Department of Banking and Finance

Center for Microfinance

MOEC0265:

Microfinance

Syllabus

Fall semester 2015

Dr. Annette Krauss Managing Director, Center for Microfinance E-mail: annette.krauss@bf.uzh.ch Büro PLC 02 (Plattenstrasse 30) Office hours upon appointment

More information is available on OLAT: www.olat.uzh.ch

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COURSE TOPIC AND GOALS Microfinance – financial services designed for poor and low-income clients in developing countries – has entered the mainstream of development finance and financial markets around the world. Much has happened since a few visionary innovators set up the first credit programs and savings banks in the 1970s, stepping into the void left by the banking sector that had deemed the lack of assets and the prevalence of information problems prohibitive for business with poor people. Today, a diversified microfinance industry offers a variety of services to growing numbers of customers. Credit programs have transformed into specialized financial institutions and banks. Commercial banks are downscaling. Mobile phone operators are offering financial services. Funding through aid agencies has been complemented by socially responsible and profit-oriented investors. Financial sector supervisors are dealing with microfinance. Specialized investment funds, rating agencies, training institutes, and credit reference bureaus complement the industry. The best performers show that it is possible to make the financial sectors of countries more inclusive and to combine a profit orientation with social objectives, while various crises hit other institutions and markets. The challenges remain to ensure sustainable investment opportunities and quality services to millions of underserved customers on a large scale, and to balance social and commercial objectives. This course is designed to increase students’ understanding of the role of microfinance institutions (MFIs) and banks in providing financial services to poor and low-income customers in developing countries. Students learn how the microfinance industry evolved and how it works. They develop an understanding of the skills and techniques used by microfinance analysts, managers, and investors. Students also explore the role of governments and central banks vis-à-vis the microfinance industry, and what are current challenges facing microfinance. The course consists of four parts:

Part I: Understanding microfinance markets Part II: Assessing microfinance service providers, in particular microfinance

institutions (MFIs) Part III: Policies to build inclusive financial systems Part IV: Financing microfinance - trends in commercializing markets

First, students examine characteristics of the demand for financial services in developing countries and analyze the market potential targeting poor and low-income customers in developing countries. They explore why credit market traditionally failed to meet the demand and how microfinance service providers use innovative services and institutional designs to overcome market failures. In the second part, students assess the institutional and managerial soundness, and financial and social performance of institutions through case studies, applying tools used in practice by analysts and microfinance managers. Part III of the course gives the opportunity to investigate the role of public players in the microfinance industry, in particular central banks and governments. This includes broader financial sector policies and more specifically, microfinance regulation and supervision. Finally, part IV is dedicated to discussing the different financing options for the industry. Students investigate the role of aid agencies, social and commercial investors. Particular emphasis is given to recent trends in the commercial financing of microfinance. The class also discusses current challenges like repayment crises and market saturation.

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WHO WOULD BENEFIT FROM THIS COURSE? This lecture is for students in the Master Program in Banking and Finance, Business, and the English-language Master in Business and Economics. The course is element of:

• MA: Wahlpflichtbereich BF • M: Wahlpflichtbereich Corporate Finance and Banking (BWL2)

CREDIT POINTS The lecture counts for 3 ECTS points. TEACHING APPROACH AND LANGUAGE Learning is based on a combination of theoretical considerations to understand financial markets in developing countries and practical experiences from around the world. It introduces the major players in the industry, current data, numerous examples, and a series of short case studies. The class will be held in English. PREREQUISITES Bachelor Degree and knowledge of the course 'Banking’ or related courses of the Bachelor program. CLASS MATERIALS AND PREPARATION Each session of the course includes a reading list with a set of assigned readings. Readings include but are not limited to selected parts of the following books:

• Armendáriz, Beatriz, and Marc Labie (eds.). 2011. The Handbook of Microfinance. Singapore: World Scientific.

• Armendáriz, Beatriz, and Jonathan Morduch. 2010. The Economics of Microfinance. Cambridge, MA and London: The MIT Press.

