New Concepts of Microfinance

PROFESSIONAL CERTIFICATE IN
MICROFINANCE
MODULE 1
INTRODUCTION TO
MICROFINANCE
(A NEW CONCEPTION)

Facilitator Fred Pokoo-Aikins, FMA

Introductions and House
Rules
 Name, Education, Job profile,
Experience
 House rules
 Cell phones on silent
 Questions one at a time; real time
 No in-discussions
 Instructor Profile

Instructor Profile
 Frederick POKOO-AIKINS,
 CEO, ALTUM Training & Consulting
 Internal Auditor and Management Consultant
 B.Com, Dip. Ed., MSc., CIA, CISA, ACFE,
MCMI, FMA
 Mobile: 020 813 3219
 fpaikins@altumtc.com
 www.altumtc.com

A New Conception


of Microfinance

Module Objectives

 To understand the nature of microfinance
 To understand the history of
microfinance
 To develop an understanding of the

socio-economic importance of
microfinance
 To understand the new concept of

microfinance in the contemporary
context.

Outline

 Introduction
 The nature of microfinance

 The demand for microfinance

 The supply of microfinance

 Products and services in
microfinance
 A new taxonomy for microfinance

 Microfinance and ethical finance

Introduction

 What is Microfinance?
 Finance

 Micro

 Is there any such thing as Macro-

finance?

Defining Microfinance

 By product/needs focus definition
 By target market

 By market focus

Defining microfinance by
product/needs focus
 The provision of financial services, to
the poor and low income groups who
traditionally could not access these
from formal financial institutions.

product/needs focus
 Such services include:
 Micro-savings/deposits

 Micro-credit

 Payment services

 Remittances/money transfers

 Micro-insurance

So then….

 A microfinance institution (MFI) is an
organisation that offers micro-finance
services.

target

Defining microfinance by market
focus
 The economically active poor-micro-
entrepreneurs or small localised
traders:
 Vendors

 Carpenters

 Metal workers (e.g. repairers, sheet

metal fabricators etc)

Defining microfinance by market
focus - cont
 Small retail shop owners/corner
shops
 Small farmers

 Service people (e.g. plumbers,

kindergarten operators, shoe
repairers etc).

Therefore we can conclude
that…
 Microfinance refers to the small-scale
financial services including both credits and
deposits provided to people who farm or
fish or herd; operate small or
microenterprises where goods are
produced, recycled, repaired or traded;
provide services; work for wages or
commissions; gain income from renting out
small amount of land, vehicles, draft
animals, or machinery and tools; in both
rural and urban areas.

Question

 Is financial intermediation the only
objective of microfinance?
 No!!!

 Social Intermediation

 Social Mission

Social Mission
 Most MFIs have a social mission.
They may be working, for example,
 to broaden access to financial

services,
 reduce poverty,

 empower women,

 build community solidarity,

 or promote economic development

and regeneration.

Social performance

 refers to the extent of their success in
meeting these goals. The concept of
social performance focuses not only
on the final impact, but also provides
a framework to understand the
process by which social objectives
are achieved.

Social Performance
framework
 INTENT and DESIGN:
 ACTIVITIES:

 OUTPUT:

 OUTCOME:

 IMPACT:

Intent and Design

 What does the MFI seek to achieve
(its mission and social performance
objectives)?
 How are services and performance

objectives designed to this end?

Activities

 How are services to target clients
through specific organizational
structures created to reach the
organization’s objectives?

Output

 What services are delivered?
 How good are they?

 To whom are they delivered?

 What is the breadth and depth of

the outreach?
 Are the services sustainable?

Outcome

 What changes result from the use of
the services provided?
 Do businesses expand? Incomes

increase? Skills develop?

Impact

 What are the longer term, sustainable
changes as a result of the outcomes,
such as poverty reduction? What are
the unintended consequences?

History of Microfinance

 The history of microfinance can be
traced back as long to the middle of the
1800s when the theorist Lysander
Spooner was writing over the benefits
from small credits to entrepreneurs and
farmers as a way getting the people out
of poverty. But it was at the end of World
War II with the Marshall plan the concept
had an big impact.


