Basics of Microfinance

Agenda

Basics of Microfinance

Agenda
Microcredit Vs. Microfinance Microfinance (Different Perspectives) Microfinance Products Microfinance Best Practices Basic Steps in Micro lending SWOT Matrix-Microfinance Microfinance: Challenges & Opportunities Islamic Microfinance Microfinance Sector in Pakistan

Microfinance Vs. Microcredit

Microfinance Vs. Microcredit

Microfinance Vs. Microcredit

Micro

finance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients. credit refers to a small loan to a client made by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending.

Micro

Microfinance Basics
(Different Perspectives)

Microfinance Basics

Microfinance(Different
Perspectives)

Micro Finance is the supply of loans, savings, and other basic financial service to the poor . CGAP

To

most, micro finance means providing very poor families with very small loans (micro credit) to help them engage in productive activities or grow their tiny businesses. Financial Gateway

About Microfinance

The modern micro finance movement dates back to the 1970s when experimental programs in Bangladesh, Brazil, and a few other countries began to extend tiny loans to groups of poor women to invest in micro enterprises By lending to groups of women where every member of the group guaranteed the repayment of all members, these micro credit programs challenged the prevailing conventional wisdom and proved that poor people without collateral could be "credit worthy". When offered the opportunity, they would repay loans with interest, at extraordinary rates of repayment.

Microfinance Products

Microfinance Products

Microfinance Products

Microfinance: Ideology of Yunus all start? How did

On the field Prof. Yunus saw that Even poor people and women need loans They can have an activity and repay

Yunus idea

Prof. Muhammed Yunus Founder of the Grameen Bank, Bangladesh

Set up financial institutions with a social mission Listen to the needs and constraints of the excluded & offer them adapted financial tools to empower themselves ( solidarity groups) Spirit: SUSTAINABILITY
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Why Microfinance?

Lack collateral or guarantors A bad credit history Gap in the communication / lack of confidence in the Banks Doubt of the bank of the repayment capacity Lack of access to financial infrastructure and services in remote areas

WHAT IS THE ALTERNATIVE?

MICROFINANCE

MICRO

FINANCE

Micro-entrepreneurs Self-employed Low income populations Excluded populations

Business & educational loans Savings Micro-insurances Remittances

Micro-entrepreneur training Coaching & workshops on health, hygiene, etc.

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Best Practices

Microfinance Best Practices

Microfinance Best Practices

1 Visit of Mrs. Akhtar to the MFI Meeting wit the Loan Officer Convinced, reception of a loan of Rs.50,000 @ 30% markup 2 Purchase of the ingredients Start of cooking & sale (Daily benefits amount Rs. 500)

Regular contact and follow up between the MFI and the client

4 Final Repayment 12 months Demand for a 2nd loan

3 Monthly Repayment Remaining money is used to buy food

Best Practices: Repayment

Microfinance is not philanthropy! Clients need to pay for the services Microcredit clients need to repay the loans Service Charges to cover the costs Why is repayment important?
Offer new loans and extend the client base Ensure correct functioning and growth of the institution Cover office & operational costs Cover for non-payments when they occur Avoid financial loss and loss of credibility for the

institution

REPAYMENT ON TIME GUARANTEES THE SUSTAINABILITY OF THE PROGRAM

Best Practices: Interest Rates

Prejudices The social mission should consist in a free loan Interest Rate, perceived as a burden to the client

Reality Micro-credits allow for the creation or expansion of an income generating activity and the generation of profit Interest rates are no burden if the business plan is solid and good evaluation has been done

Best Practices: Key Success Factors

Methodology Regular follow up Requirement of good repayment for future access to a bigger loan Local loan officers familiar with local culture Adapted products and procedures Small and short term credits Repayment capacity assessment Adapted collaterals / group solidarity guarantee Business Development Services Compensation for lack of education of loan beneficiaries Delinquency Management Maintain PAR (Portfolio At Risk less than 3 %)

Microfinance: Tool Against Poverty

Microfinance is a tool against poverty by enabling the beneficiaries to :

Create sustainable activities to increase their incomes Reduce external shocks

Improve the living conditions of entrepreneurs and of their families

Empower people and mainly the women.

Building Blocks..
Capital Funds MF Model

MFI/MFB

Training

Technology

Manpower

Basic Steps in Micro lending

Decentralized Model Mobilization Client Initial Screening Credit Appraisal Loan Need Assessment Character Assessment Break Even & Repayment Capacity Analysis Cash Flow Analysis Client Screening (Senior Authority) Branch Credit Committee Loan Disbursement Collections Relationship Management Repeat Loan Centralized Model Mobilization Client Initial Screening Credit Appraisal Loan Need Assessment Character Assessment Break Even & Repayment Capacity Analysis Cash Flow Analysis Client Screening (Senior Authority of Head / Regional Office) HO / RO Credit Committee Loan Disbursement Collections Relationship Management Repeat Loan

Micro lending Options

Cash flow based lending Character based lending Islamic Microfinance Individual vs. Group lending Short term vs. