Micro Financing

Joanna Buickians Narine Mirzakhanyan Econ 490Professor CastilloMICROFINANCING

Key PointsMuhammad YunusGrameen BankMicrofinancingMicro-credit & MicrobanksMicrofinancing ServicesWomen being targetedWeb Based MicrofinancingBorrowers & Lenders

Muhhamed Yunus

Yunus is the 1st Nobel Prize winner from Bangladesh_________________________Founder of Grameen (Rural) Bank in 1976 _________________________

Started microfinancing by giving out a loan of $27 to 42 women in a village in Bangladesh.

Worlds Banker to the PoorIf society was structured for self-employment, there would be no reason to fear being poor. - Dr. Muhammad Yunus

Microfinancing Supply of capital loans, consumer credit, savings, insurance & other basic financial services to low income households. People need to run their businesses, build assets, stabilize consumption & shield themselves against risks. Its a service in which the poor people desire & are willing to pay for.Loans are typically less than $125 made to the rural poor who normally do not qualify for traditionally banking credit.

say NO to poverty

Microfinancing is very beneficial; it is a combination of financial and non-financial education. Microfinancing used to be unknown, but it is now worldwide. World Bank estimates that there are 7,000 microfinance institutions worldwide.

Microfinancing (continued)

Micro-Credits & Micro-BanksCREDITS The Grameen transactions take place at the village level, usually in a local hall or temple. The borrowers will use a loan to buy tools and equipment to set up on their own.BANKS Banks lend money to individual entrepreneurs in groups of five, each member being responsible for their own loans before any one individual can re-apply for the next level of funding. they use each other as collateral for their loans. This proven method has boasted over a 95% success rate in repayment and flourishing businesses.

Microfinancing Services

_______________________________________________________________________Why Targeting Women? One billion people in the world are illiterate and two thirds of those people are women. - Muhammed Yunus

Microfinancing is a step towards uplifting women. The Grameen Bank has lend $$$$ especially to women so that they can launch their own businesses. Women gaining control over their lives. Women achieving economic and political empowerment w/in their homes About 90% of the people that are on micro-credit are women. Women are more reliable in paying back the money. Reducing domestic violence by giving women independence.

Why Targeting Women? (continued)

Web Based MicrofinancingCELLPHONES In poorer nations phones have help open up microfinancing. In Dev. Countries where bank branches and ATM are few/nonexistent, cell phones make the financial services practical.Cell phones have the potential to take financial markets outside the urban areas. INTERNET With $$$$ transfer one can do anything to help the poor and support the economy.

Web Based Microfinancing (continued)_______________________________________________________________________KIVA.ORG Connects people to make chance San Francisco based nonprofit that has taken a step further w/just few clicks of the mouse, & now everyone can become a microfinancier. Includes photos of loan recipients & stories about borrowers, lenders can choose aspiring small-business owner and make their own loans. Kiva has worked w/more than 20 microfinance institutions around the world & enabled more than $1 million in loans for more than 2000 businesses.

Borrowers & Lenders microfinance is provided by non-governmental organizations (NGOs), cooperatives, non-bank financial intermediaries and commercial banks. More than 10,000 microfinance institutions are in existence with a loan portfolio exceeding $7 billion. most of them are very small w/ clients base of less than 2,500 Some 1000 million people access microfinance services globally. Clients are typically self-employed and w/a relatively stable source of income. while most borrowers are women, studies indicated that many loans awarded to women and paid back by them are in fact used by men.

Global change through Microfinance

Case Study #1: Microloans in IraqAllaur Abd Mottar: microentrpreneur, Iraq Business: used $3,000 loan to start a scrap metal business

Case Study #2MFI helps Dedan Ireri in Nairobi, KenyaStreet begger, lost leg MFI gave him loan to start business with his friends, it failedGot a bicycle, worked as messenger for MFIWill be in 2008 Para OlympicsIt works best when there are middle-class entrepreneurs who have business savvy but do not have access to capitalUSAID Rep Gary Robbins

General InformationMicro-entrepreneurs:Dont need collateral Small and shorter loansGroup borrowingReputation and Peer pressureSome criticismMicrofinance Institution: Higher operating expensesRural costs are higher than urban costsHigh transaction costsBecause of the size of the loans Higher interest ratesOverall: Improves employment

