1

GEST-D-602

Banking and Microfinance,

Banking and Microfinance Exercises

1st semester EMP 2012-13

Prof. Laurent WEILL, Prof. Annabel VANROOSE

Arnaud GILLIN

Planning

Date Time Lecturer Guest speaker Place

12/11/2012 6 pm – 9 pm A. Gillin R.42.4.110

13/11/2012 6 pm – 9 pm A. Gillin R.42.4.110

17/11/2012 6 pm – 9 pm A. Gillin N. Renier R.42.4.110

23/11/2012 6 pm – 9 pm Prof. A. Vanroose Prof. E. De Keuleneer R.42.4.110

28/11/2012 6 pm – 9 pm Prof. A. Vanroose R.42.4.110

29/11/2012 6 pm – 9 pm Prof. A. Vanroose R.42.4.110

30/11/2012 6 pm – 9 pm Prof. A. Vanroose R.42.4.110

18/12/2012 6 pm – 9 pm Prof. L. Weill R.42.4.110

19/12/2012 6 pm – 9 pm Prof. L. Weill R.42.4.110

20/12/2012 6 pm – 9 pm Prof. L. Weill R.42.4.110

21/12/2012 6 pm – 9 pm Prof. L. Weill R.42.4.110

Part 1: Prof. A. Vanroose

Part 1: Objectives of the course

Obtain insights in differences and interrelationships between banks and MFIs

Go deeper into the regional distribution of banks and MFIs and what this means

for access to financial services

Expansion strategies of MFIs and banks and link with access to financial

services

Part 1: Topics covered

This first part of the course will provide an overview of the commercialization and

increasing interrelationships between banks and MFIs and what this means for access

to financial services. Latin American cases will be presented. Additionally, the

expansion process of MFIs will be studied and the different expansion logics MFIs may

follow. The case of Peru and India will be presented. The following specific topics will

be covered:

Session 1 and 2

Banking and microfinance: institutions and interrelationships

Access to financial services

i. Clients

ii. Banks and MFIs

iii. Geographical spread

Differences between banks and MFIs

i. Regulation

ii. Methodologies

iii. Financial and social performance

Relationships between banks and MFIs

i. Cooperation and linkages: eg SHG program in India

ii. Competition: eg. MFIs in Peru and Bolivia

Correlation between traditional financial sector development and the

microfinance sector from a macro point of view

Latin American country cases on financial sector development and the

role of microfinance institutions

Session 3

Microfinance expansion strategies and access to financial services

Location and access to financial services

Expansion strategies of MFIs and their logics

Case: Peru

Case: India

Part 1: Recommended Readings

Session 1 and 2

- Ahlin, C., Lin, J. and M. Miao, 2011, Where does Microfinance Flourish?

Microfinance Institution Performance in Macroeconomic Context, Journal of

Development Economics, vol. 95, no. 2, pp. 105-120

- Armendariz, B and Morduch, J., 2010, Chapter 8: Commercialization and

Microfinance, in the Economics of Microfinance, Second Edition, MIT Press.

- Claessens, S., 2009, ‘Competition in the Financial Sector: Overview of Competition Policies’, IMF Working Paper, 09/45, The International Monetary Fund, Washington D.C.

- Cull R, Demirgüç-Kunt, A. and Morduch, J., 2009, Microfinance Meets the

Market, Policy Rsearch Paper, no. 4630, the World Bank.

- Demirguc-Kunt, A., Beck, T. and Honohan, P., 2008, Finance for All? Policies

and Pitfalls in Expanding Access. World Bank Policy Research Report, World

Bank, Washington DC.

- Vanroose, A. and D´Espallier, B., 2012, Do Microfinance Institutions Accomplish

their Mission? Evidence from the Relationship Between Traditional Financial

Sector Development and MFIs´ Performance and Outreach, Applied

Economics, Vol 45, no. 15, pp. 1965-1982.

Session 3

- Bebbington, A., 2004, ‘NGOs and Uneven Development: Geographies of Development Intervention’, Progress in Human Geography, 28 (6), pp. 725 – 745.

- Fouillet, C., 2009, ‘La Construction Spatiale de la Microfinance en Inde’, Doctoral Thesis, Université Libre de Bruxelles, Brussels.