• Joanna Ledgerwood. 2013. The New Microfinance Handbook. A Financial Market System Perspective. Washington, D.C: The World Bank.

The most important readings are marked with a star (*). It is recommended that students read these materials before class. The syllabus also includes optional reading marked with an (o). These texts help deepen students’ knowledge and provide additional food for thought on selected topics covered each week. There is a collection of books and readings, including those readings marked with a star (*), in my “Handapparat” at the business library at Plattenstrasse 14 (ground floor).

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Please note that reading of these materials does not substitute for attending classroom sessions. The lecture notes (slides and handouts) as well as the readings marked (*) are part of materials tested in the final exam. ADDITIONAL READING AND WEB SITES The area of microfinance is a well-documented field. Students are encouraged to access microfinance-related research in scholarly journals such as World Development, World Bank Economic Review, Journal of Development Studies, Journal of International Development, Journal of Banking and Finance but also the wealth of materials made available through a number of specialized institutions and online resources. Some helpful links are:

• The Microfinance Gateway, www.microfinancegateway.org • Consultative Group to Assist the Poor (CGAP), www.cgap.org • The Mix Market, www.mixmarket.org • Microsave, www.microsave.org • Your SRI, www.yourSRI.com

GRADING Grades will be based on a final exam. Refer to the “Vorlesungsverzeichnis” for the date, time and location of the final exam. In addition, class participation will be considered in cases where the exam result falls between two grades. Class participation is particularly important in this class that uses experiential learning approaches, and you are encouraged to frequently ask questions and contribute to discussions. Enjoy the class!

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COURSE OUTLINE AND READING LIST Part I: Understanding Microfinance Markets Wednesday 16 September 2015 Introduction and Overview: Supply and Demand for Financial Services at the “Bottom of the Economic Pyramid”

• Definition of Microfinance • Characteristics of microfinance clients • Understanding the demand for financial services at the BOP • Evolution of the supply of financial services at the BOP • Microfinance as a development strategy; microfinance as an industry

Reading:

(*) Armendáriz, Beatriz, and Marc Labie. 2011. “Introduction and Overview: An Inquiry into the Mismatch in Microfinance”. In The Handbook of Microfinance, edited by Beatriz Armendáriz and Marc Labie, 3-7 (excerpt). Singapore: World Scientific.

(*) Cull, Robert, Asli Demirgüç-Kunt, and Jonathan Morduch, “Microfinance Trade-Offs: Regulation, Competition and Financing”, in The Handbook of Microfinance, edited by Beatriz Armendáriz and Marc Labie, 2011, pp.141-157, Singapore: World Scientific

(o) Robinson, Marguerite S. 2001. The Microfinance Revolution. Sustainable Finance for the Poor. Volume 1. Washington, D.C. and New York: The World Bank and Open Society Institute, 6-41.

(o) Rutherford, Stuart et al. 2013. “Chapter. 2 Clients.” In The New Micro-finance Handbook. A Financial Market System Perspective, edited by Joanna Ledgerwood et al., 49-71. Washington, D.C: The World Bank.

Case (Classroom material): (*) Financial Services in Orinapa Village

Wednesday 23 September 2015 Why Do Poor People Lack Access to Financial Markets?

• Efficiency, market structure, competition and distribution issues • Agency problems: asymmetric information, adverse selection, and moral hazard • Limited liability and lack of collateral • Non-economic factors

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Reading:

(*) Armendáriz de Aghion, Beatriz, and Jonathan Morduch. 2005. The Economics of Microfinance. Cambridge, MA and London: The MIT Press, 25-52.

(o) Beck, Thorsten, Asli Demirgu-Kunt, and Maria Soledad Martinez Peria. 2008. “Banking Services for Everyone? Barriers to Bank Access and Use around the World”. World Bank Economic Review 22 (3): 397–430.

