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Microfinance 01

Introduction

MIT India Reading Group
Kaustuv De Biswas , Sept 24, 2009

Scope of the discussion
Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map

Microfinance
It refers to the provision of financial services to low-income clients.
Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map

Microfinance
It refers to the provision of financial services to low-income clients.
Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map

Microfinance It refers to the provision of financial services to low-income clients. Credit Savings/Deposits Insurance Plans Money Transfer Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map .

Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map .Microfinance It refers to the provision of financial services to low-income clients.

Microfinance It refers to the provision of financial services to low-income clients. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map BOP .

identical goods should have only one price. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Purchasing Power Parity (PPP) based on the law of one price: the theory states that. . in ideally efficient markets.Microfinance It refers to the provision of financial services to low-income clients.

Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map world s 4 billion poor people who live on far less than $2 a day BOP .Bottom Of the Pyramid It refers to the provision of financial services to low-income clients.

Bottom Of the Pyramid It refers to the provision of financial services to low-income clients. K. 2002 There Is Money at the BOP The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable market. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . Prahalad and Stuart Hart. Strategy + Business. Issue 26. C. The Fortune at the Bottom of the Pyramid.

0 1.00 $0. Prahalad and Allen Hammond.000% 12±18% 53.28 $0.Price you pay to be at the Bottom Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map The Poor and High-Cost Economic Ecosystems Item Credit (annual interest) Municipal grade water (per cubic meter) Phone call (per minute) Diarrhea medication Rice (per kg) Dharavi Warden Road Poverty Premium 600±1. .12 $0. K.2 Source: Reprinted with permission from Harvard Business Review.8 10.04±0.03 37." From "Serving the World¶s Poor Profitably" by C.05 $20. September 2002.0 $1.24 1. "The Poor and High Cost Economics Ecosystems.0 $0. all rights reserved.025 $2. Copyright ©2002 by the Harvard Business School Publishing Corporation.00 $0.

" From "Serving the World¶s Poor Profitably" by C.0 Causes $0.000% 12±18% 53.0 $1. Prahalad and Allen Hammond.12 $0.04±0.Price you pay to be at the Bottom Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map The Poor and High-Cost Economic Ecosystems Item Credit (annual interest) Municipal grade water (per cubic meter) Phone call (per minute) Diarrhea medication Rice (per kg) Dharavi Warden Road Poverty Premium 600±1.2 1.0 Lack of scale and competition Misconceptions of suppliers 1.00 $0.03 37. .00 $0. Copyright ©2002 by the Harvard Business School Publishing Corporation. September 2002. K. "The Poor and High Cost Economics Ecosystems.24 Transaction costs Distribution costs 10.8 Source: Reprinted with permission from Harvard Business Review.28 $0.025 $2. all rights reserved.05 $20.

K. Strategy + Business. 2002 There Is Money at the BOP The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable market. C. Issue 26. The Fortune at the Bottom of the Pyramid. Access to BOP Markets The dominant assumption is that distribution access to the BOP markets is very difficult and therefore represents a major impediment for the participation of large firms and MNCs.Bottom Of the Pyramid It refers to the provision of financial services to low-income clients. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . Prahalad and Stuart Hart.

HLL selected entrepreneurial women from these villages and trained them to become distributors. and access to products to their villages.S. These village women entrepreneurs. these entrepreneurial women are increasingly becoming the educators and access points for the rural BOP consumers in their communities. is a case in point.000 per month (U. More important. (HLL) in India. 3. They earn between Rs. providing education. advice. One such experiment.000 and 7. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . $60 $150) and therefore create a new capacity to consume for themselves and their families.Shakti Amma and the Avon Ladies It refers to the provision of financial services to low-income clients. have unique knowledge about what the village needs and which products are in demand. called Shakti Amma ("empowered mother"). Project Shakti at Hindustan Lever Ltd. HLL created a direct distribution network in hard-to-reach locales (markets without distribution coverage through traditional distributors and dealers).

