MF 111 MICROFINANCE AND DEVELOPMENT Topic 2: EVOLUTION AND HISTORY OF MICROFINANCE

Hybrid AY 2022.2023

PERIOD/TERM: Prelim-term

CMDI Hybrid Learning AY 2022.2023

Prelim Topic 2 EVOLUTION AND HISTORY OF MICROFINANCE

I. CONTENTS
 What is Microfinance?
 Evolution and History of Microfinance
 Progress, trends, and challenges in microfinance in Asia
 Goals - Triangle of Microfinance

II. OVERVIEW
 An inspirational Chinese Proverb relating to the growth of microfinance institutions.

III. DISCUSSION
A. What is MICROFINANCE?
Microfinance is the provision of a broad range of financial services such as deposit, loans, payment
services, money transfers/remittances, and insurances to poor and low-income households and their
micro-enterprises. It is important to note that Microfinance is NOT subsidized credit, NOT adole-out, NOT
salary or consumption loans, and NOT a cure-all for poverty.

B. Who are the CLIENTS of Microfinance?

The clients of microfinance are the economically active, entrepreneurial poor (e-poor). Some examples of
these are shopkeepers, ambulant vendors and household-based entrepreneurs. These are the clients
who have a stable economic activity and will be able to sustain and enhance these if they are provided
with even a small amount of readily available funds.

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MF 111 MICROFINANCE AND DEVELOPMENT Topic 2: EVOLUTION AND HISTORY OF MICROFINANCE
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C. Who are CARD MRI clients?

Poor women who are willing to borrow to start a small business and attend meetings, save,
pay insurance premium, and repay loans without default weekly.
Husbands who also believe that they can do all the above.
Poor women and men who have no time to attend weekly meeting but would like to save to
save weekly.
Children who are at least 18 years old and are willing to do at least saving, weekly meeting
and insurance.
Children of who are below 18 years old but would like to start saving weekly.

D. Three Principles of Microfinance

 That the poor needs sustained access to financial services and products and this sustained
access isa primary issue over interest rates.
 That the poor have the capacity to repay their loans and to save.
 That microfinance institution can be operationally and financially self-sufficient.

E. Evolution and History of Microfinance

PERIOD AND IDENTITY MILESTONES
Ancient Egypt Pyramids
15th Century Franciscan More than 500 years before the birth of modern microfinance, Franciscan monks in
Monks (Community Perugia, Italy, developed their own method of social finance. They would lend money to
Pawnshops). the poor in times of crisis; as collateral, they would hold some precious item and charge
a fee for its safekeeping to cover their operating costs. The idea was endorsed by the
Pope and widely emulated. The monks called the fund a “Monte di Pietà”, a Fund of
Mercy. Today, we would call it a pawnshop.

1700s – Irish Loan Fund In those days the poor also lacked access to finance, and it was Jonathan Swift, an
System by Jonathan Irish nationalist and author of Gulliver's travels, who in the early 1800s founded a £500
Swift (no Collateral) fund to lend to “poor industrious tradesmen” (Sheridan, 1787). Small sums of 5 to 10
pounds were loaned out and repaid in weekly installments of 2 to 4 shillings, without
interest. To overcome the problem of possible non-repayment, borrowers were
required to have two neighbors guarantee the loan, both of whom would be notified in
case of late payments. On top of that Swift took all three of them to court in case
repayment was not made. Apparently, this strategy worked very well since Swift is
said not to have suffered any losses from this enterprise (Hollis &Sweetman, 2001).

1800s - People’s Bank, Raiffeisen sought to understand the credit needs of farmers and craftsmen. With the
Credit Unions in Europe support of the wealthy class, he created a new association that helped small farmers
by Friedrich Raiffeisen
acquire cattle so they wouldn't have to mortgage their assets and go into debt. This
association quickly evolved into a credit society where farmers could borrow money
at a low rate to buy their cattle directly.

1900s – Latin America, In the early 1900s, various adaptations of these models began to appear in parts of

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MF 111 MICROFINANCE AND DEVELOPMENT Topic 2: EVOLUTION AND HISTORY OF MICROFINANCE
Hybrid AY 2022.2023

Agriculture/Reducing rural Latin America. While the goal of such rural finance interventions was usually
Oppressive Feudal defined in terms of modernizing the agricultural sector, they usually had two specific
Relations objectives: increased commercialization of the rural sector and reducing oppressive
feudal relations (it was a way of structuring society around relationships derived from
the holding of land in exchange for service or labor) that were enforced through
indebtedness. In most cases, these new banks for the poor were not owned by the
poor themselves, but by government agencies or private banks.

Early beginnings  Informal credit and savings groups.

 Informal village level moneylenders.

 Proliferation of government directed credit programs.

