Bankers without Borders®Introduction to Microfinance

A training module developed by Grameen Foundation and High Water Women

Contents

Microfinance clientsMicrofinance & its goalsMicrofinance & its goalsHousehold lifecycle needsKey operating principles of microfinanceEffective methodologies of microfinanceVideoMicrofinance landscapeMicrofinance InstitutionsMeasuring performance & success f fof microfinance institutions

Challenges to growth of microfinanceGrameen Foundation’s roleBankers without Borders

A borrower of Grameen Bank, Bangladesh

Bankers without Borders

2

Who does microfinance serve?

• Majority of world’s poor are working families

Annual Income (USD PPP)

According to the United Nations:1.2 billion survive on less than $1/day3 billion struggle on less than $2/day854 million suffer from hunger

Tier 1

Tier 2-3

(USD PPP) >$20,000

$1,500-$20,000

1.5 - 1.75 Bn

Tier 4

$1500

<$1500

4.0 Bn

Source: The Economic Pyramid. Source: Prahalad, C.K., and Hart. Stuart, 2002. The Fortune at the Bottom of the Pyramid. Strategy + Business, Issue 2006, 2006 – via “A Billion to Gain? A Study on global financial institutions and microfinance” Feb., 2006

Tier 5 <$1500

• 70% of microfinance clients are women– Good microenterprise skills and high repayment rate

I t i f ili d i t i b i

y g ,

– Invest in families and reinvest in businesses

3

A borrower from Uganda

What is microfinance & its goals?

An effective poverty reduction strategy via provision of small

Leasing and Supplier C ditprovision of small

uncollateralized loans to support income generating ventures

Consumer Credit,

Including Credit Cards

Mortgages and Home

Improvement Lending

Credit

Goals:• Reduce poverty• Improve quality of life of

Savings Healthcare

Loans to Poor Micro-• Improve quality of life of

borrowers & families• Provide borrowers with

access to a range of business development

Remittances BusinessTraining

entrepreneurs

business development, financial & non financial services

• Provide borrowers with t iti t b

Insurance Education

opportunities to become part of the formal economy

4

Household lifecycle Needs

Education, Marriage,

Birth

Working CaptialOld Age

Safe Place to Save

Microenterprise Loans

Pensions

Access toIllness

Remittancesand Transfers

Loans for Emergency

NeedsAccess to

Funds sent by relatives

Illness, Emergency Insurance

Death and Asset

Protection

Key operating principles of microfinance

• Cash flow-based• No collateral needed• No collateral needed• Suited to income-generating

activity & household life cycle needs• Disciplined repayment• Disciplined repayment

structure with suitable incentives• Group lending model

6Borrowers from India

Effective methodologies of microfinance

Group lending

– Typically US$50-$300 loans to self-y yselected group members

– Minimizes transaction costs / increases efficiency

– Joint liability model– Joint liability model • No need to quantify risk for clients

without credit history• Group collectively responsible for

repayment• In lieu of collateral / inadequate

collateral• Social pressure to repay loanp p y• Addresses information gap for loan

officers

7Borrowers from Cameroon

Effective methodologies of microfinance

Individual lending

T i ll US $1000 $10 000 & b l t i di id l– Typically US $1000 -$10,000 & above loans to individuals– Based on individual’s income / collateral / reputation– Uses cash flow analysis– Loan amounts may be higher with more flexible repayment termsLoan amounts may be higher with more flexible repayment terms– More costly to track loan repayments

8A borrower from China

Microfinance landscape

• Large global funding gap • Demand far exceeds supply

Potential and Actual Borrowers

3.5

Microfinance Funding Gap Current Supply (USD 25Bn)

Total Working Poor (3 Bn)

2

2.5

3

ns

Demand for Microfinance by Working Poor (1.5 Bn)

0.5

1

1.5

Bill

io

Untapped Demand forBorrowing(USD 250Bn)

0

Source: Meehan, CGAP via Deutsche Bank Research: Microfinance: An Emerging Investment Opportunity; Dec. 19, 2007

Source: Estimates based on Gonzalez and Rosenberg (2006) “The State of Microfinance” and CGAP Occasional Paper #8 (2004) via McKinsey “Optimizing Capital Supply in Support of Microfinance

(USD 250Bn)Actual Borrowers: 100,000

Emerging Investment Opportunity; Dec. 19, 2007

9

McKinsey Optimizing Capital Supply in Support of Microfinance Industry Growth”, Oct., 2006.