Issue 26.Bottom Of the Pyramid It refers to the provision of financial services to low-income clients. The Fortune at the Bottom of the Pyramid. The BOP Markets Are Brand-Conscious The dominant assumption is that the poor are not brand-conscious. Access to BOP Markets The dominant assumption is that distribution access to the BOP markets is very difficult and therefore represents a major impediment for the participation of large firms and MNCs. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . C. They are also extremely value-conscious by necessity. On the contrary. the poor are very brand-conscious. K. Prahalad and Stuart Hart. 2002 There Is Money at the BOP The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable market. Strategy + Business.

these residents are unlikely to invest in improving their living quarters. 75 percent own a pressure cooker and blender. The poor also spend their earnings in ways that reflect a different set of priorities. clean running water. and 21 percent have telephones. which they rent out by the minute to other villagers. In Bangladesh.Bottom Of the Pyramid It refers to the provision of financial services to low-income clients. Without legal title to land. do a brisk business. in Dharavi. For example. and better homes. For example. much less the public facilities surrounding their homes. 56 percent own a gas stove. but will spend it on items traditionally considered luxuries. women entrepreneurs with cell phones. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . they might not spend disposable income on sanitation. It is estimated that the poor in Bangladesh spend as much as 7 percent of their income on connectivity. 85 percent of the households own a television set.

They are also extremely value-conscious by necessity. 2002 There Is Money at the BOP The dominant assumption is that the poor have no purchasing power and therefore do not represent a viable market. the BOP consumers accept advanced technology readily. BOP Consumers Accept Advanced Technology Readily Contrary to popular belief. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . The Fortune at the Bottom of the Pyramid. The BOP Market Is Connected Contrary to the popular view. They are rapidly exploiting the benefits of information networks. C. Access to BOP Markets The dominant assumption is that distribution access to the BOP markets is very difficult and therefore represents a major impediment for the participation of large firms and MNCs. BOP consumers are getting connected and networked. Issue 26.Bottom Of the Pyramid It refers to the provision of financial services to low-income clients. the poor are very brand-conscious. K. Strategy + Business. Prahalad and Stuart Hart. On the contrary. The BOP Markets Are Brand-Conscious The dominant assumption is that the poor are not brand-conscious.

The spread of wireless devices. The ITC e-Choupal (literally. thus improving their margins. an Indian conglomerate. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . ITC. The e-Choupal network allowed the farmers access to information that allowed them to make decisions about how much to sell and when. decided to connect Indian farmers with PCs in their villages. but also prices of soybean futures at the Chicago Board of Trade. "village meeting place") allowed the farmers to check prices not only in the local auction houses (called mandis).ITC E-Choupal It refers to the provision of financial services to low-income clients. PC kiosks. and personal digital assistants (PDAs) at the BOP has surprised many a manager and researcher. For example.

High Risks Innovations The poor are not creditworthy Indian Scenario The real causes probably had more to do with the mechanisms of service Challenges provision and inadequate regulation. The poor's lack of collateral can be overcome with joint liability within a group Resources of borrowers.BOP and Financial Services Definitions It refers to the provision of financial services to Why low-income clients. and this has resulted in very high repayment rates in micro credit Road map over the last three decades. . Key Features Building Blocks 1.

. The experience of Bangladesh s Grameen Bank turned this around and now a broad range of alternative microfinance models are in place. giving little incentives for any expansion. High Transaction Costs Indian Scenario The programs need to be subsidized Challenges Failed government initiatives work on the premise that the poor households Resources cannot afford to borrow at high interest rates. Costs would quickly mount and Road map programs would quickly get bogged down. Key Features Building Blocks 1.BOP and Financial Services Definitions It refers to the provision of financial services to Why low-income clients. High Risks Innovations 2.

Empirical research shows that the poor use many financial instruments frequently. they have to rely mainly on unreliable informal service providers. 1. High Transaction Costs 3. below health. Finance falls lower in the 'hierarchy' of needs for the poor. High Risks 2. education etc.BOP and Financial Services It refers to the provision of financial services to low-income clients. but due to absence and unsuitability of formal mechanisms. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map .

education etc. to protect against exogenous shocks. 4. below health. High Risks 2. and c) investment/risk management mechanisms that allow for wealth creation and diversification of risk Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . 1.BOP and Financial Services It refers to the provision of financial services to low-income clients. for example insurance. Finance falls lower in the 'hierarchy' of needs for the poor. High Transaction Costs 3. b) savings facilities to smooth consumption and get reasonable returns even on small amounts. Credit is the only financial service required by the poor Poor need a range of services such as a) risk mitigation mechanisms.