1960’s to 70s  State as the main provider of financial services.
 Development banks and agricultural credit projects.

Grameen Bank in Bangladesh

Mid-80’s  Dr. Muhammad Yunus, economics professor at Chittagong
University started an action researchprogram.
 Experimental credit program to solve banking problems faced by the poor.
 Started with 42 clients with US$27 of portfolio.

80’s – Onwards  Many MFIs/Banks/NGOs were established and involved in microfinance including
CARD MRI.
 Prodem (Promocion y Desarollo de la Microempresa) in Bolivia –
started by Pancho Otero.
 Prodem later gave rise to Banco Sol
 Bank Rakyat Indonesia (BRI) – a government bank that created
successful village banking networks (Unit Desas). This is the largest
commercial bank in Indonesia; Government revitalized unit desas;
UDs is measured by profitability not in portfolio.
 Bank Perkreditan Rakyat (BPRs) or People’s Credit Bank in Indonesia. The
Beginnings of microfinance during the 80s led to many MFIs collapsing due to:
 Trial and error, untrained staff.
 No proven direction growth.
 Unsustainable operations.
 Undiversified portfolio.
 Whims (a sudden desire or change)
Depth and breadth of  Microfinance became the buzzword.
outreach still limited  Microfinance attracted attention from donors, academicians and development
1990s – The Financial practitioners.
System’s Approach  Microfinance widely diversified and funded by donors, networks, apex
organizations, lobbygroups and CGAP.
 Massive literature on microfinance that includes toolkits, handbooks and best
practices guide.
 Most microfinance institutions are at an infancy stage operating at less than 10
years
 Rise of micro-credit summit campaign (1997) with a nine-year goal

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of providing financial servicesto 100 Million poor families with 1,700

member institutions (800 of which are practitioners.

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MF 111 MICROFINANCE AND DEVELOPMENT Topic 2: EVOLUTION AND HISTORY OF MICROFINANCE
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 The CGAP is a global partnership of more than 30 leading

Consultative Group to organizations that seek to advance financialinclusion. CGAP
Assist the Poor (CGAP) develops innovative solutions through practical research and active
engagement withfinancial service providers, policy makers, and
funders to enable approaches at scale. Housed at theWorld Bank,
CGAP combines a pragmatic approach to responsible market
development with an evidence-based advocacy platform to increase
access to the financial services the poor need to improve their lives.
 Building on the achievements of the 1997 Summit, a series of Global
Microcredit Summit and Regional meetings have since been successfully held. They have
Campaign attracted more than 15,000 delegates from over 140 countries. From
1997 to the present, the Microcredit Summit Campaign has
relentlessly pursued its goals, maintaining a steadfast commitment to
the Summit's four core themes. The Microcredit Summit Campaign is
a global effort to restore control to people over their own lives and
destinies.
 In November of 2006 the Campaign was re-
launched with two new goals:
1. Reaching 175 million poorest families with credit for self-
employment and other financial and business services.
2. Helping 100 million families lift themselves out of extreme poverty
Effects of Asian  Number of poor increased dramatically – more potential
Financial crisis (1997- customers, more competition, lessdemand.
1998) on Microfinance  Great reduction in economic activity.
(Study of MFIs in  Arrears on MFI portfolio gone up while total value of assets gone down.
Philippines, Indonesia,  Crisis had greater effect on institutions serving small business customers.
Malaysia and Thailand
2000s  Maturing financial institutions.
Commercialization and  Expansion of microfinance services both in depth and breadth of outreach.
Globalization of  Rise of apex funding institutions
Microfinance  Diversified funding sources (local and international creditors, tie-up
with commercial sector,savings).
 Use of information technology (e.g., Software, MIX market, internet banking).
 Rise of innovations (loans and savings products, target customers,
micro-insurance, strategicalliances, evaluations) and intensified
competition.
 Major shifts in institutional strategies.
 Push for commercialization and regulation and supervision of microfinance among
regulators.
 Mergers, acquisitions, diversification of ownership.

 Population density – denser population generally more favourable to sustainability.

