microfinance, a profitable business or a mean

Microfinance, a profitable business or a path to economic development

Jose Manuel GonzalezApril 2011

Université of xxxxxxxxxxxxxxxxx

MICROFINANCE

• Microfinance is the variety of financial services that target low income population.

• The services include, loans, savings, insurances, remittances in small amounts.

• Microlendings are given for several purposes, usually Microenterprise development.

• These small loans can make a big difference, by giving opportunity to invest in their business and improve their lives.

MICROFINANCE

• Microfinance is not magical. It may be a long process before improving peoples life

Micro business

$More productivity• Reinvestment• Growth• Increased loan

capacity

Saving Capacity

Progresive Life improvement

• Nutrition• Health• House• Education• Diversification

Financial source

Micro credit

Employment and Microfinance

• Developing countries present very low rates of formal employment.

• The future does not look any promising• Ande

Recorte de pantalla realizado: 24/03/2011 06:12 p.m.

Employment and Microfinance

• Employment rates will not recover their pre/crisis level before 2015, the Gap ranks among 2 million jobs.

Employment and Microfinance

• With formal employment rates of 62.5% of economically active population and a fall during crisis, people have to occupy by themselves.

Employment and Microfinance• Jobs lost, are absorbed by informal sector• Sometimes, 1 job by family is not enough: The family will

have to self-employ in order to accomplish family earnings.• Low level of

education, prevent poor people from getting qualified jobs

• Poor people only have access to very low waged jobs, normally rural or handcrafting.

Micro Entrepreneurs

• Poor people, mostly in developing countries, are not part of formal employment. Estadistica

• Due to lack of formal employment, or the lack of education and therefore, formal skills, They have to start their own small business.

• Very limited opportunities to formal jobs, mostly in rural areas.

• Wages are extremely low

Micro Entrepreneurs

• Poor people, mostly in developing countries, are not part of formal employment. Estadistica

• Due to lack of formal employment, or the lack of education and therefore, formal skills, They have to start their own small business.

• Very limited opportunities to formal jobs, mostly in rural areas.

• Wages are extremely low

Micro Entrepreneurs• EMPLOYMENT. Poor people, mostly in developing

countries, are not part of formal employment. Estadistica

• Due to lack of formal employment, or the lack of education and therefore, formal skills, They have to start their own small business.

• Very few opportunities for formal job, mostly in rural areas

• Response, they become MICROENTREPRENEURS to s

• They remain informal, that means>– Are not registered in the contributors data bases– Therefore, Do not pay taxes– Usually they keep very basical registers of their

activities, or don’t keep them at all– They might employee some people, buy in an

informal way > No social security, no retirement fund

Micro Entrepreneurs

• Según la OIT, en México el empleo informal como porcentaje del empleo no

• agrícola es de 55%. En la India es de 83% y en Brasil de 60%.

MICROFINANCE

• How does MICROFINANCE get there– Development of several methodologies to be able

to provide the financial services under reasonably risk controlled environments.

– The methodologies depend on few criterions.• Geographical dispersion• Sofistication of microbusiness.• Assets and collateral disposition• Availability of information (Credit Bureau, Level of

accountancy registries, etc…)

MICROFINANCE Methodologies

• Village Banking– Groups of 12/ 50 women living in the same community,

generally rural or semi/rural.– Women must know each other.– Create their own organization. Name president,

secretary and treasurer. – Decide by themselves amount of loan for each member.– Weekly meetings, previously appointed to collect

money. Treasurer makes payment to MFI– Short term cicles: 16, 20 or 24 weeks

MICROFINANCE Methodologies• Village Banking– Savings plans of up to 20%

of credit, along loan term.– Good behavior guarantee

extension and refinancing of new cicle.

– – Solidary response. In case a member miss a weekly payment, the group has to cover up the default. Purpose: the group complies on time.

– Group default will damage every single member-s future credit access.

MICROFINANCE Methodologies

• Solidary Group– Small 4 – 8 members groups.– Each member own a microbusiness– They have to know each other, and belong to

same community.– Each individual business is analyzed to determine:• Periodical cash generation.• Payment capacity• Consistency between way of living and activity.

MICROFINANCE Methodologies

• Solidary Group– Each participant agrees to solidarily cover an

eventual default of any other member.– The group has to pay on time, regardless of who is

contributing.– Group default means no future access to credit to

any member.

MICROFINANCE Methodologies

• Solidary Group– Each participant agrees

to solidarily, cover an eventual default of any other member.

– The group has to pay on time, regardless of who is contributing.

– Group default means no future access to credit to any member.

MICROFINANCE Methodologies

• Individual Loans to business– Profile of micro entrepreneur• Established or semi fix business• Experience and empiric knowledge of business• Basic assets, and possibility of basic collaterals• Simple registry of activity.

– Deep analysis of a micro business to determine• Payment capacity and cash flow generation

– Usually, no

MICROFINANCE Methodologies

• Individual Loans to business– Deep analysis of a micro business to identify

possible risk sources.– Field evaluation by specialized credit agent.– Home visit to assess way of life vs. business

activity.– Evaluation provides elements to structure a loan:

term of loan, amount, collaterals, guarantor, etc…

Individual loans Scheme of business analysis issues

Business Family

Qualitative

• Experience• Location• Market• Accessibility• Demand Cyclicity• Competition• References• Reputation• Distribution

• Cohesion• # of members• Home ownership• Years in town• Dependents• Health issues• Access to services• Education• Possible addictions

Quantitative

• Sales• Margins• Cash flow• Working Capital• Inventories• Assets• Debt• Inventory rotation• Production cycle

• Family expenses• Other income• Variability of income• Assets• Debt• Etc…

Credit behavior Records (Credit Bureau or other)

MICROFINANCE Methodologies

• Individual Loans