1. 4. below health. The poor are not sophisticated in using financial services. they end up creating a complex mesh of informal financial mechanisms around their lives. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . Finance falls lower in the 'hierarchy' of needs for the poor. High Risks 2. so access to finance may end up damaging their livelihoods. For example.BOP and Financial Services It refers to the provision of financial services to low-income clients. Credit is the only financial service required by the poor 5. It seems this is the only way they can meet multiple needs using informal instruments. financial diaries of the poor show how they creatively use a variety of loan sources to deal with the irregularity in their incomes and expenditures. High Transaction Costs 3. education etc. Due to the absence of well-designed formal services.

BOP and Financial Services It refers to the provision of financial services to low-income clients. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . High Transaction Costs 3. education etc. 4. High Risks 2. 1. so access to finance may end up damaging their livelihoods. Credit is the only financial service required by the poor 5. below health. Finance falls lower in the 'hierarchy' of needs for the poor. The poor are not sophisticated in using financial services.

Bottom Of the Pyramid It refers to the provision of financial services to low-income clients. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map .

Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . and BOP penalties arise from inefficient or monopolistic markets or lack of attention and investment. productivity. addressing these barriers may also create significant market opportunities for businesses. and income to enabling BOP households to find their own route out of poverty. Engaging the BOP in the formal economy must be a critical part of any wealth-generating and inclusive growth strategy. to the extent that unmet needs. informality traps. And eliminating BOP penalties will increase effective income for the BOP. Moreover.Capitalism for the BOP Addressing the unmet needs of the BOP is essential to raising welfare.

Characteristics of Leading Programs Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Repayment Rates: > 90% Source: Journal of Economic Literature. . Vol XXXVII Dec 99 pg 1574.

enterprises ‡ High outreach. and shallow outreach relative to demand ‡ Interest rates that cover costs. sporadic. enable profits ‡ Excellent portfolio quality ‡ Understand household economies. economic activities of the poor ‡ Financial products and processes that respond to poor households.Characteristics of Leading Programs Compliance Culture Sustainable Microfinance ‡ Low interest rates ‡ Low repayments ‡ Low know your customer ‡ Minimal loan amounts ‡ Low. impact Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: WWB : Building Domestic Financial Systems that Work for the Majority .

Characteristics of Leading Programs Service ‡ Rapid. convenient access Respect. connection Asset Building. Risk Mitigating Products ‡ ‡ Voluntary savings Health and life insurance ‡ Flexible Loans ‡ ‡ ‡ Small initial loan sizes Larger loans over time Longer terms Variety of Products ‡ ‡ ‡ ‡ Housing loans Education loans Life cycle products Business development services What The Poor Want Group Individual Loans Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map No Traditional Collateral Source: WWB research Source: WWB : Building Domestic Financial Systems that Work for the Majority .

profitability ‡ Financial integration ‡ Impact ‡ Portfolio size. regulations and legal structures that fit microfinance ‡ Access to finance that fits the institution¶s size and stage ‡ The ability to mobilize savings Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map . Encourage a range of financial institutions and methodologies: 2. Provide appropriate support modalities² institutions that meet high standards need: ‡ Commercial banks ‡ Regulated MFIs ‡ Microfinance NGOs ‡ Finance companies ‡ Coops. credit unions ‡ Grassroots organizations ‡ Client reach ‡ Efficiency. growth ‡ Portfolio quality ‡ Policies. Adopt standards on performance in: 3.Building Financial Services for the Poor 1.

associations Rating agencies Credit bureaus Tech applications Payment systems Business services Financing Microfinance ± Domestic Capital Markets Retail Capacity. Savings Grass Roots Groups Others Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Savings Product Offerings Microloans ± Working Capital Insurance Remittances.Building Blocks Interest rates Financial sector policies Governmentp olicy Regulations. Health Women¶s Decisionmaking. securitizations Grants for smaller MFIs Guarantee mechan-isms Transparency Healthy market overall Commercial Banks MicroFinance NGOs Regulated MFIs Coopera-tives. savings. Power Community Participation . Credit Unions. assets Income Assets Impact in Poor Households Education. supervision Legal structures Legal systems Performance indicators Governmentr ole Donor support Policy Industry Infrastructure Domestic capital markets Tech service providers Wholesale financial institutions MF networks. Supply Savings mobilization Wholesale financing Bonds.

