FUNDAMENTALS OF MICROFINANCE

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FUNDAMENTALS OF MICROFINANCE

• 5th Annual Conference of the Microfinance
  Institutions in CEE the NIS
• 16-18 May, 2002
• Budapest, Hungary

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The Objectives of Microcredit
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Microcredit Today- Global Perspective
Banco Sol one of the most successful commercial
banks lends strictly to microenterpreneurs. It
started as a rural community program with a grant
from USAID and now serves 70 000 borrowers a
month (40 of banking clients in
Bolivia).Portfolio in arrears is at .04 (other
banks 4.42).
Programs around the world serving the very poor
consistently achieve strong repayment rates.
Experience has shown that women as a group are
consistently better in promptness and reliability
of repayment.
Focusing on women has also been a very effective
method of ensuring that the benefits of
increased income accrue to the general welfare of
the family, and particularly the children
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Microcredit Today- Global Perspective

• Microcredit is a powerful tool that has
  demonstrated relevance to people on five
  continents and in nearly every country. It is
  estimated that microcredit programs now reach
  something in the order of eight million very poor
  people in developing countries, as well as a
  growing number of the poor in developed nations
  and the economies in transition

Accordng to the microcredit summit data at the
end of 1999 over 9,3 mln of the poorest clients
were reached worldwide of which 7 mln were women
(78 institutions with verified data)

• The global microcredit summit which met first in
  February, 1997 has established a global movement
  to reach 100 million of the worlds poorest
  families, especially the women of those families,
  with credit for self-employment and other
  financial and business services by the year 2005

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Microcredit Today- Global Perspective

• Microcredit financial institutions include
  commercial or development banks, credit unions,
  community banks, NGOs, cooperatives, credit
  unions and other specialized institutions

Often governments and aid agencies wish to use
microfinance as a tool to compensate for some
other social problem such as flooding, relocation
of refugees from civil strife, recent graduates
from vocational training, and redundant workers
who have been laid off. Microcredit programs
directed at situations where whole classes of
individuals have been made poor rarely work
Traditionally microfinance was focused on
providing a very standardized credit product.
The poor need a diverse range of financial
instruments to be able to build assets, stabilize
consumption and protect themselves against risks
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Microcredit Today- Regional Perspective

• Microfinance develops in 3 major regions
  Balkans, Caucasus and Central Asia and Central
  and Eastern Europe and Russia (23 countries)
• Estimate of around 180 microfinance institutions,
  majority of them microcredit NGOs
• Approximately 250,000 active clients who are
  using the services provided by the microfinance
  institutions in the region (top 10 NGOs have from
  20,000 to 6,500 active clients)
• Average loan size for NGOs (61) is below 1000

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Microcredit Today- Regional Perspective

• 85 of NGOs still rely on donor funds
• NGOs are more focused on serving women (66)
• Methodology 79 individual loans 53
  solidarity groups and 13 village banking
• Shorter period of time that it takes to reach
  financial viability (up to 3 years)

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Impact Study Findings
Impact studies of programs around the globe,
overall, show that credit programs are successful
in reaching poor households and in moving
significant numbers above the poverty line
Impact studies consistently find positive impact
in the areas of production, sales and income. In
general, average increases in business income
attributed to loans range from 25 to 40
Positive impact is somewhat less consistent,
however, in the areas of asset accumulation and
employment. In industrialized nations,
employment creation is significantly higher than
in the developing world
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Impact Study Findings
Microloans have been shown as important in
maintaining businesses through economic downturns
At the household level, impact studies have
generally found increased income and asset
accumulation and improved consumption, savings
and education. Household income increases range
from 25 to 75 across a range of study findings.
Microloans made to women are shown to have a
direct influence on improved conditions for
children
Findings from several studies also suggest
changes in womens empowerment levels. Studies in
Asia, Africa and Latin America show strong
positive changes both in decision-making patterns
and also increased self-confidence among women
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Impact Study Findings
Studies have shown that in a minority of cases,
credit may increase the vulnerability of poor
borrowers, but there is nothing to suggest that
the very poor are made worse off by credit
Data from microbanking bulletin reports that 63
of the worldstop MFIs had an average rate of
return (after adjustments) of about 2.5 of total
assets
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Viability of the Microfinance Institution

• Financial sustainability
• Operational income from lending activity exceeds
  expenses
• Institutional capacity
• Human resources
• Mission, vision and goals
• Systems and procedures

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Microfinace in the Region is DIVERSE

• Goals
• Environment
• Target group
• Methodology
• Growth strategy

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Principle 1 Offer Products and Services That
Are Tailored to the Needs of Poor Entrepreneurs

• Appropriate loan terms for environment and
  needs
• Repeat loans full repayment brings access to
  another. It is a process, not an event
• Relatively unrestricted uses let the
  entrepreneur manage his/her finances
• Very small loans appropriate for meeting
  day-to-day requirements of very small enterprises
• Customer-friendly locate outlets close to
  entrepreneurs use very simple forms limit time
  between application and disbursement to a few
  days

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Principle 2 Streamline Operations to Reduce
Costs

• Develop highly streamlined operations (minimize
  staff time per loan)
• Standardize the lending process (simple
  applications, approval on basis of easily
  verified criteria)
• Decentralize loan approval
• Maintain inexpensive office

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Principle 3 Motivate Clients to Repay Their
Loans

• Use non-traditional collateral (group lending,
  character-based lending)
• Guarantee continued access to loans upon
  repayment
• Increase loan sizes sequentially
• Preferential pricing for on-time repayers
  

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Principle 4 Charge Full Cost Interest Rates and
Fees

• Small loans needed by poor people are much more
  costly to deliver than commercial loans
• Low income borrowers can and will pay high
  interest rates
• Charge market-based rates when you start up, even
  if your costs are much higher at first

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Why Do MFIs Fail?
Create obstacles such as legal registration,
personal guarantees, property title, and
collateral requirements that effectively bar most
potential clients
Are expensive for the poor because of excessive
documentation, repeated visits to the institution
and endless waiting for loans
Staff has good community outreach skills, but
little business experience, and often lack the
ability to provide relevant advice or proper loan
analysis
MFIs are often too complicated, expensive and
limited in their capacity to serve clients
MFIs are undercapitalized and cannot reach
sufficient levels of loan volume
Welfare and business goals are often mixed so
staff does not know whether to be social workers
or business developers