What Is Microfinance
- 1. What is microfinance?Trockman Microfinance InitiativeIndustry Analysis Team – EconomicsFebruary 25, 2009
- 2. Report OverviewIntroduction– Why microfinance?Microfinance – What is microfinance?Microcredit – What is microcredit?Debate– Is microfinance a viable long-term solution?Conclusion – What feedback can TMI offer?
- 3. Introduction: Diminishing Returns to Scale as JustificationOutputMarginal product of capital (mpk) decreases as capital increasesReturns are much greater at the low end of the scale, meaning that small amounts can be lent at high costs and still be efficienty=zf(k)mpkmpkCapital
- 4. Introduction: Status Quo of MicrocreditMoneylenders
- 6. 1990 survey in rural Indonesia found that 70% of low income households borrowed money
- 7. Bangladeshi households borrow, on average, 2/3 of their income per year ($839), from an average
- 8. 42 households borrowed from 33 different sourcesIntroduction: Goals of MicrofinanceDoes not seek to reinvent the wheel, merely to correct and improve issues with the status quo
- 9. Ideally a market based solution, not a form of charity
- 10. Replaces moneylenders and governments that are often unfair or inefficient in allocating capitalIntroduction: Problem with SubsidizationInterest RatesSupplyGovernment (or other entity) allocates capital as opposed to the market, leading to bias and abuse in who receives lending, creating inefficiency and corruptionGovernment set rateShortage at price ceilingDemandDemand for Capital
- 11. Introduction: Microfinance in ActionNot just microcredit, expands to other services that ensure a sustained and long term solution to fundamental problems
- 12. Creativity in contracts and forms of lending
- 13. Group lending
- 15. Education in household finance and health issuesMicrofinance: Financial Services ProvidedCredit
- 18. Major expenses
- 19. Savings
- 20. Deposit accounts
- 21. Client ownership
- 22. Insurance
- 23. Health policies
- 26. Money transfer
- 28. Microfinance: Services as SolutionsThese services replace means commonly used by the poor, freeing them from constraints that keep them in poverty.ProblemServiceSolutionActivityBorrowing from predatory lenders
- 29. Borrowing in this way often leads to abuse or being taken advantage of by lenders
- 30. Credit
- 31. The poor can “break the cycle” of poverty, eliminating their reliance on predatory lenders
- 32. “Saving by buying,” “putting money under the mattress”
- 33. Saving in these ways yields no return, is not liquid, and is prone to theft and loss of wealth
- 34. Savings deposits
- 35. The poor are able to build up wealth in a safe, liquid waySource: www.microfinancegateway.org
- 36. Microfinance: Other ServicesMany MFIs use microfinance as a way to provide clients with other aid.Source: www.microfinancegateway.org
- 37. Microcredit: Features of LendingGroup Lending affects risk and effectiveness
- 39. Women: 85% of microcredit borrowersMicrocredit: Interest Rates and Cost AnalysisRisk: low information, credit history, collateral.
- 40. Administrative: loan officers’ time, personalized, small loans.Source: Brigit Helms and Xavier Reille, Interest Rate Ceilings and Microfinance, The Story So Far, based on data prepared by Sanjay Sinha.
- 41. Debate: Milford BatemanHurts local economy
- 42. Used data from Serbia
- 43. 2 Results from the increase in microfinance
- 44. Shortage in funds for small and medium large businesses
- 46. Examined East Asia Growth Debate: AneelKarnaniMicrofinance does not significantly affect poverty
- 48. Supports notion of employment and worker productivity as key to reducing poverty
- 49. International Labor Organization and United Nations Development Program support this notionDebate: China’s ChallengeHigh transaction costs
- 50. Recipients lack literacy and education
- 51. Government does not allow MFI’s to collect deposits
- 52. Training of both management and on the ground individualsDebate: InefficienciesPlace emphasis on substance activities
- 53. Idea of borrowing and collectivism deter economic development
- 54. Trade off between economic development and cultureDebate: Long Run SustainabilityNot conclusive
- 55. Some success and some failure
- 56. Part of the solution, but not the only solutionQuestions/suggestions?Look for our final report and presentation in the coming weeks!18