(o) Demirguc-Kunt, Asli, Klapper, Leora, Singer, Dorothe and Peter Van Oudheusden. 2015. The Global Findex Database 2014: Measuring Financial Inclusion around the World. Policy Research Working Paper; No.7255. Washington, D.C.: World Bank Group.

(o) Hoff, Karla and Joseph E. Stiglitz. “Imperfect Information and Rural Credit Markets: Puzzles and Policy Perspectives”. World Bank Economic Review 4 (3): 235-250.

(*) Robinson, Marguerite S. 2001. The Microfinance Revolution. Sustainable Finance for the Poor. Volume 1. Washington DC and New York: The World Bank and Open Society Institute, 150-162.

Wednesday 30 September 2015 Microfinance Contract Innovations to Overcome Financial Market Problems

• Joint liability: group lending, guarantors • Stepped lending and repeat loans • Character and cash-flow based lending • Flexible approaches to collateral • “Mandatory” and “voluntary” savings products • Non-financial services

Reading:

(*) Armendáriz de Aghion, Beatriz, and Jonathan Morduch. 2005. The Economics of Microfinance. Cambridge, MA and London: The MIT Press, 89-142.

(o) Ghatak, Maitreesh, and Timothy Guinnane. 1999. “The Economics of Lending with Joint Liability: Theory and Practice”. Journal of Development Economics 60: 195-228.

(o) Ledgerwood, Joanna, and Julie Earne. 2013. “Chapter 9. Credit”. In The New Microfinance Handbook. A Financial Market System Perspective, edited by Joanna Ledgerwood et al., 213-229. Washington, D.C: The World Bank.

(*) Robinson, Marguerite S. 2001. The Microfinance Revolution.

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Sustainable Finance for the Poor. Volume 1. Washington, D.C. and New York: The World Bank and Open Society Institute, 162-166.

(o) Churchill, Craig. “Insurance for the Poor: Definitions and Innovations”, in The Handbook of Microfinance, edited by Beatriz Armendáriz and Marc Labie, 2011, pp.527-562, Singapore: World Scientific

Part II: Assessing Microfinance Service Providers, in Particular Microfinance Institutions (MFIs)

Wednesday 7 October 2015 Institutional Factors: Governance, Ownership and Legal Form of MFIs

• The importance of institutions • Introduction to the process and tools of institutional assessments for MFIs • Types of financial institutions offering microfinance services • Strategic decisions in ownership, capital structure, and governance • Governance during expansion, growth and transformation

Reading:

(*) CGAP. 2008. Appraising Microfinance Institutions. Washington, D.C.:

CGAP Brief.

(o) Fundactión Microfinanzas BBVA. 2011. Guide for the Adoption of good governance principles in microfinance institutions. Madrid: Fundactión BBVA.

(*) Labie, Marc, and Roy Mersland. 2011. “Corporate Governance Challenges in Microfinance”. In The Handbook of Microfinance edited by Beatriz Armendáriz and Marc Labie, 283-298. Singapore: World Scientific.

(o) McConaghy, Peter. 2013. “Chapter 15. Governance and Managing Operations”. In The New Microfinance Handbook. A Financial Market System Perspective, edited by Joanna Ledgerwood et al., 351-355, 364-376. Washington, D.C: The World Bank.

(o) Mersland, Roy, and R. Østein Strøm. 2009. “Performance and Governance in Microfinance Institutions”. Journal of Banking and Finance 33: 662-669.

Case (Handouts):

(*) HKL, Part I

Wednesday 14 October 2015 No class on Wednesday 14 October 2015!

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Wednesday 21 October 2015 The People and Market Factors: Leadership and Human Resources Management, Managing Products & Services and Risks

• The importance of leadership and organizational structures • Adequate human resources policies • Business planning in MFIs • Market research and product development • Outreach and competition • Managing operational and credit risks

Reading:

(o) Campion, Anita. 2000. Improving Internal Control. A Practical Guide for Microfinance Institutions. Microfinance Network with GTZ, Technical Guide No.1.

