Transcript Microfinance

Microfinance
By
Amphol Unves, Team Manager,
Capacity Building Office,
Bank for Agriculture and Agricultural
Cooperatives (BAAC)
Scope of the session
• Microfinance overview
• Microfinance main services; Saving and
Credit
• BAAC Practices on micro credit
• Experiences sharing on microfinance from
informal financial system
The year 2005 has been declared the
International Year of Micro credit.
“Microfinance has proved its value, in many
countries, as a weapon against poverty and
hunger. It really can change peoples’ lives
for the better – especially the lives of those
who need it most.”
(Kofi Annan, quoted from The European Union’s Social Support Project in
Thailand, Case Studies in Rural Development Banking,
Volume 2, January 2005)
Microfinance Services
Microfinance is the provision of financial
services such as
• Deposits
• Loans
• Other Services
– Payment services
– Money transfers
– Insurance to poor and low-income
households and their micro-enterprises
Sources of Microfinance
• Formal Financial System
– Formal institutions – e.g. banks,
cooperatives
• Informal Financial System
– Semiformal institutions/systems – e.g.
non-government organizations, groups,
special programs, funds
– Informal sources – e.g. relatives, money
lenders, shopkeepers
Importance of Microfinance
• As poverty reduction strategy:
- Improve access, provide services to enable
the poor for consumption needs, risk mgt.,
assets, income generation, improve quality
of life
– Improve resource allocation, markets,
technology, promote economy and
development
Microfinance services’ effect
on poverty reduction
– Savings: more savings, income, technology,
cope with risks, productive assets, growth
• Effect on Poverty: more income, reduce risks,
reduce poverty, empowerment
– Credit: chances in investment, technology,
business expansion, less rely on informal
sources, cope with risks, profitability, growth
• Effect on Poverty: more income, education,
reduce poverty, empowerment
Microfinance services’ effect
on poverty reduction
– Insurance services: savings, reduce risks &
impact, more investments
• Effect on Poverty: more income, security
– Payments/Money Transfer Services: trade
and investments
• Effect on Poverty: more income, consumption
Savings
• The poor can save
=I–E
I–S=E
• Existing concept : S
• New concept :
• Ways to achieve:
increase income / reduce
expenses
•Saving methods
– Individual/personal
savings
– Group Savings
– Proportional deduction of
loan amount
– Shareholding
– Savings in kinds
Savings mobilization
• Competitive interest rate
• Develop saving products
• Provide incentives
• Marketing campaigns
Savings’ Outcomes
•
•
•
•
Financial discipline
Build social trust
Savings as loan collateral
Loan insurance savings
Credit
Credit consideration by 4 Cs
- Characteristic
- Collateral
- Capacity
- Condition
Micro credit
• Micro credit : Part of microfinance
• Extension of small loans to the poor who lack
collateral, steady employment and credit history
• It allows the poor self-employment projects that
generate income, be better-off, and exit poverty
• It gains credibility in banks, its success makes
banks to recognize these micro credit borrowers
Microfinance: Lending Models
•
•
•
•
•
•
•
•
•
•
Individuals
Cooperatives
Association
Community/Village Banking
Intermediary/NGOs
Grameen model
Joint Liability Group
Peer Pressure
Bank Guarantees
Etc.
Grameen credit’s features
-
-
Promotes credit as a human right
Targets the poor, particularly poor
women
Based on trust, not on legal procedures
and system
Creating self-employment for income
generating activities and housing
Borrowers must join group
Loans to be paid back in installments,
e.g. weekly, bi-weekly
Grameen credit’s features (Con’d)
-
-
Provides service at the door-step
Enable the poor to build on their skill to
earn better income
Simultaneously more than one loan
Obligatory and voluntary savings
programmes
Put high priority on building social capital
Charity not an answer to poverty
Delivery-Models for Microfinance
Microfinancing
Organizational
Approach
Individualistic
Direct
Cooperation
People
Indirect
Participation
Moneylenders
Formal Microfinance
Institution Approach
Point
of Sale
Institutions
Solidarity Group
Self Help Coopera
Groups
tives
Cluster
Grameen
Group
Federation
Own
staff
Joint
Liability
Group
Agent
Refinance
Securitization
Equity
Model
Model
Model
Mobile banking
• Another method of service
• Move to locate in the field for service
accessible
• Can be part or full operation
Microfinance Facts
•
•
•
•
•
•
Rural poor have farm or farm-related activities
Many run micro enterprises
The poor are not served by financial
institutions because of high risks, high costs,
low profitability, and not able to provide
collateral.