Different from traditional credithttp://www.microcapital.org/downloads/resourcepapers/IADB-VillagetoWallStreet.pdf

Example: Financing urban structure Nepalhttp://www.idrc.ca/openebooks/216-3/

Sustainable development continuum for organic microfarminghttp://www.idrc.ca/openebooks/216-3/

The larger picture: Improves EmploymentIncome-generationTo start or expand micro enterprise activityHelps entrepreneurs build assets and sustain jobsRisk-management and reduction of vulnerability Microfinance also plays a role for vulnerable persons to cope with and mitigate risk. Building up emergency loans for unpredictable expenses and income droughts. Empowerment: Mobilizing savings enables people to take financial responsibility for their lives

As business income rises, businesses expand affecting the entire community through employment and contribution to the economy

http://moderato.files.wordpress.com/2007/06/diego.jpg

Job CreationMFIs do increase jobs in agriculture and transportation, however they decrease construction and manufacturinghttp://www.dallasfed.org/research/swe/2006/images/0605b_c1.gif

Some negative resultsDepend on microcrediting for subsistence

Engage in "copycat" behaviorThus leads to more sellers saturating the market as more microcredit is made available. low "barriers to entry."

Largely, subsistence activities with no prospect of comparative advantage.

Child LaborChild labor increases current income but reduces future income

The enterpriseWhat enterprise?For the Lender: The clients decision may diverge from the agreed purpose. Lending to people closer to the poverty line is riskyFor the Borrower:Risk aversion restrains the propensity to invest in new production technologies, which would boost employment.

Is this true? Researchers find limited technological innovation and increased labor productivity as a result of micro loans.

Credit and financing does not directly lead to employment.

MFIs are successfulIncrease profits and social prosperity Decrease risks, thereby increase loans and the number of investorsNumber of lenders growing at 25% per yearIs the future bright?

http://www.sinapiaba.com/links/arreas.html

The FutureSource: http://www.microcreditsummit.org/pubs/reports/socr/EngSOCR2007.pdf

Sourceshttp://www.microcreditsummit.org/papers/Assocsession/Balkenhol.pdfhttp://www.cgap.org/docs/DonorBrief_06.pdfhttp://pdf.dec.org/pdf_docs/Pnacl633.pdfhttp://www.nytimes.com/2007/11/18/weekinreview/18deparle.html?_r=1&scp=12&sq=microfinance&st=nyt&oref=sloginhttp://www.economist.com/world/la/displaystory.cfm?story_id=10650663&CFID=15558859&CFTOKEN=3526b3b503e0171b-859DC346-B27C-BB00-012713530EF5EF4Chttp://www.ft.com/cms/s/0/0d21e542-e8c4-11dc-913a-0000779fd2ac.htmlhttp://www.ft.com/cms/s/0/f39adbe2-dc02-11dc-bc82-0000779fd2ac.html

QUESTIONS

say NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertysay NO to povertyThrough so much of the political turmoil in Iraq, USAID is promoting microfinancing. Mottar is an example of this, he got a $3000 loan from a micro-loan program. The way it works was the USAID turned to the Louis Berger Group, an international consulting firm in New Jersey; from there they supervise loans that go to 18 different provinces in Iraq. So far there has been $154 million vested in this. Through the loan Mottar was able to start selling scrap iron, which is used as housing. Case Study #1An MFI in Nairobi say NO to povertyHigher interest rates:Microcredit interest rates are set with the aim of providing viable, long-term financial services on a large scale. MFIs must set interest rates that cover all administrative costs, plus the cost of capital (including inflation), loan losses, and a provision for increasing equity. Unless MFIs do so, they may only operate for a limited time; reach a limited number of clients; and will tend to be driven by donor or government goals, not client needs. Why are microcredit interest rates higher than bank interest rates? Because the costs of making a small loan are higher in percentage terms than the costs of making a larger loan. If the actual cost per loan is $25, the percentage cost is 0.25 percent for a $10,000 loan, but 25 percent for a $100 loan. For a microentrepreneur, the cost of a microcredit loan represents a small proportion of total business costs. A three-month $100 microloan with a 6 percent monthly interest rate, calculated on a declining balance, costs a client a total of $12.23. A study in Chile, Colombia, and the Dominican Republic found that a 6 percent monthly interest rate represented less than 3.4 percent of a typical microentrepreneurs total costs. Subsidies: problem rent-seeking For a financial institution to scale and remain sustainable, at a bare minimum it has to cover its costs. In the example below, a large bank (big lender) can charge anything over 14 percent to recoup its costs, whereas the MFI has to charge a rate of at least 31 percent to cover its costs.