(o) Galema, Rients, Robert Lensink, and Roy Mersland. 2012. “Do Powerful CEOs have an Impact on Microfinance Performance?” Journal of Management Studies 49 (4): 718–742.

(o) Holtmann, Martin. 2001. “Designing Financial Incentives to Increase Loan Officer Productivity: Handle with Care!” MicroBanking Bulletin 6: 5-10.

(o) McConaghy, Peter. 2013. “Chapter 15. Governance and Managing Operations”. In The New Microfinance Handbook. A Financial Mar-ket System Perspective, edited by Joanna Ledgerwood et al., 355- 364. Washington, D.C: The World Bank.

(*) Stuart, Guy. 2011. “Microfinance – A Strategic Management Framework”. In The Handbook of Microfinance, edited by Beatriz Armendáriz and Marc Labie, 251-266. Singapore: World Scientific.

Case (Handouts):

(*) HKL, Parts II and III Wednesday 28 October 2015 Financial Factors: Analyzing and Managing Financial Performance of MFIs

• Analyzing financial statements • Financial performance ratios • Selected aspects of managing financial performance and risks: efficiency and

productivity; liquidity and capital adequacy; asset and liability management • Benchmarking • Rating MFIs

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Reading:

(o) Balkenhol, Bernd, and Marek Hudon. 2011. “Efficiency”. In The Handbook of Microfinance, edited by Beatriz Armendáriz and Marc Labie, 383-396. Singapore: World Scientific.

(o) Cull, Robert, Asli Demirguc-Kunt, and Jonathan Morduch. 2007. “Financial performance and outreach: A global analysis of lending microbanks”. Economic Journal 117: F107-F133.

(o) Cull, Robert, Asli Demirgüç-Kunt, and Jonathan Morduch. 2009. “Microfinance Meets the Market”. Journal of Economic Perspectives 23 (1): 167–192.

(*) Ledgerwood, Joanna et al. 2013. “Chapter 14. Monitoring and Managing Financial and Social Performance”. In The New Microfinance Handbook. A Financial Market System Perspective, edited by Joanna Ledgerwood et al., 321-341. Washington, D.C: The World Bank.

(o) CGAP. 2003. Definitions of Selected Financial Terms, Ratios, and Adjustments for Microfinance. Washington, D.C.: CGAP Consensus Guidelines.

Case (Handouts):

(*) HKL Part IV Wednesday 4 November 2015 Financial Factors: Analyzing and Managing Financial Performance of MFIs (continued) Social Performance Measurement and Impact Assessments

• Why measuring social performance and impact? • What do we know about the impact of microfinance? • Methodological aspects of social performance measurements and impact assessments • Common sets of indicators used in practice • A closer look at selected tools and studies

Reading:

(o) Adams, Dale W., and Vogel, Robert C. 2013. “Through the Thicket of Credit Impact Assessements”. In Microfinance in Developing Countries: Issues, Policies and Performance Evaluation, edited by Gueyie, J.P., Manos, R., and Yaron, J., 36-61, Palgrave Macmillan.

(o) Armendáriz de Aghion, Beatriz, and Jonathan Morduch. 2005. The Economics of Microfinance. Cambridge, MA and London: The MIT Press, 199-224.

(*) Bédécarrats, Florent, and Lapenu, Cécile. 2013. “Assessing Microfinance: Striking Balance Between Social Utility and Financial Performance”. In

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Microfinance in Developing Countries: Issues, Policies and Performance Evaluation, edited by Gueyie, J.P., Manos, R., and Yaron, J., 62-82, Palgrave Macmillan.

(o) Koning, Antonique, and L. Wardle. “Embedding Social Performance Management in Financial Service Delivery“, Washington, D.C., CGAP Brief, May 2014.

(o) Hartarska, Valentina, Nadolnyak, Denis, and Thomas McAdams. 2013. “Microfinance and Microentreprises’ Financing Constraints in Eastern Europe and Central Asia”. In Microfinance in Developing Countries: Issues, Policies and Performance Evaluation, edited by Gueyie, J.P., Manos, R., and Yaron, J., 22-35, Palgrave Macmillan.

