Microfinance

University of Luzon College of Business Administration 1st Semester 2011-2012

DR. AMALIA G. DELA CRUZ

Case study

CASE STUDY
Mrs. Israel, 48 years old

Unemployed husband 4 children No savings Good cook

Mrs. Israel decides to start a small catering service at home Mrs. Israel goes to the bank and makes a demand for a loan at her bank MRS. ISRAELS DEMAND IS REJECTED

Justification and definition of microfinance Justification and definition of

microfinance

Why are people excluded from certain financial Lack services? collateral or guarantors
A bad credit history Gap in the communication / lack of confidence in the Banks Doubt of the bank of the repayment capacity Lack of access to financial infrastructure and services in remoted areas

WHAT IS THE ALTERNATIVE? MICROFINANCE

Justification and definition of microfinance Justification and definition of

microfinance
MICRO

FINANCE

Micro-entrepreneurs Self-employed Low income populations Excluded populations

Business & educational loans Savings Micro-insurances Remittances

Micro-entrepreneur training Coaching & workshops on health, hygiene, etc.

What is Microfinance?
It is a provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance products to the poor and low income households and their microenterprises

-the provision of financial services to low-income clients or solidarity lending groups including consumers and the selfemployed, who traditionally lack access to banking and related services. -a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. -Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients.

Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity are engaged in microfinance.

Important Features of the Definition

It is not just credit It has a target market - the poor and low income households It is linked to the microenterprise

Principles in microfinance

1. Poor people need not just loans but also savings, insurance and money transfer services. 2. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. 3. Microfinance can pay for itself. Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 4. Microfinance means building permanent local institutions. 5. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. 6. The job of government is to enable financial services, not to provide them. 7. Donor funds should complement private capital, not compete with it.

8. The key bottleneck is the shortage of strong institutions and managers. Donors should focus on capacity building. 9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. 10. Microfinance institutions should measure and disclose their performance both financially and socially. Microfinance is considered as a tool for socio-economic development and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions.

Invigorating MICROENTERPRISES through access to MICROFINANCE can lead to economic growth and development on the local and national level.

Subsidized Credit

What Microfinance is NOT

Dole-out
Consumption/ Salary Loan

Cure-all for poverty

Who are the Clients?

Near Poor

E-poor
Laboring Ultra Poor

Features of Microfinance Loans

Fit for those who can not access traditional sources of financing Innovative Product Designs

Use of collateral substitutes Short term loans Frequent amortizations Inclusion of savings Enterprise lending Simple Documentation Requirements

Benefits of Microfinance for Microenterprises

Increase economic activity and income Generate employment Save and invest in the future Guard against emergencies and shocks Better invest in health, nutrition and education

Myths, Misconceptions and Barriers

Poor people can not pay market interest rates and can not save Microfinance institutions are primarily civicoriented, non-profit organizations that can not be sustainable and viable Microfinance institutions can not access commercial funds

Myths, Misconceptions and Barriers

High transaction costs of serving the poor

Regulatory barriers Implementation of government directed credit programs Poor are intimidated by formal institutions Lack of infrastructure and physical access to formal institutions

New Paradigm of Microfinance

From beneficiaries to clients From directed credit to market approach From evolving programs to evolving institutions From donor dependence to financially self sufficient institutions with access to commercial funding

Key Success Factors for Microfinance 4 Cs

Clearly identified market

Capable and committed staff

Creative methodologies and technologies

Commitment to standards and best practices

Best Practices for Microfinance

Appropriate Products for Clients (flexible, accessible, simple in process and documentation, appropriately priced, and permanent) Appropriate Delivery Clear Organizational/ Institutional Structure (Governance) Adequate Risk Management (Use of Portfolio-at-Risk, Zero Tolerance for Delinquency) Subscription to Performance Standards

Leading Microfinance Methodologies

Group

Methodology Microfinance services are provided in the context of a group.

Some Examples of Group Methodolgy

Grameen Methodology

7-8 groups of 5 women forming 1 center Disbursement and collection through center Loans are provided on a rotation basis (2-2-1) Collateral substitute (i.e. JSS, peer support/pressure)

ASA (Association for Social Advancement)

7-8 groups of 5 women forming 1 center Disbursement and collection through center Simultaneous disbursement of loans Collateral substitute (i.e. peer support/pressure)

Leading Microfinance Methodologies

Individual

Methodology - single client lending where repayment and schedules rely solely on the individual (cash-flow, character based lending)

Some Examples of Individual Methodology

MABS approach (Microenterprise Access to Banking Service)

USAID funded technical assistance to rural banks that want to engage in microfinance Individual loans are granted based on the character and household cashflow Culture of zero tolerance for delinquency

Where Can I Access Microfinance?

Banks (Rural, Thrift, Some Commercial

NGOs Cooperatives

BSP Initiatives

Anchored on the General Banking Law of 2000, Sections 40, 43 and 44

Recognizes the peculiar characteristics of microfinance in the requirements, terms and amortization of loans and other credit accommodations.

Microfinance Friendly Policy and Regulatory Environment Training and Capacity Building within BSP and banking sector Promotion and Advocacy

Three-Pronged Approach

Policy and Regulatory Environment

Issuance of 13 Circulars governing the practice of microfinance in the banking sector provides incentives like rediscounting, recognize microfinance loans (no collateral, loan documentations, etc), allow for branching, promote best practices Modification of Manual of Examination to include microfinance operations

Member of the Technical Working Group

Ways How a Bank can Engage in Microfinance

Establishment of a microfinance-oriented bank Establishment of a microfinance-oriented branch Establishment of a microfinance unit within an existing bank

Training And Capacity Building

Creation of a Microfinance Committee and Microfinance Unit Establishment of a Core Group of BSP Microfinance Examiners Inclusion of microfinance in the Basic Rural and Thrift Banking Courses Conduct of training for banks on microfinance best practices

Promotion And Advocacy

Regional tour to promote microfinance best practices to practitioners and potential players BSP as Chair of the Philippine Celebration of the UN International Year of Microcredit
Microentrepreneur of the Year Awards

Banking Sector Exposure to Microfinance

As of March 31, 2006 (in millions)

Micro Loans Portfolio

Amount Microfinance-oriented Banks: Thrift Banks (5 banks) 212.400 Rural Banks (4 banks) 230.992 Traditional Banks: No. of Borrowers

50,187 34,984

Thrift Banks (9 banks) 144.666 Rural Banks (159 banks) 2,373.291 410,110
Cooperative Banks (27 banks) 696.803 97,899

Total

(204 banks)

3,658.052

593.180

Thank you.
DR. AMALIA G. DELA CRUZ