Introduction to Microfinance

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Urban Program for Livelihood Finance
and Training
Introduction to Microfinance
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Flow of training

• Topic 1 Where does Microfinance come from?
• Topic 2 What is Microfinance ?
• Topic 3 Who are the clients of Microfinance ?
• Topic 4 What are the main issues in Microfinance
  ?

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Urban Program for Livelihood Finance
and Training
Where does Microfinance come from ?
Sentence 1 Rich people pay better than poor
people. Sentence 2 To alleviate poverty, it
is better to invest a lot of money in few
companies which will create a lot of employments
rather than investing a lot of small amounts of
money in small fragile businesses
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Urban Program for Livelihood Finance
and Training
What is Microfinance ?

• CGAP definition
• Microfinance is the supply of loans, savings and
  other basic financial services to the poor.

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Urban Program for Livelihood Finance
and Training
What is Microfinance ?

• Asian Development bank definition
• Microfinance is the provision of a broad range
  of services such as deposits, loans, payment
  services, money transfers and insurance to poor
  and low-income households and their
  micro-enterprises.

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What is Microfinance ?
The services in Microfinance
Financial services needed by the poor include
working capital loans, consumer credit, savings,
pensions, insurance, and money transfer services
(CGAP).
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Urban Program for Livelihood Finance
and Training
What is Microfinance ?

• Definition of Microfinance institution
• From ADB Microfinance institutions are defined
  as institutions whose major business is the
  provision of Microfinance services.
• From CGAP A Microfinance institution is an
  organization that provides financial services to
  the poor.

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Urban Program for Livelihood Finance
and Training
What is Microfinance ?
Microfinance clients are low-income people
receiving one or several Microfinance
services. They can be granted a loan, save their
earnings or benefit from an insurance scheme.
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Urban Program for Livelihood Finance
and Training
What is Microfinance ?

• The three methodologies
• Individual lending
• Peer group lending
• Community-managed revolving loan fund (Village
  banking).

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Urban Program for Livelihood Finance
and Training
Who are the clients of Microfinance ?
C A R E M A T R I X
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Urban Program for Livelihood Finance
and Training
Who are the clients of Microfinance ?
Key distinction
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Urban Program for Livelihood Finance
and Training
Who are the clients of Microfinance ?
Target groups methodologies
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Urban Program for Livelihood Finance
and Training
Who are the clients of Microfinance ?

• Describing the clients targeted, using the
  following categories and questions.
• Economic activities
• Scale of activitieswould you classify your
  clients as people operating income generating
  activities or as micro-enterprises? Why? What is
  the maximum assets owned by business prior to
  receiving a loan (or the value of assets
  necessary to start a business)? How many people
  will be typically employed in the business?
• Sector of activities in which sector do your
  clients operate (production, service, trade,
  agriculture,/livestocks) ? What approximate
  percentage of all clients are or do you expect to
  be engaged in this sector ?
• Time in operation How long, on average, would
  your clients have been operating their business
  prior to requesting a loan from your organization
  for the first time?
• Demographic characteristics
• Age
• Citizenship
• Gender
• Education and literacy levels
• Cultural characteristics
• Cultural cohesion (factors binding people in a
  community church, cooperatives, paluwagan, etc.)
• Perception of credit

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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance
IMPACT
OUTREACH
SUSTAINABILITY
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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance

• Sustainability refers to the capability to
  sustain an organization, to ensure its survival
  in order to operate in the long run.
• Sustainability in Microfinance is three folded.
• Financial sustainability to ensure that enough
  funds are available to pay the expenses and grant
  loans.
• Organizational sustainability to ensure that the
  structure of the MFI is appropriate. The MFI must
  contain the bodies that take decisions (BOT) and
  necessary units (finance and admin, IT, training
  for examples) that allow the MFI to keep on
  operating.
• Institutional sustainability to ensure that the
  formal status of the MFI is the proper one to
  operate (NGO, Bank, Cooperative, etc.). This
  depends on the final goals of the MFI and also on
  the legal context in one country to operate
  Microfinance.

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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance

• Interest rate setting
• Interest rate in one MFI must cover several
  costs
• Administrative and operational costs
• Cost of money
• Loss of Capital
• Reserve (especially in case of savings
  mobilization)
• Development of the organization

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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance

• Outreach refers to the capability of one MFI to
  reach its target population.
• Outreach can be seen in three ways
• Volume the overall number of people reached (ex.
  Of UPLIFT around 15,000 clients).
• Quality the percentage of clients that precisely
  correspond to the target population.
• Depth the level of saturation in one area.
  Knowing the potential clients in one area, how
  far a MFI is able to reach them ?

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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance

• Impact refers to the capability to make ones MFI
  vision-mission real. More generally, the Impact
  is the capability to alleviate poverty.
• IMPACT can be measured at the level of
• Individual (empowerment, income, health, etc.)
• Household (status of the house, education of
  children, nutrition, etc.)
• Business (income, assets, etc.)

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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance
Measuring sustainability in UPLIFT
Income
Self sufficiency ratio It can be measure at
the level of a branch, a program or the entire
organization. Income statement It can be
prepared at the level of a branch, a program or
the entire organization.
Expenses
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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance
Measuring Outreach in UPLIFT

• Number of Partners (per LDO, per Branch, per
  Program and for all UPLIFT)
• Number of new loans (per LDO, per Branch, per
  Program and for all UPLIFT)
• Number of re-loans (per LDO, per Branch, per
  Program and for all UPLIFT)

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Urban Program for Livelihood Finance
and Training
Main issues in Microfinance
Measuring impact in UPLIFT
From two impact studies in 1997 and 2001 To the
implementation of impact monitoring tool