Economic situation in  Annual income per capita.
Asia-Pacific that gave  Human Development Index – includes measures of health, literacy
rise to microfinance & education as well as percapita income.
“The Microfinance  Many countries in poverty trap – poverty itself as a cause of economic stagnation
BOOM!!!”  Physical geography
 Countries in debt trap
 Governance failures

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MF 111 MICROFINANCE AND DEVELOPMENT Topic 2: EVOLUTION AND HISTORY OF MICROFINANCE
Hybrid AY 2022.2023

Progress and Trends of  Rapid expansion of microfinance in some countries (Philippines,

Microfinance in Asia Cambodia, Indonesia,Bangladesh, India, Nepal)
 Emerging microfinance markets (e.g., Mongolia, Laos, Myanmar, China, Pacific
Islands)
 Regulation and supervision of microfinance (Cambodia, Philippines, Vietnam)
 Increasing sophistication in microfinance operations
 Microfinance operators reaching the double bottom lines of sustainability and
impact
 Better depth and breadth of outreach, product and service delivery innovations
 Stronger and more sophisticated networks and support groups
 Emergence of tie-ups with commercial institutions

Product and Service Innovations

 ASA Bangladesh– going beyond group guarantee
 CARE/Bangladesh– family savings pilot project
 CARD MBA micro-insurance
 Grameen Bank Bangladesh– housing and mobile phone loans
 PMUK Bangladesh– financial services for street children
 WOCCU/FFH Philippines– credit with education and integrating
VB methodology into credit unions

Innovations in Program Financing

 MIX Market –virtual marketp l a c e for donors, lenders, support
groups and microfinancepractitioners.
 Emergence of rating institutions for microfinance

Innovations in Program Evaluation

 AIMS/SEEP evaluation tool (learning from clients)
 CGAPs poverty assessment tool
 Social Performance Management (SPM)
 Client Assessment Techniques Tools (CATT)

Innovations in IT
 Manual systems now being replaced by computerized loan tracking
systems and accounting software.

Innovations in Asia  Use of Technology

 Diversification of target clients
 Farmers
 Hardcore poor, Beggars, Male and Youth
 Development of new products and services
 Insurance
 Loans (Agricultural, merchandizing, health and others)
 Savings Products (extended to other family members and community
 Going to Scale
 NABARD India – tie-up with 750 NGOs to reach 462,000 SHGs reaching 7.8
million clients
 PKSF microcredit fund - partners with 200 MFIs in Bangladesh with 2 M
borrowers.
 WEP Nepal – savings-led approach training 240 local NGOs reaching 130,000
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clients
 LPWF China –Grameen replication established in 1989
 Reaching the Poorest
 CFTS (CASHPOR) India – poultry program for full-time farm
laborers

. There are four (4) Core Themes in Microfinance:

1. Reaching the Poorest
While we recognize the importance of financial inclusion for all overlooked by the traditional banking
sector, the Campaign specifically focuses on reaching the poorest families. In developing countries these
are families living below 50 percent of the poverty line. In industrialized countries the Campaign is focused
on all of those living below their nation’s poverty line.

2. Empowering Women
Experience shows that women are a good credit risk, and that woman-run businesses tend to benefit
family members more directly than those run by men. At the same time, through earning an income
woman achieve a higher status in their homes, their communities, and their nations.

3. Financial Self-Sustainability
Experience has shown that microcredit programs in developing countries can improve their efficiency by
structuring their interest rates and fees to eventually cover their operating and financial costs
Thoughthe economic context in industrialized countries is radically different, the Summit encourages
programs inthese countries to explore ways of becoming self-sufficient so that, to the greatest extent
possible, their operating costs will be covered through direct revenue from program services.

4. A Positive, Measurable Impact

While financial measures such as program repayment rates give an indication of the strength of a
microcredit institution, the Campaign is committed to programs having a positive, measurable impact
on the lives of the very poor. The Campaign’s 100 million Project is directly linked to this effort by
promoting the use of and collecting data from, poverty measurement tools to enable MFIs to generate
products and services that best help their clients move out of poverty.

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 Comparing this microfinance institution (MFIS) to plant/tree and the indicators mentioned, this visualizes the
achievement,
Seedling Sapling Tree

 There are General Issues and Challenges experienced by MFIs worldwide:

 Over-indebtedness of the poor caused by multiple loans and wrong assessments by MFI.
 Over-saturation of accessible areas and absence of services in remote areas.
 Unfair competition.
 Negative publicity of other MFIs.
 Violation of code of ethics particularly client and staff pirating.
 Delaying” government response to poverty such as discriminatory laws,corruption, and inadequate
services
 Unclear/ no laws governing or related to microfinance in many countries
 Weak regulatory systems
 Sophistication of microfinance operations.
 Massive scale, intense competition.

 Several Strategies and Innovations of MFIs

 Savings orientation/customer orientation of microfinance operators.

 Beyond group lending.
 More governments adopting regulations
 Consolidation/mergers of smaller MFIs
 More depth of outreach
 Credit and social performance ratings
 Diversified products and services (to include savings, cash transfers, consumption loans, micro-insurance,
etc)
 Links of microfinance with business development services.
 Digitization of financial services

References:
 The Alchemy of Microfinance – Dirk Steinwand, 2001
 Pathways Out of Poverty – 2002
 The End of Poverty – Jeffrey Sachs, 2005

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