Characteristics of Leading Programs Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Innovations Cutting costs to clients and the institutions Building new distribution channels Helping clients build assets and mitigate risk Mobilizing capital markets for microfinance Source: WWB : Building Domestic Financial Systems that Work for the Majority .

Building Blocks Legal framework for establishing the co-operative movement Innovations set up. 1995 Passing of Mutually Aided Co-op. Resources Road map 1969 Nationalisation of banks. Indian Scenario Challenges 1934 Reserve Bank of India Act provided for the establishment of the Agricultural Credit Department. Act in AP in 1995. Source: Doug Johnson. The Geographic Distribution Of Microfinance Services In India 2007 .Indian Scenario Definitions Evolution of Microfinance in India Why Key Features 1904 Microfinance has been in practice for ages ( though informally). 1976 Grameen Bank. Yunus 1982 NABARD established as an apex agency for rural finance. 1975 Regional Rural Banks created.

Indian Scenario Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: Doug Johnson. The Geographic Distribution Of Microfinance Services In India 2007 .

Indian Scenario Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: Doug Johnson. The Geographic Distribution Of Microfinance Services In India 2007 .

Indian Scenario Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: Doug Johnson. The Geographic Distribution Of Microfinance Services In India 2007 .

The Geographic Distribution Of Microfinance Services In India 2007 .Indian Scenario Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: Doug Johnson.

The Geographic Distribution Of Microfinance Services In India 2007 .Indian Scenario Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: Doug Johnson.

462 Cashpor 201.108 Bandhan 449.304 AML 416.829 Microcredit Foundation of India (MFI) 410.912 BASIX Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: http://ifmr.html .ac.Indian Scenario Top 10 India MFIs by Number of Active Borrowers MFI* Total # of Active Borrowers (2007)** Spandana 916.in/cmf/map/notes_on_data.517 SKS 513.692 BISWA 200.329 KAS 394.261 Share 826.

Source: http://www. 60.microfinance.000 crores.ppt . Only about 5 % of rural poor have access to microfinance.in/presentation/sou.Indian Scenario:Profile Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Estimated that 350 million people live Below Poverty Line This translates to approximately 75 million households. Annual credit demand by the poor in the country is estimated to be about Rs.

These include . Resources While MFIs have shown that serving the poor is not an unviable proposition Road map there are issues that have constrained MFIs while scaling up.ppt . Source: http://www.in/presentation/sou. Innovations .Indian Scenario : Status of MF Definitions Considerable gap between demand and supply for all financial services Why Majority of poor are excluded from financial services.High transaction costs Indian Scenario .microfinance. This is due to.Bankers feel that it is fraught with risks and uncertainties.Limited access to equity .Unfavourable policies like caps on interest rates which effectively limits the Challenges viability of serving the poor. the following reasons: Building Blocks .Difficulty in accessing low cost on-lending funds (as of now they are unable to offer savings services in a legitimate manner. Key Features inter-alia.Lack of an appropriate legal vehicle .

4 %) and crop insurance (0.Indian Scenario : Status of MF Definitions Why Key Features About 56 % of the poor still borrow from informal sources. Negligible numbers have access to health insurance (0. Building Blocks Innovations 70 % of the rural poor do not have a deposit account Indian Scenario Challenges 87 % have no access to credit from formal sources. Source: http://www.microfinance.ppt . Resources Road map Less than 15 % of the households have any kind of insurance.2 %).in/presentation/sou.

ppt . The loan outstanding will consequently grow from the present level of about 1600 crores to about 42000 crores.e. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: http://www. 75 % of the total poor households of 80 million (i. about 60 million will be reached in the next five years.Indian Scenario : Projections Annual growth rate of about 20 % during the next five years.in/presentation/sou.microfinance.

Indian Scenario : Challenges Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Source: http://www. Ability to attract and retain professional and committed human resources. Appropriate loan products for different segments.microfinance.ppt .in/presentation/sou. Design of apt MIS including user friendly software for tracking accounts and operations.

The Microfinance Revolution Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map .

The Microfinance Revolution ? Low-Income Entrepreneurs and Households LARGE ENTERPRISES Middle Class Definitions Why Key Features Building Blocks Innovations Indian Scenario Challenges Resources Road map Wealthy .