(*) Ledgerwood, Joanna et al. 2013. “Chapter 14. Monitoring and Managing Financial and Social Performance”. In The New Microfinance Handbook. A Financial Market System Perspective, edited by Joanna Ledgerwood et al., 341-349. Washington, D.C: The World Bank.

(o) Martinez, Catalina. 2015. “Doing Well by Doing Good? Empirical Evidence from Microfinance”, Zurich, CMF Working Paper Series. No. 04, 2015

(o) Meyer, Julia. 2015. “Social Versus Financial Return in Microfinance”, Zurich, CMF Working Papers Series. No. 01, 2015

(o) Social Performance Task Force. 2012. Universal Standards for Social Performance Management. [online at http://sptf.info/spstandards1]

Part III Policies to Build Inclusive Financial Systems Wednesday 11 November 2015 Microfinance Macro and Meso Policy Issues and Choices

• Macro effects of microfinance • Financial systems levels and microfinance • The role of governments in microfinance; national microfinance policies • Institutions at the meso level: networks, credit reference bureaus, rating agencies

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Reading:

(*) Ahlin, Christian, Jocelyn Lin, and Michael Maio. 2011. “Where does microfinance flourish? MFI Performance in macroeconomic context”. Journal of Development Economics 95 (2): 105-120.

(o) Barr, Michael S. 2007. “Government Policies to Expand Financial Access”. In Building Inclusive Financial Systems. A Framework for Financial Access, edited by Michael S. Barr, Anjali Kumar, and Robert E. Litan, 143-174. Washington, C.C.: Brookings Institution Press.

(*) CGAP. 2004. The Role of Governments in Microfinance. Washington, D.C.: CGAP Donor Brief No. 19.

(o) Hermes, Niels, Robert Lensink, and Aljar Meesters. 2011. “Financial Development and the Efficiency of Microfinance Institutions”. World Development 39 (6): 875-881.

(o) Law, Siong Hook and Nirvikar Singh. 2014. “Does Too Much Finance Harm Economic Growth?” Journal of Banking & Finance 41: 36-44.

(o) Porteous, David. 2006. Competition and Microcredit Interest Rates. Washington, D.C.: CGAP Focus Note No. 33.

(o) United Nations. 2006. Building Inclusive Financial Sectors for Development. New York: United Nations, 93-118; 139-162.

Case (Handout): (*) Expanding Access to Financial Services in Malawi, by Kiendel Burritt

(excerpts) Wednesday 18 November 2015 Microfinance Regulation and Supervision

• When is microfinance regulation and supervision needed? • Key principles of microfinance regulation and supervision • Regulatory issues from the MFI’s perspective

Reading:

(*) Rosengard, Jay K. 2011. „Oversight is a Many-Splendored Thing: Choice and Proportionality in Regulating and Supervising Microfinance Institutions“. In The Handbook of Microfinance, edited by Beatriz Armendáriz and Marc Labie, 159-171. Singapore: World Scientific.

(o) Basel Committee on Banking Supervision. 2010. Microfinance activities and the Core Principles for Effective Banking. Basle: Bank for International Settlements. [online at http://www.bis.org/publ/bcbs175.htm]

(o) CGAP. 2012. Guide to Regulation and Supervision in MicrofinanceGuiding Principles on Regulation and Supervision of Microfinance. Washington, D.C.: CGAP Microfinance Consensus Guidelines.

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(o) Peck Christen, Robert, and Richard Rosenberg. 2000. The Rush to Regulate: Legal Frameworks for Microfinance. Washington, D.C.: CGAP Occasional Paper No. 4.

(o) Hartarska, Valentina, and Denis Nadolnyak. 2007. “Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence”. Applied Economics 39: 1207-1222.

