Welcome to class of
Microcredit / Microfinance
in Emerging Markets
Dr. Satyendra Singh
University of Winnipeg
Canada
www.uwinnipeg.ca/~ssingh5
How does it work?
What is Microcredit
Different from Conventional Banks
• 5 features
– Loan size is small  b/w $100-$500  average $100
– Customers are rural poor, particularly women
– Income activities  Self-employment, non-formal sector
– No collateral required
– Must have saving account linked to MC
Microcredit – Different from Informal $ Lenders
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MC  No profit motives
NGO’s approach to poverty alleviation
Before the poor was blamed for personal failing
Now, poverty  deprive the poor of access to
social resources  human rights issue
• Non-judgemental
• MC leaders  inspire social and economic
revolutions in the EM by organizing the poor under
the banner of MC organization (NGOs)
Microcredit (MC) – Small loans
• Why is MC important?
– Four billion poor people need access to financial
services
– Social justice
– Only philanthropy is not enough
– Women suffering the most
– Development of informal sector  farmers, tailors…
– Need to remove poverty in EM
– ↑ Demand  $50 billion per year for MC
– ↑ 15-30% growth annually
– Moral responsibility of businesses
What is Microfinance: It is broad
Loan, saving, insurance, money txfr…
Debate: Microfinance
• Sustainability
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↑ interest is ok to cover admn cost and be profitable
Attract ↑ people to open MF venture
↑ competition  ↑ innovation
↓ interest rate for clients
Able to serve the 3 b people
• Poverty alleviation
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↑ interest is NOT ok because it exploits poor
↑ profit will attract ↑ MF investors
Growth of new and uncertain sector
Profit-making venture
Microfinance (MF) Venture
• Microfinance  Profit-making venture
– But serve the poor
• Self-financed  Savings/borrowing > lending
– Share Capital  collected from the public
– Equity Capital  supplied by owners of the MF venture
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Owners have little equity capital
Public has little interest in investing in the business
Problem of seed capital  not profitable at outset
Assistance from private firms, donors agencies for seed capital
Donors World bank, development banks, CIDA, USAID…
Justification for Assistance to MF venture
• 2 reasons for the justification
– Social
• Vast differences in wealth and education among people
• MF Owners are not as greedy as banks (↑ interest rate from poor)
• So, MF owners are different from traditional bankers
– Economic
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Need help/grants/seed  ↓ interest loan
MF entrepreneurs  able to deliver appropriate services & make $
Infant industries  subsidize initial phase of operation
↑ productivity  ↑ $  ↑ money mgmt skills  resource mgmt  ↓
transaction costs  ↑ MF entrepreneur’s skills to be market
oriented  sound business decision  contributes to economy
Dr Yunus, President Clinton
Social Consciousness-Driven Capitalism Theory
• Psychological Component  Dr. Md. Yunus
– Capitalism  premise  we are selfish by nature  ↑ $
– So, ok to develop capitalist enterprise (financial return) if
fair to customers (social return/consciousness)
• This premise creates 3 types of entrepreneurs
– Traditional capitalist  maximize financial return/profit
– Philanthropic organisations  traditional credit/NGOs
– Microfinance enterprises  combine both returns while
making decisions subject to financial return cannot be
negative  social consciousness-driven capitalist
enterprise
SHG Self Help Group  10-15 women
Social consciousness-driven Microfinance…
• Reasons for investing in the MF
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Large market size
Unfulfilled demand
↑ return on investment despite ↑ admin cost
↓ default rate of borrowers  1-5%
Success or failure is not linked to world political events
Appealing due to altruism
Helping poor directly and avoiding corrupt government
Feeling good by doing good
Investors may like the reasons to invest in MF venture
IShop4Microfinance
These firms donate X% to microfinance venture
Social consciousness-driven Microfinance
• But investors need to see sustainability of MF
• Means of Entry  Mainly motivated by ↑ rate of return
• Equity stakes
– For-profit orgn buys equity in MF  difficult  ↓ confidence
• Securitization
– Ability to securitize loans and sell  access to cheaper capital for
MF venture  pass on the savings to clients
• Service provision partnerships  Insurance for loans
• Donors  self-sufficient  $ should exit
– Capacity building  leverage other successful MF venture
– Regulatory infrastructure  credit bureau, rating, legal framework
www.kiva.org
How Kiva works?