Microfinancing

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Microfinancing

• Hope for Argentinas Poorest

2
Microfinancing

• Small loans and small deposits for poor
  households left unattended by banks
• Helps small farmers and self-employed
• Uncollateralised loans to borrowers without a
  constant source of income from a wage job
• Increases costs for lenders to judge risk and
  enforce repayment
• Grameen Bank in Bangladesh
• Professor Muhammad Yunus

3
Rural Financial Markets Matter

• Agriculture
• More than ½ of foreign exchange earnings
• Sustained growth
• Increased domestic savings
• Poverty is deep and wide
• Between 37 and 55 of 37 million
• Efficient production is facilitated
• Equity is affected
• Investment is affected
• Creation of jobs (unemployment at 16)

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History of Populism

• Access to credit is a right.
• Equity under democracy requires that voters get
  what they think they deserve.
• Liberal democracy and capitalism defensible only
  if equal opportunity for all
• In education, financial services, etc.

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Equity Rich vs. Poor

• Government has responsibility to reduce the
  differences
• Wealthiest 5? 25 of national income
• Wealthiest 10? 40
• Poorest 30? 7.5
• Government should provide redress for the poor

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Purpose/ Challenge of
Microfinancing

• To reach the poor in substantial numbers
• To enable them to move out of poverty
• To create financial institutions that are
  sustainable

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The Savings Equation
8 8 s(t)
-? Et ?Y(t k) ? Et ?0(t k) k1
(1 r)k k1 (1 r)k
8 ? ? ?t (t k)
ln(r - d) 2(1r) k0 (1 r)k
r
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The Triangle of Microfinance
Macroeconomic and sectoral policy framework and
socioeconomic environment
Impact
Institutional innovations
Financial Sustainability
Outreach To the poor
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Outreach

• Breadth- serving more of the poor
• May be able to use loans more effectively
• Depth- serving the poorest of the poor
• May smooth their consumption
• Quality- making services affordable
• Lack of access
• May improve welfare, but not necessarily life out
  of poverty

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Impact

• The alleviation of poverty
• Food security and economic growth
• Enhance through complementary services
• Business or marketing services
• Training of borrowers

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Financial Sustainability

• Need lasting financial institutions
• Must have faith in permanence to entrust savings
• Crucial indicator of MFI performance
• Will influence decision of being worthwhile in LR
  
• Forces MFIs to think about client demand
• Induces to improve products, operations,
  outreach, etc.

12
Public Investment

• Failure of public development banks
• Justified from public policy perspective only if
• Comparison of social costs with social benefits
• Opportunity costs
• Subsidy dependence index

13
Material Conditions

• Transaction costs and risks
• Rural, sparse populations
• No market days
• Lack of infrastructure
• High risk
• Seasonal cycles
• Not well-diversified
• Privatization of public development banks
• No national credit bureau
• No national pledge registry
• Constraints on loans

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Argentine Macroeconomy

• Convertibility Plan of 1992
• Tequila Crisis of 1994-95
• Devaluation of Peso Crisis of 2001

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Fundación Emprender

• Argentinas only significant MFI
• Patterned after Bolivias PRODEM
• Small, urban
• Outreach deep, small, low quality
• Almost self-sufficient
• Not worthwhile social investment

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Possibility of Microfinancing in rural Argentina?

• Needs improvement first