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
Presentation by:
Maria Kristina S. GalvezProject Manager – Social Enterprise UnitPunla sa Tao Foundation
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
Why the poor cannot borrow from other formal financial institutions?
Can the poor really pay or save?
Dr. Mohammad YunusFounder, Grameen BankNoble Peace Prize Winner, 2006
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
From “low income, low saving & low investment“ into "low income, injection of
credit, investment, more income, more savings, more investment, more income".
Defined as provision of financial services, savings and credit to the poor on a sustainable basis.
CreditSavings
Other Financial Services (ex. Insurance)
Serve the poor or reduce poverty
while at the same time
Pursue the business to maximize return on investments
NGOs – 500Rural Banks – 195Savings and Credit Cooperatives – 4,579
Source: GTZ-PhilHealth Orientation for Microfinance
Near Poor
E-Poor
Laboring
Ultra-
Poor
Entrepreneurial Poor or “e-poor”
17 million people still do not have access to financing services
Source: National Anti-Poverty Commission, 2005
Process, Approach and Methodologies
Group Lending
• Around 5-30 members per group• Members guarantee each other’s loan
Example: Grameen methodology
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.
CreditSavings
Compulsory SavingsVoluntary Savings
InsuranceDeath InsuranceHealth Insurance
Payment ServicesAgricultural Microfinance
Client Orientation Credit/Background Investigation 1
Loan Documentation
Loan Review and Approval
Processing DisbursementCollection
Small loans granted to borrowers based on cash flowGiven to increase income levels, for small enterprises
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
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
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
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.
A “win-win” proposition: more microcredit lent and gross returns to lenders.
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.
Studies and Evidences
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
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.
Risk Management, Good Governance and Shift to
More Enterprising Environment for Clients!
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.