microfinance

7th October 2013S-ENT, Session 6, Anirudh Agrawal CBS

7th October 2013

Fundamental concepts in microfinanceTheory and Practice

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7th October 2013

Review Session 4

• Fair Trade– Theory of Change– Grounded to bring about social and environmental

impact– Labeling, branding : Creating a sense of exclusivity– Business Model– Consumers and market

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7th October 2013

Review Session 5 : Performance of Social Enterprise

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7th October 2013

Review Session 5

• SROI– Measuring the Theory of Change (social, public

and financial returns)– Best when few KPIs– Lack of structure/template/ high subjectivity (--)– Managing stakeholders (++)– Gaining legitimacy

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7th October 2013

SKS Microfinance Case

• Discuss the role and compatibility of founders and professional CEO in this case?

• Discuss the organizational stigma associated with SKS Microfinance?

• Is for profit social business an Oxymoron?• Discuss the role of regulators when suicides

were reported, what happened?• Should social business go for IPO?

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7th October 2013

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7th October 2013

Financial Services Pyramid

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7th October 2013

Poverty Pyramid

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7th October 2013

What Is Microfinance?• Microfinance is the offer of financial & non-financial services

to people excluded from the traditional banking system. The services are adapted to the needs of the target populations.

FINANCE MICRO

• Micro-entrepreneurs• Self-employed • Low income populations• Excluded populations

• Business & educational loans• Savings• Micro-insurances• Remittances

• Micro-entrepreneur training• Coaching & workshops on health, hygiene, etc.

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7th October 2013

Microfinance Theory of Change

• Financial Inclusion– Provide Financial services to the marginalised– Protect the marginalised from loan sharks

• Ethical Financial Practices– Low or zero collateral– Low interest rates

• Additional services– Entrepreneurship training and consulting– Housing loan– Insurance services at low cost

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7th October 2013

Types of Financing

• Debt Financing• Equity Financing

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Why high interest rate?

• Moral Hazard• Information Asymmetry

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7th October 2013

Different Microfinance Products

• Cost of burial replacement costs, natural calamity …. (MF : Insurance)

• Retirement plans, Health care plan..(MF…Pension plan, health insurance)

• Equipment for agriculture activities, livestock, home upgrade.. (MF: Medium term)

• Social obligations like Marriage, Festivals.. (MF: Short term)• Housings, Wells, Capital intensive enterprise (MF: Long term

Loans)• Emergency loans like family disaster, natural calamity• Short term loans to meet daily/weekly needs

Source: Insead case study 2009 (Santos and Anne Claire)

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7th October 2013

Activity 1

• In groups of 3-4, discuss the target segment for microfinance in Scandinavia?– Think about the background and the strata of

people that are financially excluded in Scandinavia– Who do you think can be benefited from

microfinance in Scandinavia?– What are their needs and how much microfinance

loans can they have?Hint (Immigrants with no financial history)

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7th October 2013

Business Basics at the Base of the Pyramid… Akula (2008)

• Scaling• Standardization of products and services• Adopt a profit oriented approach to signal

commercial capital• Use of technology• Focus on volume

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7th October 2013

Building Social Business Models: Lessons from the Grameen Experience

• Social Business Model– How products can be ‘servitised’ to serve the

poor– Grameen Phone, Grameen Veolia, Grameen

Danone (each using their own innovative ways to reach out to the poor)

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7th October 2013

Building Sustainable Hybrid Organizations : The Case Of Commercial Microfinance Organizations

• How organizations can navigate competing logics?

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7th October 2013

Design a Microfinance Business Model

• In a group of 3-4, discuss to design a microfinance business model?– Define the target customer/region– Target loan / person– Profit/Social business– Interest rate

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7th October 2013

Difference Traditional banking industry and Microfinance

• Location• Salary• Stress• Interest Rate• Certainty about the future• Purpose, goals and values• Working hours, motivation• Outdoor time, real world impact• Working environment• Friends and Family

Source: Kiva

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7th October 2013

Principles of Microfinance

• Poor people need a variety of financial services, not just loans. • Microfinance is a powerful tool to fight poverty. • Microfinance means building financial systems that serve the poor.• Microfinance must pay for itself to reach large numbers of poor people.• Microfinance is about building permanent local financial institutions. • Microcredit is not the best tool for everyone or every situation. • Interest rate ceilings making it harder for poor people to get credit. • The role of government is to enable financial services, not to provide them.• Donor funds should complement private capital, not compete with it.• The key bottleneck is the shortage of strong institutions and managers. • Microfinance works best when it measures and discloses its performance.

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7th October 2013

Points Against Microfinance

• High interest rates– How to decide the optimum interest rate?

• Lack of legal protection for the borrowers and for the lenders

• High operating costs and low margins• Lack of institutional structures, business

framework, data, operating procedures

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7th October 2013

Way Forward in Microfinance Study

Fundamentals• Describe fundamental concepts in microfinance • Design client-focused services • Apply effective microcredit methodologies • Describe the effects of the local environment on microfinance Financial analysis and Risk Analysis• Read financial statements • Measure delinquency • Identify key financial factors • Identify effective interest rate practices • Measure financial viability Institutional Analysis• Gauge institutional viability • Strengthen relations between donors and microfinance institutions

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microfinance

Economy & Finance