What is Micro credit?

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PRESENTATION OF -MICRO CREDIT BUSINESS MODEL- By
Kira Kay September 2009
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What is Micro credit?

• Provision of small loans (generally USD 50 USD
  550 value in local currency)
• Repayment is made over a set period, usually less
  than one year
• Interest is charged (the rate varies with each
  country)
• No collateral is required, however most group
  guarantee

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Who receives Micro credit?

• Most recipients are women (as they are considered
  food providers of family)
• People below the poverty line (daily income less
  than USD 2)
• Generally recipients own no property
• Often seasonal or no regular income source
• Displaced persons (e.g. from flood relocation,
  rural to urban migration due to civil conflict)

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What is the benefit of Microcredit?

• Advancement of entrepreneurship and
  self-employment, thus creating cash flow
• Supports individuals and families to climb out of
  poverty cycle.
• Enhancement of self-esteem and supports
  creativity
• Encourages participation and initiation in
  solutions in local community
• Increase of education options for both adults and
  children

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Is Microfinance different to Microcredit?

• Micro Finance is the provision of financial
  services to low income clients
• Micro Finance includes Micro credit (provision of
  small non-collateral loans)
• Micro Finance includes provision of savings
  accounts, and additional investment options
• In some cases Micro Finance includes insurance
  (agricultural, health and death ins.)

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Where does Microcredit occur?

• Rural areas
• Urban areas
• Emerging Developing countries (e.g. Bangladesh,
  India, Columbia, Peru, Nepal, Mongolia).
• Restructuring countries (e.g. Eastern European
  countries Ukraine, Bosnia, Azerbaijan).
• Developed countries urban poor unable to access
  standard banking due to poor credit rating (e.g.
  USA, Germany, UK).

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Basic Micro Credit Model
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Example of Micro Credit Loans
MC Client takes loan of USD 80 to buy two goats.
Fortnightly payments (incl. interest) of USD
3.50. Completed repayment within one year. Goats
give birth during year, yearly income from sale
of USD 80 plus goats as asset. Thus now has
capital and future income production. Plus
self-confidence!
MC Client takes loan of USD 150 to set up small
roadside shop. Fortnightly payments (incl.
interest) of USD 6.50. Completed repayment within
one year. Shop produces weekly income of USD
16.50. At year end net profit approximately USD
400, plus shop stock on hand. Thus now has
capital and income production, and, increased
self-esteem.
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Key features of MC delivery

• No collateral, instead group guarantee for loan
• Loan officers go to the client to arrange loan
  and receive repayments
• Generally women clients to achieve maximum impact
  for family care
• Education and support on business management, net
  income and profit making provided as a
  complimentary service to clients
• No currency risk, loans supplied in local
  currency and repaid in local currency

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Types of MFIs
Donation funded (NGO model)
Self-sustaining (Business Model)
PROS

• Access to capital markets
• Broad range of finance products
• Unlimited potential to scale up
• Regulatory environment protects investors
  clients

• Lower Interest Rates
• Potential to undermine
• non-subsidized MFIs

CONS

• Capacity growth limited to donation availability
• Limited capacity for different financial products

• Pressure to maintain administration costs
• Higher interest rates

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Complex example of self-sustaining MFI
Shareholders of MFI
Standard Loans require collateral Home/Land
15 Trading/business 16 Home appliance 15 Hire
purchase 14-16
Capital Investment
Dividend Return
Loan
International Investor (CM) Private contract,
fixed term Interest rate 1-14 pa
MFI Administration (has fixed overhead costs)
Loan repayment interest
Savings Deposit
Loan
Interest Paid on Deposit
Micro credit Loans Rural Urban Non-collateral,
group guarantee 9-12 Agricultural e.g.
goats, chickens, vegetable crops, buffalo. Small
industry e.g. carpet weaving, roadside shop,
basket making. Service provision e.g. shoe
repair, water delivery, transport, tea shop.
Local Investor (Savings deposit) 7 current daily
account 10 6-12 month fixed term 15-16 5 year
plus fixed term (Savings account options open to
all persons, including MC clients)
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Input of self-sustaining MFIs

• Sources of Funds into MFI
• Shareholders put in capital investment, and gain
  a dividend on the profitability of the MFI.
  Shareholders are generally local persons or
  companies, although some countries allow foreign
  ownership of shares.
• International Investors (private or capital
  markets) loan investment at fixed interest rate
  and terms. Due to differential currencies between
  MFI and international investor, currency risk for
  one party depending on type of investment of
  international investor.
• Local Savings available for all local clients
  including micro credit clients, providing
  interest on deposits. Generally a variety of
  savings instruments can be offered. Registration
  of MFI with local financial regulatory
  institution contingent.
• Interest paid on loans both standard and micro
  credit types.
• This provides the capital available for the MFI
  to then make loans, both standard loans and micro
  credit loans.

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Output of self-sustaining MFIs

• Output of Funds from MFI
• Shareholders dividend payments
• International Investors interest payment on
  their deposit
• Local Savings interest payment on their deposit
• Loans Standard (15-16)
• Loans Micro credit (9-12)
• Administration costs accounting, salaries,
  building costs and various other fixed overheads.

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Comments

• The inputs create capital to lend
• The outputs are the use of capital
• The spread of interest paid and interest earned
  creates the income for the MFI to pay its fixed
  administrative costs plus pay a dividend to its
  shareholders
• This is a basic business model which offers all
  stakeholders benefits
• (this example based on functioning MFI, Nava Udya
  Savings Credit Cooperative Pty Ltd, based in
  Kathmandu, Nepal.)

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Final Summary

• Provision of Microfinance, and specifically,
  Microcredit, changes lives - dramatically.
• It provides individuals and families with tools
  to help themselves. give the net, not the fish
• It is empowering and contributing to increased
  well-being and happiness of individuals and
  families.
• It contributes to the overall GDP and economic
  health of the country.
• It stimulates creativity and initiative, thus
  reducing social and civil unrest.
• A clear WIN-WIN Solution Everyone benefits!!