fundamentals of microfinance
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Fundamentals of Microfinance. Presentation by: Maria Kristina S. Galvez Project Manager – Social Enterprise Unit Punla sa Tao Foundation. Presentation Outline. Where Did It All Began: The Grameen Bank The Philippine Financial System Philippine Microfinance Profile - PowerPoint PPT PresentationTRANSCRIPT
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Presentation by:
Maria Kristina S. GalvezProject Manager – Social Enterprise UnitPunla sa Tao Foundation
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Where Did It All Began: The Grameen BankThe Philippine Financial SystemPhilippine Microfinance ProfileProcess and Procedure: How Does Microfinance Work?Impact Assessment: Does Microfinance Really Work?Microfinance and the Financial Crisis
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Why the poor cannot borrow from other formal financial institutions?
Can the poor really pay or save?
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Dr. Mohammad YunusFounder, Grameen BankNoble Peace Prize Winner, 2006
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Grameen means “village” – thus, Village BankingEnvisioned as the “biggest development wonder”Extended banking facilities to poor men and womenAimed to create opportunities for self-employment in rural Bangladesh
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From “low income, low saving & low investment“ into "low income, injection of
credit, investment, more income, more savings, more investment, more income".
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Defined as provision of financial services, savings and credit to the poor on a sustainable basis.
CreditSavings
Other Financial Services (ex. Insurance)
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Serve the poor or reduce poverty
while at the same time
Pursue the business to maximize return on investments
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NGOs – 500Rural Banks – 195Savings and Credit Cooperatives – 4,579
Source: GTZ-PhilHealth Orientation for Microfinance
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Near Poor
E-Poor
Laboring
Ultra-
Poor
Entrepreneurial Poor or “e-poor”
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17 million people still do not have access to financing services
Source: National Anti-Poverty Commission, 2005
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Process, Approach and Methodologies
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Group Lending
• Around 5-30 members per group• Members guarantee each other’s loan
Example: Grameen methodology
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Individual Lending
• Loans are given based on the capacity to pay (Household or Business Cash Flow)
• With collateral or co-maker• Clients are screened for credit checks or
character references• Loan size are tailored to business needs.
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CreditSavings
Compulsory SavingsVoluntary Savings
InsuranceDeath InsuranceHealth Insurance
Payment ServicesAgricultural Microfinance
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Client Orientation Credit/Background Investigation 1
Loan Documentation
Loan Review and Approval
Processing DisbursementCollection
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Small loans granted to borrowers based on cash flowGiven to increase income levels, for small enterprises
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Amount starts from Php 2,000 to Php 5,000 and maximum principal amount pegged at Php150,000
Equivalent to the maximum capitalization of a microenterprise (under RA 8425)
Source: Bangko Sentral ng Pilipinas
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Direct Costs1. Costs of Funds for lending2. Cost of Risk (Loan Loss)3. Administrative Costs4. Expand Capital Base
Indirect Costs1. Staff Salaries2. Other Operating
expenses
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Old Approach – subsidized interest ratesNew Approach – market-based interest rates
The new approach permits the microfinance institution to cover the costs in lending a loan,
thus making it sustainable.
Interests at MFIs are currently at 2% - 3% per month
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Commercial banks deal with large loans therefore their transaction costs are lower.Government-owned MFIs are also lower because of political considerations.Some MFIs charge very low rates (ex. 20% per annum), but incur losses. Losses are recovered through subsidies.
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A “win-win” proposition: more microcredit lent and gross returns to lenders.
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Government should continually seek consultation with MFIs to understand better the
infrastructure bottlenecks they face.
The government should not lend, rather make an enabling environment for lending.
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Studies and Evidences
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Majority of existing clients and new clients are not poor according to the official definition.No significant impact on household assets and human capital investments.For microfinance to be an effective poverty-alleviation tool, beneficiaries must be identified correctly.
Source: Kondo, Toshio (2007) Impact of Microfinance on Rural Household in the Philippines, ADB
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Asian Financial Crisis : Banking and currency crises had little relevance to subsistence-based economies in closed ecosystem marketsMoney will become more scarce, more conservative, and more costly.Financial pressures on families may lead to less savings and more withdrawals.
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Risk Management, Good Governance and Shift to
More Enterprising Environment for Clients!
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Maybe necessary, but not sufficient as a poverty-alleviation tool.Microfinance should pay for itself to reach more poor people.The role of the government is to enable financial services, not to provide them.
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