X% OFFERING CLIENTS BDS,MARKET LINKAGES, ETC.
DIRECT SUBSIDIES
RISK-FREE RATE = A% OFFERING NEAR RISK-FREE RETURNS
RETURNGUARANTEES
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Basic Risk Matrix
RISK AREA MARK-UP RISK REDUCTION AREAS INTERVENTIONS
RETURN DEMAND = B%
COUNTRY RISK +Z% WORKING WITH GOVERNMENTREDUCING INSTITUTIONAL RISK
POLITICALLEVERAGE
SECTOR RISK + Y% PARTNERING WITH PRIVATESECTOR PLAYERS
RISK SHARING
PROJECT RISK + X% OFFERING CLIENTS BDS,MARKET LINKAGES, ETC.
DIRECT SUBSIDIES
RISK-FREE RATE = A% OFFERING NEAR RISK-FREE RETURNS
RETURNGUARANTEES
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Basic Risk Matrix
RISK AREA MARK-UP RISK REDUCTION AREAS INTERVENTIONS
RETURN DEMAND = B% OUTCOME: NARROWING GAP BETWEEN B% AND A%
COUNTRY RISK +Z% WORKING WITH GOVERNMENTREDUCING INSTITUTIONAL RISK
POLITICALLEVERAGE
SECTOR RISK + Y% PARTNERING WITH PRIVATESECTOR PLAYERS
RISK SHARING
PROJECT RISK + X% OFFERING CLIENTS BDS,MARKET LINKAGES, ETC.
DIRECT SUBSIDIES
RISK-FREE RATE = A% OFFERING NEAR RISK-FREE RETURNS
RETURNGUARANTEES
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Complicated?
Not really: it is how Public Private Partnerships work
The public sector decides on policy priorities Attending to market segments that are Commercially unfeasible but developmentally critical
The private sector invests and leads With risk reduction support from public sector Through performance-based contracting
And the civil society sector comes in To guard community interests and build capacities
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Example?
It is how health systems work in many OECD countries
The public sector decides on policy priorities Affordable access to quality care By capping profits and offering low-risk returns
The private sector invests and leads Through accessing low-cost capital And making modest yet acceptable returns
And the civil society sector comes in By guarding patient interests
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A Creative Approach
Therefore is based on multi-sector cooperation
That engineers respective roles and capabilities
Into functional PPPs that allow all sectors to make their required returns in financial and/or social terms
And makes finance really inclusive
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And Ms. Thangam?
Under a creative PPP approach
She would not have borrowed beyond her means Or her loans would have been rescheduled Without destroying her marginal earning capacity
She would still have her goat, probably a few more Without having over-glutted the local market Perhaps she would have been a shareholder in a professional goat farm
And also her goat would have been in much better shape