The poor rely on informal sources because of
lack of access to credit at reasonable price.
Microfinance services affect poverty,
socioeconomic aspects but need to provide
services to the not-served poor too
Microfinance services empowers the poor at
the household, enterprise, and community
level.
Microfinance Facts
• Formal sources has increased from
– Expansion through linkage programs with
semiformal sources
– New institutions focused on microfinance
– Microfinance programs by Gov. through nonfinancial institutions
• Cooperatives, semiformal microfinance,
e.g. NGOs provide microfinance services.
Microfinance Facts
• Microfinance has developed to viable
business.
– The poor can and do save
– The poor are creditworthy
– MFIs can make profits at low transaction costs
without relying on physical collateral
Experiences from
Various Countries
Quoted from APRACA Journal of Rural Finance, April-June 2007 volume.
Bank Rakyat Indonesia
“Micro-finance not only provides credit facilities for
MSMEs but also facilitates savings and remittance
facilities and, therefore, is recognised as a pivotal
element in the system of financial intermediation.”
Bank of Ceylon, Sri Lanka
“Micro-finance Institutions Act, which would
empower the monetary board of the Central Bank
of Sri Lanka to provide license, formulate
regulations and supervise micro-finance
institutions.”
Land Bank of the Philippines
“Rural financial market has gone through
stages of development and experience –
from a policy environment characterised by
credit subsidies and allocations, to a
rebound of financial reforms.”
Nepal Rastra Bank
“The development of the formal micro-finance
sector in the country dates back to 1974. …..which
are regulated by the Nepal Rastra Bank and
supervised by the Supervision Department. ”
Myanmar Agricultural Development Bank
“In spite of the existence of four stateowned banks in the country, the
development of private banking appears
more impressive if we take into
consideration the negative real interest
rates, credit restrictions, and lack of banking
habits among the people in the country.”
Bank for Agriculture and Agricultural Co-operatives
“People in the lower income group have a demand
for efficient micro-finance services that do not
result in high transaction costs for the
borrowers/clients…. .”
National Institute of Bank Management, India
“..Informal financial services has been an
important feature of rural economy. A very high
cost of financial services… has helped the growth
of these informal financial services”
Bank Keshavarzi, Iran
“Bank Keshavarzi’s reforms…focusing on resource
mobilization through attraction of public deposits
and offering diverse banking services and
products rather than emphasizing on receiving
resources…from the government.”
Agriculture Promotion Bank, Lao PDR
“..each regulation such as interest rate policy
attract new entrants into rural finance and microfinance, and ensures the creation of a sound
financial intermediation system.”
“This is not charity. This is
business: business with a
social objective, which is to
keep people get out of
poverty.”
Muhammad Yunus, quoted from APRACA, Journal of Rural
Finance, July-Sept. 2007
BAAC’s Micro credit Practices and Experiences
• Non-farm Micro credit
• SMEs are backbone of Thai economy
and important factors for jobs/income
creation in rural areas.
• Only lately that credit services for
SMEs covered only non-farm
activities.
• 90% of rural households earn farm
and non-farm income.
BAAC’s Microfinance Practice (Con’d)
• Micro-entrepreneurs lack of access to
credits since they lack of collateral and are
high-risk (?)
• Micro-entrepreneurs often rely on high
interest rate moneylenders’ loan and incur
rising debt.
• BAAC was not allowed to provide nonfarm credit. This led to lack of suitable
products and staff knowledge, skills and
experience.
• BAAC has struggled for its Act
amendment.
Micro-Finance Linkage Project
Savings mobilization, development of
savings product tailored to meet poor
households’ needs
• Campaign and test non-farm micro-credit
services to micro-entrepreneurs
• Enhance BAAC’s staff competency and
service culture to improve financial
services quality to rural people
Project Implementation
• Credit services:
– Maximum short-term microcredit size:
100,000 Baht
– Loan repayment: Set on regular,
monthly installments basis, tailored to
match small non-farm entrepreneurs’
cashflow.
– JLG was the prevailing form of
security.
Project Implementation
- Interest rate: 1% per month flat (on the initial
loan principal), the borrower got a
remittance of one/fourth of his interest paid if
he repaid all installments on time.
- BAAC dedicated specialized microfinance
staff for this non-farm segment.
- First loan disbursed on February 1998.
