MicrofinancingMicrofinancingPresented by:Presented by:

Myasnik PoghosyanMyasnik PoghosyanRamiel BetnisanRamiel Betnisan

Kari RothKari Roth

IntroductionIntroduction

Existence of extreme povertyExistence of extreme poverty

Fight against global povertyFight against global poverty

Lack of traditional financingLack of traditional financing

Help poor to help themselvesHelp poor to help themselves

A profound effect of microfinanceA profound effect of microfinance

Defining MicrofinanceDefining Microfinance

What is Microfinance ?What is Microfinance ? MicrofinanceMicrofinance is a proven “micro” is a proven “micro”

financial solution that helps poor financial solution that helps poor people to help themselves.people to help themselves.

Provision of several financial Provision of several financial services such as services such as microcreditmicrocredit, , microsavingsmicrosavings, and , and microinsurancemicroinsurance

Origins of MicrofinanceOrigins of Microfinance

1864-Friedrich Wilhelm Raiffeisen1864-Friedrich Wilhelm Raiffeisen Village-bank movement in GermanyVillage-bank movement in Germany Reached 2 million farmers by 1901Reached 2 million farmers by 1901

1900-Alphonse Desjardins 1900-Alphonse Desjardins ““Caisse Populaire” movement QuebecCaisse Populaire” movement Quebec Member-owned financial co-operativeMember-owned financial co-operative

1970’s- A new wave of microfinance1970’s- A new wave of microfinance An early pioneer Akhtar Hameed KhanAn early pioneer Akhtar Hameed Khan

Revolutionary idea of “microcredit”Revolutionary idea of “microcredit”

The Key Role of MFIThe Key Role of MFIss

Reaching out to the very poor Reaching out to the very poor

Delivering microfinance servicesDelivering microfinance services

Educating local communitiesEducating local communities

Collecting weekly loan paymentsCollecting weekly loan payments

Providing additional social servicesProviding additional social services

Models of MFIsModels of MFIs

The Grameen Bank modelThe Grameen Bank model Focus on womenFocus on women Borrower group Borrower group Five members guarantee each otherFive members guarantee each other

The Village Bank modelThe Village Bank model Latin America and AfricaLatin America and Africa External accounts and internal accountsExternal accounts and internal accounts

Credit UnionsCredit Unions Self-help GroupSelf-help Group

Grameen BankGrameen Bank

ComCommmunity Development Bankunity Development Bank Makes small loans without requiring Makes small loans without requiring

collateralcollateral Accepts deposits, provides other Accepts deposits, provides other

services, and runs several services, and runs several development-oriented businesses development-oriented businesses including fabric, telephone and including fabric, telephone and energy companies energy companies

Founder, Founder, Muhammad Muhammad YunusYunus, were , were jointly awarded the jointly awarded the Nobel Peace PrizeNobel Peace Prize in 2006.[1] in 2006.[1]

Grameen BankGrameen Bank

SSelf-help group elf-help group Group of five individuals are Group of five individuals are

loaned money, but the whole loaned money, but the whole group is denied further credit if group is denied further credit if one person defaults one person defaults

(97%) loan recipients are (97%) loan recipients are women women

High payback rates—over 98 High payback rates—over 98 percent percent

Grameen BankGrameen Bank

Of the total equity of the bank, the Of the total equity of the bank, the borrowers own 94%, and the remaining 6% borrowers own 94%, and the remaining 6% is owned by the Government of Bangladesh is owned by the Government of Bangladesh

Total number of borrowers is 6.67 million, Total number of borrowers is 6.67 million, and 97% of those are women and 97% of those are women

The Bank has 2,247 branches (as of May, The Bank has 2,247 branches (as of May, 2006) covering 72,096 villages, with a total 2006) covering 72,096 villages, with a total staff of over 18,795 staff of over 18,795

Since inception, total loans distributed Since inception, total loans distributed

amounts to (US$ 5.72 billionamounts to (US$ 5.72 billion) ) Out of this, Tk 258.16 billion (US$ 5.07 billion) has Out of this, Tk 258.16 billion (US$ 5.07 billion) has

been repaid. been repaid.

Rural Telephone Rural Telephone ProgrammeProgramme

Bangladesh has one of the lowest Bangladesh has one of the lowest telephone densities of the world. telephone densities of the world.

Grameen Phone, a sister company of the Grameen Phone, a sister company of the bank, is already the largest mobile bank, is already the largest mobile telephone provider of the country telephone provider of the country

Grameen Telecom, another sister company Grameen Telecom, another sister company of Grameen Bank, brought radio-of Grameen Bank, brought radio-telephones and mobile phones to almost telephones and mobile phones to almost half of the villages of Bangladesh. half of the villages of Bangladesh.

Distributed loans to almost 139,000 poor Distributed loans to almost 139,000 poor women in rural areas to pay for the women in rural areas to pay for the phones.phones.

Woman and MicrofinancingWoman and Microfinancing

Economic developmentEconomic development Reduce birth ratesReduce birth rates Improve healthImprove health Improve nutritionImprove nutrition Improve educationImprove education

Types of Businesses Types of Businesses WeavingWeaving EmbroideryEmbroidery Raising LivestockRaising Livestock Basket makingBasket making Growing fruits & VegetablesGrowing fruits & Vegetables

Advantages of Advantages of MicrofinancingMicrofinancing

Easy to obtain Easy to obtain Do not need collateralDo not need collateral Offer development servicesOffer development services Used for any purpose provided it is Used for any purpose provided it is

business relatedbusiness related Microloans administrated on a local Microloans administrated on a local

level, easier to develop a relationship level, easier to develop a relationship with your lenderwith your lender

OpportunitiesOpportunities

Disadvantages of Disadvantages of MicrofinancingMicrofinancing

Big LenderBig Lender MFIMFI

Total Amount Total Amount to be lentto be lent

$1,000,000$1,000,000 $1,000,000$1,000,000

Cost of CapitalCost of Capital 10%10% 10%10%

Number of Number of LoansLoans

11 10,00010,000

Size of LoansSize of Loans $1,000,000$1,000,000 $100$100

Administrative Administrative costs per loancosts per loan

$30,000$30,000 $20$20

Default RiskDefault Risk 1%1% 1%1%

Resulting Resulting Interest RateInterest Rate

10%+3%+1%= 10%+3%+1%= 14%14%

10%+20%10%+20%+1%=31%+1%=31%

http://ies.fsv.cuni.cz/storage/sylab/148_w07_microinstitutions_eldc.pdf - Micro Institutions Lecture 7

Challenges/RecommendationsChallenges/Recommendations

Better accessibility Better accessibility Provide more formal Provide more formal

trainingtraining Tax incentives Tax incentives Performance-based Performance-based

microfinancingmicrofinancing

Questions?Questions?