 ‘Microfinance’ is a new term for age-
old micro-saving/credit arrangements
prevalent in communities (arguably
since money was invented!).

 Informal programs that have operated
for centuries:
 “Susus" and "Tontine" - West Africa

 “Chit funds" - India,

 “Tandas" - Mexico,

 ‘The partner’- Jamaica

 Savings clubs/ burial societies etc

across most parts of the world.


 Europe-19th century – emergence of
People's Banks, Credit Unions,
Housing Societies and Credit Co-
operatives organised principally
around on the poor rural and urban
communities.


 Canada-early 20th century, members
of the Antigonish Movement started
establishing small savings and credit
cooperatives by organising a handful
of acquaintances to form these.
Shortly, credit union movement was
well established in Canada.


 In India, the legal framework for
establishing the co-operative
movement set up in 1904 in India


 Late 1970s-1980s: microcredit
movement began (and compulsory
saving in some programs)


 1980’s-NGOs dominant. From the late
1980’s, over two dozens NGOs – such
as the Australi Agency for International
Development (AUSAID), GTZ and
USAID – developed micro-finance into
an industry by offering capital, providing
direct savings and loans, and offering
guarantees to banks and creditors on
behalf of beneficiaries.


 1990s-Term ‘microfinance’ coined -
referring to constellation of pro-poor
financial services-global micro-
finance movement intensifies under
the banner ‘Microcredit Summit’
championed by some of the world’s
leading donors


 1990s Microfinance adopted as a
global strategy for poverty alleviation.
 And now
 Micro-finance Industry has been
evolving over the last 3 decades and
is now a global movement.

A Short History of Grameen
Bank
 The origin of Grameen Bank can be
traced back to 1976 when Professor
Muhammad Yunus, Head of the Rural
Economics Program at the University of
Chittagong, launched an action research
project to examine the possibility of
designing a credit delivery system to
provide banking services targeted at the
rural poor.

A Short History of Grameen
Bank
 The Grameen Bank Project
(Grameen means "rural" or "village"
in Bangla language) came into
operation with the following
objectives:

Grameen Bank Project
objectives
 extend banking facilities to poor men
and women;
 eliminate the exploitation of the poor
by money lenders;
 create opportunities for self-
employment for the vast multitude of
unemployed people in rural
Bangladesh;

objectives
 bring the disadvantaged, mostly the
women from the poorest households,
within the fold of an organizational
format which they can understand
and manage by themselves; and

objectives
 reverse the age-old vicious circle of
"low income, low saving & low
investment", into virtuous circle of
"low income, injection of credit,
investment, more income, more
savings, more investment, more
income".


 Founded on the philosophy of credit
as a basic human right.


 Muhammad Yunus believed that
poverty is caused by the system (no
pro-poor banks), and that the poor
are credible borrowers and small
loans can make a big difference to
the poor.

Success
 An action research demonstrated its
strength in Jobra (a village adjacent
to Chittagong University) and some of
the neighboring villages during 1976-
1979.

Success
 With the sponsorship of the central
bank of the country and support of
the nationalized commercial banks,
the project was extended to Tangail
district (a district north of Dhaka, the
capital city of Bangladesh) in 1979.

Success
 With the success in Tangail, the
project was extended to several other
districts in the country.

Success
 In October 1983, the Grameen Bank
Project was transformed into an
independent bank by government
legislation.

Success
 Through replication, model has
triggered a global movement in
micro-finance over the last 3 decades
–Arab World, Americas, Asia, Africa-
with micro-finance as a tool to fight
poverty.

Success
 Today Grameen Bank is owned by
the rural poor whom it serves.
Borrowers of the Bank own 90% of its
shares, while the remaining 10% is
owned by the government.

Types of MFIs

 Governments-related,
 Private sector-related

 NGOs

 Cooperative-type institutions

 Informal lenders - . money lenders
and shopkeepers, Self-Help Groups,

49

Why Microfinance

 Theory of Adverse Selection by
Banks
 Economic Growth and Employment
Creation Perspective
 Supply Gap

 Poverty Reduction Perspectives

Theory of Adverse Selection by
Banks
 Banks discriminate against the poor and
micro-and small (MSEs) enterprises for a
number of reasons:
 Lack collateral security
 Information asymmetry and moral

hazard problems (Do not have a
credit history, trading record, or
assured employment (hence non-
bankable)). 51

Theory of Adverse Selection by
Banks
 Perceived to be high-risk.
 High transaction costs (vs caps on
chargeable interest rates).

Economic Growth and
Employment Creation
Perspective
 EU based evidence:
 23.2m or 99% of all businesses are

SMEs.
 92% of these are micro-enterprises

(0-9 employees).
 SMEs account 2/3 of private sector

employment in EU.

53

Economic Growth and
Employment Creation
Perspective
 Informal sector accounts for 10 to 15% of
EU GDP.
 In the developing world, up to 80% earn

their incomes from the informal sector.
And yet
There are not enough micro-credit
providers to meet the potential loan
demand by micro enterprises and SMEs

Supply Gap:
 Demand for financial services
outstrips supply, particularly for the
poor and low-income groups-leading
to financial exclusion.
 In India MFIs play a critical role in

areas under-supplied with banks.

55

Supply Gap:

 In Africa-banks under-supplied especially
in rural where 64 % population live.
 Africa-less than 10% adult population
have banks accounts.
 EU 2008-Estimated potential loan
demand : 700 000 loans worth 6bn euro
in demand but not enough micro-credit
providers to meet potential demand met.

Supply Gap (..ctd):

 In the U.S. approximately 40 million
U.S. households – 106 million people
– are either un- or under-banked.
 According to the Asian Development
Bank 90% of the 180 million poor
households in Asia lack access to
financial services from traditional
financial institutions.
57

Poverty Reduction
Perspectives
 Provision of micro-finance corrects market
failure and leads to poverty reduction and
economic growth by filling a huge demand
gap.
 Microfinance is considered a tool to fight
poverty on a global scale.
 2.1 billion people worldwide live on less

than US per day.
 In the EU alone 28 million of the active
58
population live below the poverty datum

A closer look at the Case of
India: Market Failure...Demand
Gap (..ctd)
 Over 40% live below PDL
 56% of the poor continue to borrow

from informal sources
 Of the rural poor, 70% do not have a
bank account
 87 % lack access to credit from the
formal financial system.
59

A closer look at the Case of
India: Market Failure...Demand
Gap
 March 2004 annual figures show that
annual disbursements to poor=5000 core
vs est. annual demand of 60 000 core.
 Less than 5% of the rural poor enjoy

access to microfinance services

(Yet India is a country where
microfinance is fairly better developed!!).

New concept of micro-finance:
An Overview of MDGs
 Goal 1 Eradicate extreme poverty and hunger
 Goal 2 Achieve universal primary education
 Goal 3 Promote gender equality and empower
women
 Goal 4 Reduce child mortality
 Goal 5 Improve maternal health
 Goal 6 Combat HIV/AIDS, malaria and other
diseases
 Goal 7 Ensure environmental
 Goal 8 Develop a global partnership for development

61

Evidence from Centre for
Financial Services Innovation,
2009
 Poverty eradication effect confirmed:

low-income households with bank
accounts are 43 percent more
likely to possess other financial
assets than those without bank
accounts.

62

New Concept of Microfinance:
...much more than microcredit
Product boundaries being redefined:
 Savings products
 Micro-insurance products
 Health savings products –in response to
Aids impact(e.g. Russia, the Baltic states
and Central Asia, Philippines, Tanzania,
Indonesia, Uganda-see annexure).
 Loans/savings for education, health,,
housing
 Mortgage finance (e.g. Kenya, Ghana)

63

New Concept of Microfinance:
...much more than microcredit
 Micro-leasing finance and hire purchase.
 Venture capital
 Loans,
 Guarantees
 Agricultural finance
 Enterprise development services (e.g.
training)
 High-tech products revolutionising the
industry? (e.g. mobile phone banking).

New Concept of Micro-finance…
Operationalisation
 Project model now being replaced by critical
mass for-profit banking model-large numbers of
small customers
 1976 Grameen began as a pilot
project..chartered as a bank in 1983.
 K-Rep Kenya began in 1984 in Kenya as an
umbrella programme (APEX) channel funds to
and monitor NGOs 990 K-Rep became an
NGO to customers…
 1997... Kenya's first commercial
microfinance bank, accepting deposits and
giving loans.
65

New Concept of Microfinance
….A Disaster Mitigation Tool
 Governments and development agencies
often now employ microfinance as a tool
to address socio-economic problems
such as relocation of refugees from civil
conflict, creating jobs for demilitarized
soldiers, or relief after a natural disaster.

….Tsunami., Sudan, DRC, Somalia,
Afghanistan etc.

66

New Concept of Micro-finance:
new market segments emerging
(...ctd)
Target market for micro-finance now being
re-defined to include:
 The economically active poor (micro-
entrepreneurs).
 SME’s (Small to medium size enterprises)

 Midwives, nurses, doctors, drug shops
(e.g. Uganda)
 Micro and small farmers

 Salaried people and pensioners.

67

New concept of microfinance - Example of
role in a new market segment-the health
sector

 Indonesia: BRI offers loans to village
midwives
 Philippines: loan company offers

loans to physicians
 Tanzania: MEDA loans to drug shops

68

 The Nature of Microfinance

The Nature of Microfinance

 Traditionally, microfinance is
associated with programmes that
benefit clients with serious
subsistence problems in developing
countries.


 For many years microfinance
overlapped with microcredit – small
loans, often without traditional
guarantees, aimed at improving the
lives of clients and their families or at
sustaining small-scale economic
activities.


 The resources, which came mainly
from funds donated by states and
supranational organizations, were
channeled to their recipients most
often through nongovernmental
organizations (NGOs) and local
partners.


Donor NGO
Credit
Officer
Local
Partner
Beneficiar
y
 Standard Microcredit Structure


 Socio-demographic changes over the
last few decades have significantly
altered the world economic scene.
For microfinance, the new situation
has meant potential new
beneficiaries, new products and a
greater involvement of financial
intermediaries.


 Exclusion from the traditional
financial system, seen as the inability
to access basic financial services,
includes millions of people today,
both in developing countries and
industrialized countries


 Traditional poverty thresholds have
shifted and new categories of ‘poor’
people have appeared, even outwith
developing countries.


 New beneficiaries have brought new
financial needs with them. Over the
past decade, new microfinance
services have developed alongside
microcredit.


 This development has also gained
momentum from the observation that
structured financial assistance
increases the efficacy of the
programmes, while at the same time
improving the level of sustainability.


 The widening of the services on offer
has taken five directions:
 credit products, which provide

alternatives to loans, savings,
insurance services, structured
finance and technical assistance.


 It is not surprising, therefore, that in
the last few years financial
intermediaries in industrialized
countries have been taking greater
notice of microfinance.


 It represents a way of reaching and
gaining loyalty from new groups of
clients and helps to improve
corporate social responsibility.


 Thus, at present, it is economic
reasons, as well as concern for their
public image, that spur financial
intermediaries to become more
involved in microfinance.


 All of which poses an unavoidable
question:
 Is it still possible to go back to a

microfinance model that resembles
the first, traditional microcredit
initiatives?


 Do the new demographic, social and
economic trends, combined with the
emerging involvement of financial
intermediaries, perhaps call for a
review of the traditional microfinance
model?

 The Demand for Microfinance

The Demand for Microfinance

 Traditionally, those people who
benefit from microfinance are citizens
of developing countries who struggle
to provide for themselves, known
unfortunately as ‘the poorest of the
poor’.


 Within this category, women are of
particular significance since they
constitute the group that is most
affected by financial exclusion in
many developing countries


 Moreover, numerous studies have
shown that women are generally
more capable of paying back
microcredit than men and manage to
invest the funding received in more
profitable initiatives.


 More recently, microfinance has
turned its attention to self-employed
workers and individuals in charge of
small, often family-owned
businesses, which are unable to
obtain bank credit.