- Micro credit supports economic activities,
e.g. small-scale trading, food stalls, repair
shops, food production, etc.
- About 65% of borrowers were women
Project Implementation
–
Performance: High portfolio at risk at first unwillingness to repay, laxity of supervision, follow-up
and enforcement
What were done:
– Appointed Non-farm micro credit officers
– PR activities to make the service known to customers.
– Monitoring system: Follow-up on regularly monthly
basis when installments got closer
– Law enforcement: For willful defaulters to prevent
mounting moral hazard problem.
– Loan Objectives: Primarily for working capital to
maintain or expand businesses and/or to
increase/diversify products
– Non-farm loans gave lessons, experience resulted in
risk minimizing design of loan procedures and support
measures for the new market segment
Project Implementation
Key success factors:
• Credit for individuals through Joint Liability
Groups (JLG)
• Shift from wholesale to individual lending
• Self-reliance under controlled interest rates
condition: through savings mobilization from
public, improved loan recovery, implementation
of prudential regulations and provisioning rules.
• Increase staff and branch productivity and
efficiency with B-MIS and decentralization
• Diversify credit services to farmers/non-farmers
• Expand branch network
• Venture into rural microfinance market segment
• Savings are equally important as credit
Social Support Project: SSP
• The project arose in response to sufferings
of rural people after 1997 financial crisis
• Aims: Help BAAC to improve microfinance
services quality, strengthen rural
microfinance & enterprise groups.
• Core concept: Provide knowledge/skills on
production to target groups first, followed
by loan extension to operate group
business
Social Support Project: SSP
• It created BAAC staff and branches awareness
• SSP integrated into BAAC’s work, e.g. in
provincial poverty alleviation campaign, i.e.
strengthening community organizations and
capacity-building for farmers and rural
communities
• For Village Funds (born in 2002: government
granted 1 mill.baht to each 77,000 villages, BAAC
coached fund management). SSP campaigned
strongly to use group development/microfinance
methods (compulsory savings, etc.) to advance
sustainability and utility of funds to villagers
Entrepreneur and General People Loan
• Customers: Individuals (generally groupbased) and Legal person
• Loan Types: Working capital, investment
loan
• Loan Objectives: Promote and support
– Customers’ products development in
investment, production, processing, marketing
– Strengthening of community economy aim at
creation of industrial, commercial and service
enterprises to increase income, reduce costs
– Community savings and self-reliance
Entrepreneur and General People Loan
• Credit Worthiness Analysis:
– Customer: Fame, honesty, loan use record,
knowledge & experience, financial status
– Loan needs: Needs from business, work, project plan
with fact & information from customers, comparison,
general standard information
– Income: Ability/opportunity to generate income,
sources of income to set appropriate installments
repayment in line with cash flow
– Repay ability: Income after costs (operation cost,
household spending) generally repayment amount not
set more than 40% of income
– Repayment history
– Collateral: stability, sufficiently covering requested
loan
Entrepreneur and General People Loan
• Loan term: not more than 18 month (on
monthly repayment basis) for working
capital loans, 15 years for investment
loans
• Interest rate: MRR (7.5%/year) for
individuals
MLR (5.5%/year) for legal
persons
Microfinance Challenges
•
•
•
•
Banks incur high overhead, they incline to deal
with better-off borrowers. Should they not be
expected to provide micro credit?
How to lower transaction costs to operate
profitably?
The poor are skillful in survival. They save
money, repay debts. Will they be successful in
their business?
Microfinance needs more than lending and
savings? Are new services, e.g. insurance,
housing microfinance, and other financial
services for the poor needed?
What to be careful?
• 1. Financial Viability: If government-directed
micro credit programs, NGOs, state-owned
banks, cooperatives that provide microfinance
services not financially self-sufficient, poor
households cannot borrow/deposit, institutions
cannot mobilize funds to serve clients and
contribute to development. This is fundamental
to reach the poor which in turn have a huge
impact on poverty reduction.
• 2. Micro credit given to the poor who do not have
a capacity to repay can increase their poverty
“The key to ending extreme poverty is to
enable the poorest of the poor to get
their foot on the ladder of development.
The ladder of development hovers
overhead, and the poorest of the poor
are stuck beneath it. They lack the
minimum amount of capital necessary to
get a foothold, and therefore need a
boost up to the first rung.”
Jeffrey Sachs, quoted from APRACA, Journal of Rural Finance, JulySept. 2007