Microfinance Landscape

• 10,000 institutions worldwide, most small and local• Typical $100-$1,000 loan size (varies by region); 6 months to 3 years term;

weekly paymentweekly payment

Tier 1 – 2% of all MFIs (~100 institutions)• Profitable, mature MFIs with track record• Most are regulated• Access to diverse sources of funding

Tier 2 – 8% of all MFIs• Younger, more growth-oriented institutions• Successful: smaller and at or near profitability • Mostly NGOs considering conversion to regulated status • Most will progress upwards to Tier 1

II

I

Tier 3 – 20% of all MFIs• Approaching profitability • Shortfalls: weak management and/or MIS, lack of capital• Some will progress upwards

Tier 4 – 70% of all MFIs• Local/sectoral MFIs

III

IV Local/sectoral MFIs • MF is not necessarily the focus• Typically financed solely by donations

Source: Fitch adaptation, based on Meehan, Grameen Foundation USA Publication Series 2004, via “The Microfinance Sector: Its Success Could be its Biggest Risk”, Fitch Ratings, June 12, 2008.

IV

10

Microfinance Institutions

Unregulated* Regulated

• Foundations• NGOs

Ch it bl O i ti

• Banks• Credit Unions• Cooperatives• Charitable Organizations

• Associations• Cooperatives• NBFI (Non Banking

Financial Institution)

No one legal structure is better than the other

* Not regulated as a financial institution

11

Microfinance Institutions

Microfinance Institutions as regulated financial entities

• Can access commercial capital markets • Can lead to mission drift

Benefits Drawbacks

Can access commercial capital markets

• Increased Leverage

• Can offer savings to clients

Can lead to mission drift

• Impact on personnel of moving from NGO to for-profit culture

More costly due to capital needs &• Reduces MFI cost of capital

• Can increase client base and generate client loyalty

• More costly due to capital needs & higher monitoring requirements

• Regulatory constraints may beburdensomey y

• Better governance • Restrictions on Owner/Investor capital contributions

• Contractual obligations may prevent

12

• Contractual obligations may preventtransfer of assets to new entity

Measuring performance & success of microfinance institutions

Double Bottom Line

• Financial performanceFinancial performance– Operating and financial self-sufficiency; efficiency

• Social and poverty impact– Number of poor clients served– Client’s movement out of poverty– Progress Out of Poverty Index™ (Grameen Foundation)

13A borrower from Ghana

Grameen HeritageGrameen Bank

• Launched in 1976• Pioneered microfinancePioneered microfinance• 6.7 million borrowers• 96.4% women• Member owned (94%) &• Member owned (94%) &

profitable (2005: $17M)• 98.9% rate of recovery• Over $5 7 billion loanedOver $5.7 billion loaned• 10,000+ families cross

poverty line each monthGrameen FoundationGrameen Foundation

• Launched in 1997• Support replication of

Grameen Bank success

Dr. Muhammad Yunus

Founder of the Grameen Bank

2006 N b l P P i WiGrameen Bank success • Outside of Bangladesh

2006 Nobel Peace Prize Winner

Grameen Foundation

• Heritage & origin• Vision• Mission• Values• Structure

15

Video: Esperanza, DR

• http://www.youtube.com/watch?v=zaMlFoG3EGM&feature=player_embeddedp y _

Grameen Foundation Strategy

We are a solution center for the world’s poorest providing products and services through:products and services through:

Microfinance TechnologyMicrofinance Technology

Approach to Microfinance

Access to Capital

Breaking Barriers for

Microfinance

Access to I f ti

Access to T h lInformation Technology

Social Performance Management

Lead the successful integration of both social performance indicators into decision-making andperformance indicators into decision making and incentive structures in microfinance and technology institutions focused on the poor.

• Scale the use of PPI, as an industry standard for social performance measurement and managementp g

• Work with socially responsible investors and other stakeholders to adopt a double-bottom line framework

Financing

Playing a catalytic role to reshape MFI access to local and foreign capital and to provide optimal financing for MFIs - - assisting them to lifecycle growth efficiently and prudently.

