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Module Objectives 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.
Outline 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
Introduction What is Microfinance? Finance Micro Is there any such thing as Macro- finance?
Defining Microfinance By product/needs focus definition By target market By market focus
Defining microfinance byproduct/needs focus 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 marketfocus The economically active poor-micro- entrepreneurs or small localised traders: Vendors Carpenters Metal workers (e.g. repairers, sheet metal fabricators etc)
Defining microfinance by marketfocus - cont Small retail shop owners/corner shops Small farmers Service people (e.g. plumbers, kindergarten operators, shoe repairers etc).
Therefore we can concludethat… 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.
Question Is financial intermediation the only objective of microfinance? No!!! Social Intermediation Social Mission
Social Mission 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 performance 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 Performanceframework INTENT and DESIGN: ACTIVITIES: OUTPUT: OUTCOME: IMPACT:
Intent and Design What does the MFI seek to achieve (its mission and social performance objectives)? How are services and performance objectives designed to this end?
Activities How are services to target clients through specific organizational structures created to reach the organization’s objectives?
Output 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?
Outcome What changes result from the use of the services provided? Do businesses expand? Incomes increase? Skills develop?
Impact What are the longer term, sustainable changes as a result of the outcomes, such as poverty reduction? What are the unintended consequences?
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 Peoples 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.
A Short History of GrameenBank 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 GrameenBank The Grameen Bank Project (Grameen means "rural" or "village" in Bangla language) came into operation with the following objectives:
Grameen Bank Projectobjectives 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 Projectobjectives 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 Projectobjectives 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 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 ProjectSuccess 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 ProjectSuccess 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 ProjectSuccess With the success in Tangail, the project was extended to several other districts in the country.
Grameen Bank ProjectSuccess In October 1983, the Grameen Bank Project was transformed into an independent bank by government legislation.
Grameen Bank ProjectSuccess 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 ProjectSuccess 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.
Why Microfinance Theory of Adverse Selection by Banks Economic Growth and Employment Creation Perspective Supply Gap Poverty Reduction Perspectives
Theory of Adverse Selection byBanks 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)). 51
Theory of Adverse Selection byBanks Perceived to be high-risk. High transaction costs (vs caps on chargeable interest rates).
Economic Growth andEmployment CreationPerspective 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. 53
Economic Growth andEmployment CreationPerspective 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 yet There are not enough micro-credit providers to meet the potential loan demand by micro enterprises and SMEs
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. 55
Supply Gap: 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 (..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. 57
Poverty ReductionPerspectives 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 58 population live below the poverty datum
A closer look at the Case ofIndia: Market Failure...DemandGap (..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. 59
A closer look at the Case ofIndia: Market Failure...DemandGap 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!!).
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 development 61
Evidence from Centre forFinancial 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. 62
New Concept of Microfinance:...much more than microcreditProduct 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) 63
New Concept of Microfinance:...much more than microcredit 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 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... Kenyas first commercial microfinance bank, accepting deposits and giving loans. 65
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. 66
New Concept of Micro-finance:new market segments emerging(...ctd)Target market for micro-finance now beingre-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. 67
New concept of microfinance - Example ofrole in a new market segment-the healthsector Indonesia: BRI offers loans to village midwives Philippines: loan company offers loans to physicians Tanzania: MEDA loans to drug shops 68
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 MicrofinanceDonor NGO Credit Officer Local Partner Beneficiar y Standard Microcredit Structure
The Nature of Microfinance 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 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.
Financial Exclusion 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.
Self-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.
Access 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’.
Political and Social exclusion The victims of this are, for example, immigrants or ex-convicts and those who are ‘unregistered’ and are, therefore, not ‘bankable’.
Condition 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.
Marketing 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.
However……… 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.
The Supply of Microfinance 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.
In Ghana 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.
Question Does operating in microfinance mean operating in the field of ethical finance?
Ethical Finance Ethical finance may be referred to as a philosophy of investing based on a combination of financial, social, environmental and sustainability criteria.
EUROSIF (www.eurosif.org) "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."
Ethical finance 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.
Focus 1 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 2 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.
So……. 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.
Therefore…. 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.
To answer the question…… Does operating in microfinance mean operating in the field of ethical finance? Itis necessary, in that case, to establish the ethical parameters to be respected.
Inclusive Finance Finance supporting the fight against poverty and financial exclusion
In this case 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 short.. The technical form of financial support comes mainly from donations and soft loans. Microfinance comes into this category.
Selective Finance Finance that supports some sectors commonly considered ethical by collective social awareness
In the second case Financial support is given only to sectors judged ethical by the lender, based on subjective criteria that represent a common sense of good.
Selective Finance 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.
Compliant Finance Finance that is in compliance with company regulations and associated rules which govern issues related to diligence, fairness and transparency of adopted behaviour.
In the third case Ethics means adopting behaviour that reduces the risk of conflicts of interest between the company and the stakeholders.
Compliant Finance This approach is followed by both enterprises and financial intermediaries and non-profit organizations.
Types of Ethical Finance Ethical finance CompliantInclusive Finance Selective Financefight against financial Support of selected Financeexclusion and poverty sectors of production Respect of stakeholder interest Social and Rules and codes humanitarian of conduct aims Exclusion Criteria Inclusion Criteria
Activities/Agents of EthicalFinance Ethical finance fight against financial Support of sectors of exclusion and poverty production Credit Activity: Collective savings Micro credit and management micro - insuranceDonors,NGOs/nonprofit Investment fundsMFIs, Banks, Pension fundsFoundationsLocal bodies,
But consider the following Financing poor women in developing world. How about if it is laundered money?
Or How ethical is a bank that excludes its own customers from the sectors of arms or alcohol?
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.