- Fruttero, A. and V. Gauri, 2005, ‘The Strategic Choices of NGOs: Location Decisions in Rural Bangladesh’, The Journal Of Development Studies, 41(5), pp. 759-787.

- Vanroose, A., 2010, Which Local Factors Drive the Regional Expansion of

Microfinance Institutions? Evidence from Peru?, Unpublished Working Paper (will be distributed).

Part 2: Laurent Weill

Part 2: Objectives of the course

Explain the fundamentals of the lending activity

Introduce the investment decision criteria

Explain the role of the financing decision on the value of the firm

Present the fundamentals of Islamic finance

Part 2: Topics covered

1) Information asymmetries

Presentation

o Adverse selection and signalling

o Moral hazard

Consequences

o Credit rationing

o The role of the long-term relationships in credit activity

2) How to solve information asymmetries

The role of collateral

o What is collateral?

o The 3 reasons for the use of collateral

The role of capital

The role of character

3) Investment decision rules

Net Present Value

o The NPV decision rule

o What does NPV depend on?

Alternative decision rules

o The internal rate of return

o Other investment criteria

4) Capital structure policies

Capital structure in a perfect market

o Equity vs. debt financing

o Modigliani-Miller

The benefits of debt

o The tax shield

o Information asymmetries and the pecking-order theory

The costs of debt

o The costs of financial distress

o The agency costs of leverage

Empirical evidence concerning capital structure policies

5) Islamic Finance

Principles

o A finance without interest

o Another paradigm

Instruments

o Mudaraba

o Musharaka

o Murabaha

o Ijara

Practice and Criticisms

o Practice : figures and reality

o Criticisms

Part 2: Recommended Readings

- Berk, J., De Marzo, P. (2007), Corporate Finance, Pearson, 1st edition

- Greenbaum, S., Thakor, A. (2007), Contemporary Financial Intermediation, 2nd

edition

- Iqbal, Z., Mirakhor, A. (2007), An Introduction to Islamic Finance, Wiley, 1st

edition

- Ross, S., Westerfield, R., Jaffe, J. (2006), Corporate Finance, McGraw Hill, 7th

edition

Part 3: Arnaud Gillin (Exercises) & Noémie Renier

Part 3: Objectives of the course

Development of MIV (from fund raising to incorporation of the fund)

Management of MIVs (from origination to portfolio management)

Investment criterias

Part 3: Topics covered

1) Fund Development (Case Study)

Market positioning: demand versus offer

Fund raising

Fund structure

Investment Policy

Risk Management (country diversification, concentration limits, currency

risk, liquidity risk)

Governance

Reporting

Servicing (payment collection, custodian,…)

Financial modeling

Technical Assistance

2) Fund Management – Advisory

Sourcing/Origination : eligibility criteria

Screening :Iinitial desk review

Term Sheet

Due Diligence (social and financial risk assessment / scoring)

Debt versus Equity

Decision making - Investment Committee

Legal documentation

Monitoring

3) Investment criteria

Country risk

Regulatory context, institutional development and microfinance market

Ownership, governance and human resources

Products and services

Operations and internal control

Social and Environmental Risk

MIS

Loan portfolio development and quality

Financial performance

Asset & liabilities management (ALM) – Liquidity, solvency, currency risk

Business Plan and Development Prospects

Part 3: Recommended Readings

Brealey, R. A. and Myers, S.C., (2000), “Principle of Corporate Finance”, 7th

edition, Pearson Education

Dieckmann, R. (2007), “Microfinance: An emerging investment opportunity”,

Deutsche Bank Research, Frankfurt.

Midford Batemen (2010), “Why Doesn’t Microfinance Work? The Destructive

Rise of Local Neoliberalism”, Zed Book,

Matthaus-Maier, I., von Pischke, J.D. (2006), “Microfinance Investment Funds:

Leveraging Private Capital for Economic Growth and Poverty Reduction”,

Frankfurt: Springer.

Matthaus-Maier, I., von Pischke, J.D. (2008), “New Partnerships for Innovation

in Microfinance”, Frankfurt: Springer.

All parts

Evaluation

Written exam