LECTURE
INTRODUCTION TO MICROFINANCE
May 6th, 2009
Emilie Levy, Executive Director
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Agenda
DEFINITION OF MICROFINANCE
STAKEHOLDERS
MICROFINANCE BEST PRACTICES
SUSTAINABILITY AND RISKS
SNAPSHOT OF MICROFINANCE TODAY
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Case study
Mrs. Israel, 48 years old
•
•
•
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Unemployed husband
4 children
No savings
Good cook
•
Mrs. Israel decides to start a small catering service
at home
Mrs. Israel goes to the bank and makes a demand
for a loan at her bank
•
MRS. ISRAEL’S DEMAND IS REJECTED
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Justification and definition of microfinance
Why are people excluded from certain financial services?
• Lack collateral or guarantors
• A bad credit history
• Gap in the communication / lack of confidence in the Banks
• Doubt of the bank of the repayment capacity
• Lack of access to financial infrastructure and services in
remoted areas
WHAT IS THE ALTERNATIVE?
MICROFINANCE
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Justification and definition of microfinance
MICRO
FINANCE
• Micro-entrepreneurs
• Business & educational loans
• Self-employed
• Savings
• Low income populations
• Micro-insurances
• Excluded populations
• Remittances
• Micro-entrepreneur training
• Coaching & workshops on
health, hygiene, etc.
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Definition
Microfinance is the offer of financial & non-financial services to
people excluded from the traditional banking system.
The services are adapted to the needs of the target populations
Microfinance is a tool against poverty by enabling the beneficiaries to :
• Create sustainable activities to increase their incomes
• Reduce external shocks
• Improve the living conditions of entrepreneurs and of their families
• Empower people and mainly the women
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Introduction to Microfinance: History
How did all start?
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On the field Prof. Yunus saw that
Even poor people and women need loans
They can have an activity and repay
Yunus’
idea
Prof. Muhammed Yunus
Founder of the Grameen
Bank, Bangladesh
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Set up financial institutions with
a social mission
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Listen to the needs and constraints of the
excluded & offer them adapted financial tools to
empower themselves ( solidarity groups)
Spirit: SUSTAINABILITY
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Actors & Mechanisms
COMMERCIAL BANKS &
INVESTMENT FUNDS
GOVERNMENT
& LOCAL
BODIES
FOUNDATIONS &
DONORS (incl.
enterprises)
MICROFINANCE
INSTITUTIONS (MFIs)
(NGO, ASSOCIATIONS & BANKS)
SUPPORT
ORANIZATIONS
(e.g. PF)
Commercial
Banks
BENEFICIARIES
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Micro-credit Best practices (1/4 ): microcredit
Mrs. Israel needs NIS 1,000
1
Visit of Mrs. Israel to the MFI
Meeting wit the Loan Officer
2
Start of cooking & sale
Convinced, reception of a loan of
NIS 1,000 (+ NIS 30 interest rate)
4
Purchase of the ingredients
(Daily benefits amount NIS 100)
Regular contact and
follow up between the
MFI and the client
Final Repayment 12 weeks later
Demand for a 2nd loan over
NIS 1500 to buy a fridge)
3
Weekly Repayment ( 86 NIS)
Remaining money is used to buy food
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Microcredit Best Practice (2/4 ) Repayment
Microfinance is not philanthropy!
• Clients need to pay for the services
• Microcredit clients need to repay the loans
• Interest rate to cover the costs
Why is repayment important?
• Offer new loans and extend the client base
• Ensure correct functioning and growth of the institution
• Cover office & operational costs
• Cover for non-payments when they occur
• Avoid financial loss and loss of credibility for the institution
 REPAYMENT ON TIME GUARANTEES THE SUSTAINABILITY OF
THE PROGRAM
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Micro-credit Best practices (3/4 ): Interest Rate
Prejudices
• The social mission should consist in a free loan
• Interest Rate, perceived as a burden to the client
Reality
• Micro-credits allow for the creation or expansion of an income
generating activity and the generation of profit
• Interest rates are no burden if the business plan is solid and good
evaluation has been done
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Microcredit Best practices (4/4): Key success factors
Methodology
• Regular follow up
• Requirement of good repayment for future access to a bigger loan
• Local loan officers familiar with local culture
Adapted products and procedures
• Small and short term credits
• Repayment capacity assessment
• Adapted collaterals / group solidarity guarantee
Business Development Services
• Compensation for lack of education of loan beneficiaries
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Sustainability: the conceptual framework
OUTREACH
SUSTAINABILITY
IMPACT
Why few MFIs are
sustainable?
How do we measure the
impact?
• Need to make trade-off sometimes
• Need to reduce the internal and external risks to maximize the
success
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Microfinance in the world today
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10,000 MFIs manage a global portfolio of US$30 Billions
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In a range from 150 US$ to 7,000 US$, the average loan size
is US$ 450
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150 Mio micro-credit active clients
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300 Mio micro-saving active clients
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50 Mio micro-insurance active clients
Sources : CGAP, BIT, Microcredit Summit, PlaNet Finance
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New trends
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Development of MF in industrialized countries (e.g. Israel,
France, USA) thanks to the adaptation of the tools and
methodologies
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Commercialization of the stakeholders
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Use of new technologies as a new development tool
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Thank you!
www.planetfinancegroup.org
elevy@planetfinance.org
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