Growth Guarantee fund•Fully deploy $100 million in guarantees

Target: Tier 1 and 2 MFIg

Catalytic Debt•Capitalize and deploy $10 million in capital to early stage MFIs•Capitalize and deploy $10 million in capital to early stage MFIs

Target: Tier 4 MFIs

Human Capital ManagementStrengthen the alignment of human capital with overall business strategy.•Create scalable tools and practices

•Develop an online technical resource

D l i t t t f H C it l M t•Develop private sector support for Human Capital Management practices by enlisting volunteers

•Create a Corporate Advisory Group

Professional Development

Strategic HR management

Human Capital Management Development

Development development

Leadership

Solutions for the PoorestBreak Barriers, both real and theoretical, that are preventing the poorest from the participating in the microfinance and technology revolutions.

• Catalyze innovation for the poorest through the provision of angel investment to pilot promising innovations

gy

• Support the scaling or replication of products and services SavingsAgricultureRisk Mitigation

Approach to Technology

For Individuals

Innovate, Scale, and Replicate

TechnologyTechnology

F I tit ti FFor Institutions For Development

Technology for Microfinance

Technology as an enabler of sound management information, not as an end product:

• Prove the IT value proposition to MFIs to inspire appropriate technology investmentappropriate technology investment

• Develop and foster MFI capacity to create and execute technology strategies and extract business valuetechnology strategies and extract business value

• Catalyze the community of local technology providers to build a vibrant, sustainable marketplace of technology services for MFIs

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Mifos Initiative Overview

Portfolio Transaction

Core technologyCore technologybackbonebackbone

Client Management

Portfoliomanagement

Transactiontracking

Reports

Technology that empowers

What Is Mifos?

Shared leadership and quality

control

Freely accessible by all

Sharing lessons & new features

controlAccess to source

code to modify & expand

CollaborativeCollaborativeOpenOpen Co abo at eCo abo at ecommunitycommunityaccessaccess

Village Solutions

• Village Phone– a micro-franchise business opportunity• Affordable access to telecommunications for poor rural• Affordable access to telecommunications for poor, rural

communities• Innovative, sustainable business model • Hybrid private / public partnership with the microfinance &

telecommunications sectors

AppLab

Should I harvest my pineapple for drying this week or will it rain?

0000

week – or will it rain?

From: 000020 May MbararaMorning: Sunny Afternoon: P t l d N t 3 d S

weather MbararaParty cloudy Next 3 days: Sunny intervals with moderate wet conditions

How do I control disease on my 

t k ? “Information Hub” or “Community 

Knowledge Worker”0000

matooke?

From: 0000To control banana diseases, crush sweet potato leaves and 

27

gmatooke disease

mix with water to spray.  Reply with 1. Wilt 2. Weevils 3. Pests 4. Help

Bankers without Borders®

• Create an efficient operational framework to mobilize the resources of private sector organizations and volunteers to p gsupport GF in fulfilling its mission

• Build the capacity of MFIs to manage and scale their organizations and strengthen access to capital and related services in order to expand their services to the poorp p

• Increase volunteerism in the microfinance industry

The BwB Process

1M k t

8P j t

9Market

Research

2 7

Project Management Evaluation

102Project

Development

7Project Training

10Recognition & Development

3Volunteer

Recruitment

6Onboarding & OrientationRecruitment

4 5

Orientation

Interviewing & Selection

Volunteer Agreements

Sample Volunteer Activities

Act as a mentor to MFI staff participating in two-course series on investment readiness

Field based activitiesDevelop an in-depth knowledge of the mobile banking pilot at a MFI

A i t i t f ti f MFI i t l t d i fiAssist in transformation of a MFI into a regulated microfinance bank: asset liability management, strategic business planning, risk management etc

Recommend hedging techniques & products, cost effective ways to remove currency risk from loan portfolio

US based supportDesign consulting skills training manual for all GF employees, consultants & volunteers

Create a content management database to serve the needs ofCreate a content management database to serve the needs of Village Phone Direct program

How to Stay Involved

• Regularly visit www.bankerswithoutborders.com to view the latest volunteer postings, and apply for specific opportunities.

• Keep your profile updated – make sure we have your resume!

P ti i t i T i i d Ed ti S i t f t• Participate in Training and Education Sessions – suggest future session topics or speakers.

• Contact us about organizing friendraising and fundraising events• Contact us about organizing friendraising and fundraising events.

• Give us your suggestions. How else can we tap volunteers to support the growth of microfinance?the growth of microfinance?

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