say NO to povertysay NO to povertyThe financial resources of the cooperative's members is generated through various types of savings such as regular compulsory (monthly), voluntary, marriage and festival savings. This variety indicates how a community-based banking facility is tailored to cultural and local practices and substantially different from conventional banking systems for the poor in which savings is simply a necessary activity that is precondition for getting a loan.In addition, the central government provides loans and (limited) grants. Various "Social Economy" institutions have provided loans, occasional subsidies and technical assistance to MPSACCO and its members (i.e. Cooperative Development Board, Federation of Savings and Credit Unions of Nepal and Aaincho Paaincho, a Micro-Finance Institution)say NO to povertyThis continuum and measurement system tracks the development of community agriculture projects through four levels: from Survival, through Subsistence, into Livelihood and then to Commercial. The continuum takes into account social dynamics such as group conflicts and the "flow-through" of members, enabling these to become positive events rather than limiting factors. It is now known that new groups need about seven years to establish a relatively stable organisation for community agriculture, while sustainable-level skills and knowledge takes approximately three years to acquire within each level. The physical infrastructure for community agriculture, in contrast, can be delivered within one year the exception being fertile soil.say NO to povertyIncome Generation: The most common approach is to provide microfinance services (credit, equity, leasing, and payment and guarantee products) to start or expand an income-generating activity in a micro enterprise. This allows entrepreneurs to build assets and to create and sustain jobs. Risk-management and reduction of vulnerability microfinance also plays a role for vulnerable persons to cope with and mitigate risk. Through appropriate risk-managing financial services, such as savings, emergency loans and possibly insurance products, microfinance helps vulnerable groups to stabilize income levels and smooth consumption and thereby to weather the storms of unpredictable expenses and income droughts. Empowerment: Microfinance approaches, e.g.: group lending, savings mobilisation etc, enable persons to take over financial responsibility for their life and thereby strengthening social capital and empowering people, especially women.not incorporated, hence the blurred liability in case of repayment problems.Being closer to the poverty line a household enterprise is more risk averse thana specialized enterprise with separate accounts and limited liability; risk aversionrestrains the propensity to invest in new production technologies, which would boostemployment. Hulme and Mosley find indeed limited technological innovation andincreases in labor productivity as a result of micro loans.say NO to povertysay NO to povertyThe poorest clients, or those with the least experience, are however the targets of the majority of microcredit practitioners today. Yet most of these borrowers are not going anywhere with their activity except from one day's subsistence to the next. In the informal sector, such borrowers are reduced to "copycat" behavior, everyone selling the same thing, and more sellers saturating the market as more microcredit is made available. They are limited by an inability to add value and low skills, which is why the informal sector is characterized by low "barriers to entry." To be sure microcredit has helped someone here and there to build up a tiny business; enabled someone to buy a bicycle and thus become an owner of a productive asset, but such examples are far fewer than the cases of those who are caught in subsistence activities with no prospect of comparative advantage.The enterprise what enterprise?Credit and any other financial service does not directly and immediatelylead to employment. It all depends on the use made of financial resources: the clientsdecision on use is often not readable for the MFI, it may diverge from the agreedpurpose. Whether that happens and how effectively credit use translates intoemployment is determined by the clients mix of income, consumption andsavings/investment.Household-enterprisesCredit and financing does not directly lead to employment.the clients decision may diverge from the agreed purpose. lending to people closer to the poverty line is more risky than otherwiserisk aversion restrains the propensity to invest in new production technologies, which would boost employment. Researchers have found find limited technological innovation and increases in labor productivity as a result of micro loans.They dont diversify, they promote from within their family, and irrevelent of if marginal returns are high or not, they will sometimes hire exploitative labor before paying actual wage labor. say NO to povertyIt can be because technological innovation is much more expensive, and

Labor productivity=quantity of output per input. say NO to povertysay NO to povertysay NO to povertysay NO to poverty