Microfinance

An emerging asset class?


By Erol Alaluf, Carol Rodrigues, Cagri Ilhan
University of Toronto
Nov. 24, 2009
A solution to end poverty?
Or
An emerging asset class?
Overview
• Philosophy of micro finance

• History of micro finance

• Major centres of micro finance

• Looking forward

• Conclusion
What is Microfinance?
• Finance that is provided to unemployed or low-
income people or groups.

• The provision of small loans (microcredit) to poor
people to help them engage in productive activities
or grow very small businesses. The term may also
include a broader range of services, including
credit, savings, and insurance.

• Microcredit is the extension of very small loans to
those in poverty designed to spur
entrepreneurship.

Who are microfinance clients?
• Microfinance is provided for the people who
do not qualify for the banking system.

– NO collateral (even if people own land they usually don’t
have the title to it)
– NO credit history

– Majority of the microfinance clients are women
(more than 90% of microcredit is borrowed by
women)
How poor are these people?
Why do poor people need financial
services?
• Lifecycle Needs: such as weddings, funerals,
childbirth, education, homebuilding, widowhood,
old age.
• Personal Emergencies: such as sickness, injury,
unemployment, theft, harassment or death.
• Disasters: such as fires, floods, cyclones and man-
made events like war.
• Investment Opportunities: expanding a business,
buying land or equipment, improving housing, etc.

Brief History of Microfinance
• In 1976, Muhammad Yunus (Nobel
Peace Prize Winner 2006) noticed
that small amounts of loans could
make a big impact on the poor
peoples’ lives.

• Grameen Bank, ("Bank of the
Villages", in Bangla) was founded
in 1983, was supported by the
central bank of Bangladesh.
How does Microfinance work?
• System of “microloans” (typically less than $100)
• Instead of using collateral to gain credit, loans are
secured against the honour of a peer group: if one
person fails to make their payments, others in the
lending circle will be denied future credit.
• It has outperformed almost all other forms of
development lending.
• It is said that microfinance have lifted 100 million
people out of poverty over the last three decades.
Major centers of Microfinance
Regional distribution of MFIs
Region Number of MFIs % of total
Countries with the
most in the region
Africa 69 14%
Ghana (13);
Ethiopia (12)
Asia 117 24%
Philippines (37);
India (32)

ECA 98
20%
Bosnia (13);
Russia (11)
LAC 179 37%
Peru (37); Ecuador
(20); Bolivia (17)
MENA 24 5%
Morocco (7); Egypt
(6)
Source: Microbanking Bulletin #18
Regional distribution of MFIs
What kind of projects is microcredit used
for?
• Microloans are used to help people, living in
extreme poverty, start or expand a range of
tiny businesses such as husking rice, selling
tortillas, and delivering cell phone services to
remote villages.

• Diverse “microenterprises” include small
retail shops, street vending, artisanal
manufacture, and service provision, etc.
Looking forward
• Industry is expanding significantly

• MFIs popular among European pension and other
institutional funds

• One of the few financial sectors not significantly affected
by the current recession

• Excellent diversification possibilities

• Way for the financial sector to 'redeem' itself

Conclusion
• Emerging markets are doing very well right now

• Good from an investor's point of view (high returns,
diversification)

• Feel-good investment

• Untapped potential