Case (Classroom material):

Uganda Part IV: Financing Microfinance - Trends in Commercializing Markets Wednesday 25 November 2015 The Role of Subsidies and Donors

• Subsidizing microfinance: why or why not, what, and how • Measuring subsidy dependence • Traditional microfinance donors and instruments • The growing involvement of socially responsible investors in microfinance • “Capacity leads, capital follows”: success factors, do’s and don’ts of subsidizing

microfinance in practice

Reading:

(o) Abrams, Julie, and Damian von Stauffenberg. 2007. Role Reversal: Are Public Development Institutions Crowding Out Private Investment in Microfinance? Arlington, VA: MicroRate MFInsights.

(*) Armendáriz de Aghion, Beatriz, and Jonathan Morduch. 2005. The Economics of Microfinance. Cambridge, MA and London: The MIT Press, 231-255.

(o) Armendariz, Beatriz, D'Espallier, Bert., Hudon, Marek, and Ariane Szafarz. 2013. Subsidy Uncertainty and Microfinance Mission Drift. Typescript. Department of Economics, University College London, 2013

(o) CGAP. 2006. Good Practice Guidelines for Funders of Microfinance. Washington, D.C.: CGAP.

(o) El-Zoghbi, Mayada, Barbara Gahwiler, and Kate Lauer. 2011. Cross-border Funding of Microfinance. Washington, D.C.: CGAP Focus Note No. 70.

(o) Stauffenberg, Damian von, and Daniel Rozas. 2011. Role Reversal Revisited: Are Public Development Institutions Still Crowding Out Private Investment in Microfinance? Arlington, VA: MicroRate.

Case (Handout):

(*) Capacity Leads, Capital Follows and When There Was No Money: ACLEDA, Cambodia, by Heather Clark (excerpts)

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Wednesday 2 December 2015 Socially Responsible and Commercial Microfinance Investments

• Socially responsible investors and commercial investors: Equity and debt financing options

• Microfinance investment funds and microfinance investment vehicles • Mission drift through commercialization?

Reading: (o) CSFI. 2014. Microfinance Banana Skins 2014. The CSFI survey of microfinance

risk. Facing Reality. London: Centre for the Study of Financial Innovation.

(o) Glisovic, Jasmina, and Louise Moretto. 2012. How Have Market Challenges Affected Microfinance Investment Funds? Washington, D.C.: CGAP Brief.

(o) Pouliot, Robert. 2005. “Governance, Transparency and Accountability in the Microfinance Investment Fund Industry”. In Microfinance Investment Funds. Leveraging Private Capital for Economic Growth and Poverty Reduction. , edited by Ingrid Matthäus-Meier and J.D. von Pischke, 147-174. Berlin, Heidelberg, New York: Springer.

(*) Reille, Xavier, and Dan Rozas. 2011. Foreign Capital Investment in Microfinance: Reassessing Financial and Social Returns. Washington, D.C.: CGAP Focus Note No. 71.

Case (Handout):

(*) Compartamos Wednesday 9 December 2015 Financial Market Instruments for Commercial Microfinance

• Commercial institutions and the choice and valuation of equity • Portfolio diversification through microfinance? • Trends in a changing environment

Reading: (o) Galema Rients, Robert Lensink, and Laura Spierdijk. 2011. “International

diversification and Microfinance”. Journal of International Money and Finance 30: 507-515.

(*) MicroRate. The State of Microfinance Investment 2013. The MicroRate MIV Survey 2011. Arlington, VA: MicroRate MFInsights.

(o) O’Brian, Barclay. 2006. “Valuing Microfinance Institutions”. Savings and Development (Fondazione Giordano dell’Amore) 4: 274-296.

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(*) Symbiotics. Microfinance Investments. The 2014 Symbiotics MIV Survey. Geneva: Symbiotics.

(o) Walter, Ingo, and Nicolas Krauss. 2009. “Can Microfinance Reduce Portfolio Volatility?” Economic Development and Cultural Change 58 (1): 85-110.

Wednesday 16 December 2015 Challenges and Burning Questions

• Current challenges in microfinance • Burning questions • Expanding the frontiers of microfinance