 For micro-entrepreneurs,
microfinance represents an
alternative to credit given by lenders,
and often constitutes a way out of the
money-lending system.


 Thus, in the last few years
microfinance has served a group of
beneficiaries largely distinct from the
one normally associated with
microcredit.


 Currently, potential microfinance
beneficiaries could also include
individuals who, although not living in
poverty, have general difficulty in
gaining access to the financial
system.


 In this way, modern microfinance is
broadening its target from ‘the
poorest of the poor’ to all victims of
financial exclusion.

Financial Exclusion

 The phenomenon of financial
exclusion has been defined in the
literature as ‘the inability to access
financial services in an appropriate
way’ (Carbo et al., 2005).

Financial Exclusion

 Exclusion from the financial system
may concern different products and
services and can be due to a number
of reasons.

Self-exclusion

 This stems, in principle, from an
individual’s feeling of inadequacy with
regard to the conditions required by
financial intermediaries;
 ‘the poorest of the poor’ come

under this category.

Access exclusion

 This is exclusion following a risk
assessment process carried out on
clients by the financial intermediaries;
 Failure of potential clients to meet

creditworthiness requirements
 in this category we find ‘the poor’.

Political and Social exclusion

 The victims of this are, for example,
immigrants or ex-convicts and those
who are ‘unregistered’ and are,
therefore, not ‘bankable’.

Condition exclusion

 This affects individuals who cannot
gain access to the financial system
because they are unable to bear the
costs and conditions of financial
products offered.
 In this case, they are ‘disadvantaged’

individuals.

Marketing exclusion

 This affects customers (mainly small-
scale entrepreneurs) considered
‘marginal’ by the intermediaries since
they represent a low-value target
compared with the traditional
customer evaluation models.

However………

 The ‘unregistered’, the
‘disadvantaged’ and the
‘marginalized’, despite their common
distance from the credit system, are
characterized, by increasing levels of
professional and managerial ability,
and respective increasing levels of
creditworthiness.

The Supply of Microfinance

 From a regulatory perspective,
microfinance institutions (MFIs) can
be classified into three main
categories, depending on the
regulatory thresholds of their
activities: informal, semiformal and
formal.

 Informal institutions
 (self-help groups, credit

associations, families, individual
money lenders) do not have the
status of an institution. They are
providers of microfinance services
on a voluntary basis and are not
subject to any kind of control or
regulation.


 Semiformal institutions
 are registered entities, subject to all
relevant general laws. They can be
defined as microfinance financial
intermediaries (MFFIs) in fact, they
provide various financial services but,
generally, they are not deposit-taking
institutions or, if they are, they cannot
grant credit.


 Formal institutions
 Can be classified into three main

categories: microfinance banks
(MFBs), microfinance oriented banks
(MFOBs) and microfinance sensitive
banks (MFSBs). They can all offer
credit and they are all deposit-taking
institutions: for these reasons, they are
all under banking regulation.

In Ghana

 Informal suppliers such as susu
collectors and clubs, rotating and
accumulating savings and credit
associations (ROSCAs and ASCAs),
traders, moneylenders and other
individuals.

In Ghana

 Semi-formal suppliers such as credit
unions, financial non-governmental
organizations (FNGOs), and
cooperatives;

In Ghana

 Formal suppliers such as savings and
loans companies, rural and
community banks, as well as some
development and commercial banks;

In Ghana

 Public sector programmes that have
developed financial and nonfinancial
services for their clients.

 Products and services in
microfinance

Products and services in
microfinance
 Credits
 Savings

 Insurance

 Other Financial Services

 Other Technical Services

 A Taxonomy of Microfinance

 Microfinance and Ethical Finance

Question

 Does operating in microfinance mean
operating in the field of ethical
finance?

Ethical Finance

 Ethical finance may be referred to as
a philosophy of investing based on a
combination of financial, social,
environmental and sustainability
criteria.

EUROSIF (www.eurosif.org)

 "This is a concept that continues to
evolve. Nevertheless, the constant
within this area is that sustainable and
responsible investors are concerned with
long-term investment; and
environmental, social and governance
(ESG) issues are important criteria to
determining long-term investment
performance."

