principles of microfinance i

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12345 7238549A I. Regulatory Environment 1. Trade policy a. Import duties b. Import quotas c. Export taxes or subsidies d. Exchange rates e. Foreign exchange controls 2. Monetary policy a. Money supply b. Interest rate c. Banking regulations 3. Fiscal policy a. Government expenditure (i) Infrastructure (ii) Direct investment in production, marketing, or service enterprises (iii) Government provision of services (iv) Transfer payments

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Page 1: Principles of microfinance i

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I. Regulatory Environment

1. Trade policy

� a. Import duties

� b. Import quotas

� c. Export taxes or subsidies

� d. Exchange rates

� e. Foreign exchange controls

2. Monetary policy

� a. Money supply

� b. Interest rate

� c. Banking regulations

3. Fiscal policy

� a. Government expenditure

� (i) Infrastructure

� (ii) Direct investment in

production, marketing, or service

enterprises

� (iii) Government provision of

services

� (iv) Transfer payments

Page 2: Principles of microfinance i

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� b. Taxes

� (i) Business income/profits

� (ii) Personal income

� (iii) Payroll

� (iv) Property

� (v) Sales

4. Labor policies

� a. Minimum wage laws

� b. Labor codes covering working

conditions, fringe benefits, etc.

� c. Social security

� d. Public sector wage policy

5. Output prices

� a. Consumer prices

� b. Producer prices

6. Direct regulatory controls

� a. Enterprise licensing and

regulation

� b. Monopoly privileges

� c. Land allocation and tenure

� d. Zoning

� e. Health regulations

Source: Haggblade, Liedholm and

Mead (1986).

II. Economic Environment

1. Wealth of the nation:

- Increasing the wealth of a

borrower makes it easier for

her to repay her loans.

- The incentive to repay is

also important

- Average repayment rates

seem to be higher in periods

of economic growth than in

the times of recession.

- If the level of

unemployment goes up in

stagnant economies, then

more people turn to self-

employment and become

potential microfinance

clients.

2. Inflation

III. Physical environment

IV. Other factors

1. Social conditions

2. Population density

Page 3: Principles of microfinance i

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Micro factors:

Micro-environmental factors answer the following questions:

� Who is in the market? (Competition)

� Who is the program designed for? (Client population)

� By what means? (Financial resource providers)

Competition

Pre-Competitive Stage Competitive Stage

Objectives: to reach more people and to

become financially viable

Objectives: To retain or increase market

share, while remaining profitable

Driving motivation: access to funding Driving motivation: attracting the customer

Management focus: developing the

institutions internal capabilities

Management focus: Internal issues remain,

but external focus is added: understanding

the external environment and adjusting

business strategy to it

Growth: High growth projections possible Growth: Low growth likely

Little need to take the behavior of other

players into account

Must study the behavior of clients,

prospective clients, and competitors

Client demand taken as given Client demand can evaporate quickly if

competitor provides better service

Low risk, predictable future; high degree of

control over outcomes

Rapid change, high uncertainty; lower

control over outcomes

Client Population

� The MFI may identify its target market in several ways. Two possible ways are:

� By the characteristics of the potential clients (sex, poverty level, ethnicity, citizenship, education etc.)

� By the type of business activity it intends to support (new businesses, existing enterprises, specific businesses).

Financial resource providers:

� Self funding

� Commercial loans

� Donors

� etc

Page 4: Principles of microfinance i

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� unserved or undeserved enterprises and households (from extreme poor � to small growing enterprises that provide employment in their communities) � constitutes the demand side for microfinance services � MFI need supply services to fill the gap and integrate the unserved groups to the market.

Page 5: Principles of microfinance i

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Page 6: Principles of microfinance i

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%enerally refers to the allocation of a specific amount of

funds to provide credit to a particular sector of the

economy or population.

Direct targeting is founded on the belief that because

certain groups (the poor, specific castes) or sectors

(agriculture, fisheries) are unable to access credit (or to

access it at affordable prices), credit must be made

accessible through a government or donor mandate. In

some cases the government or donor also subsidizes the clients' cost of borrowing.

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� Indirect targeting means that products and services are

designed for and aimed at people who are beyond the

normal frontiers of formal finance, instead of mandating

specific funds to particular groups who fit a narrowly

defined profile. With indirect targeting, self-selection

takes place by virtue of the design of microfinance services.