Ethical finance

 Turning point from traditional banking
to disintermediation and innovative
finance may have occurred in 1971
with the end of the dollar’s
convertibility into gold..

Ethical finance

 In the following years corporations
expanded their businesses
internationally and looked for new
ways of funding, including the
issuance of bonds sold on the capital
markets to individuals and
institutional investors.

Ethical finance
 With disintermediation banks have
transferred some of their traditional risks
- such as credit and market risks – to
other economic agents and have
engaged in a fierce competition for the
development of innovative products that
generate new sources of non-interest
income to offset the declining
intermediation margin from traditional
lending activities.

Focus 1
 increasing size, diversification, and
especially profitability –
 increasing focus on immediate or short
term profits, high levels of executive
compensation, blind acceptance of
higher risks, and
 a parallel erosion in trust and confidence
in the institutions, in the products and
services, and in the individuals involved.

Focus 2

 Strive to prove that finance is on its
way to re-discover its instrumental
function in support of the economy
 increasing consideration of

environmental, social and
governance issues in investment
decisions and services being offered.

So…….

 Ethical finance responds to specific
criteria regarding:
 the characteristics of intermediaries

and beneficiaries,
 the behaviour and processes

adopted,
 the products and

 the economic conditions applied.

Therefore….

 If an intermediary labels itself as
ethical, but does not operate ethically,
it carries out a process of unfair
competition, and may be / could be
liable to prosecution by national and
community authorities.

To answer the question……

 Does operating in microfinance mean
operating in the field of ethical
finance?

Itis necessary, in that case, to
establish the ethical parameters
to be respected.

Inclusive Finance

 Finance supporting the fight against
poverty and financial exclusion

In this case

 We are in the field of finance that sets
itself social and humanitarian goals,
and that concerns national and
international, donors, development
banks, national governmental bodies,
non-profit organizations and, in a
lesser way, financial intermediaries
oriented to credit.

In short..

 The technical form of financial
support comes mainly from donations
and soft loans. Microfinance comes
into this category.

Selective Finance

 Finance that supports some sectors
commonly considered ethical by
collective social awareness

In the second case

 Financial support is given only to
sectors judged ethical by the lender,
based on subjective criteria that
represent a common sense of good.

Selective Finance

 With this approach, for example,
industries such as arms, alcohol,
tobacco, gambling, pornography are
not financed, while investments for
the environment, culture, art and
social ends are supported.

Compliant Finance

 Finance that is in compliance with
company regulations and associated
rules which govern issues related to
diligence, fairness and transparency
of adopted behaviour.

In the third case

 Ethics means adopting behaviour that
reduces the risk of conflicts of interest
between the company and the
stakeholders.

Compliant Finance

 This approach is followed by both
enterprises and financial
intermediaries and non-profit
organizations.

Types of Ethical Finance
Ethical finance

Compliant
Inclusive Finance Selective Finance
fight against financial Support of selected Finance
exclusion and poverty sectors of production Respect of stakeholder
interest

Social and
Rules and codes
humanitarian
of conduct
aims

Exclusion Criteria Inclusion Criteria

Activities/Agents of Ethical
Finance
Ethical finance

fight against financial Support of sectors of
exclusion and poverty production

Credit Activity:
Collective savings
Micro credit and
management
micro - insurance

Donors,
NGOs/nonprofit Investment funds
MFIs, Banks, Pension funds
Foundations
Local bodies,

But consider the following

 Financing poor women in developing
world.
 How about if it is laundered money?

Or

 How ethical is a bank that excludes
its own customers from the sectors of
arms or alcohol?

 If the management of a bank is
against conflicts, does it mean that it
must not finance the production of
arms designated for the police
forces?

 And, moreover, does fighting
alcoholism mean not financing
efficient winemakers and giving up
our glass of wine with dinner?

 A bank that finances the production of
land mines but that respects all the
rules in matters of transparency could
hardly describe itself as ethical.

New Concepts of Microfinance

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New Concepts of Microfinance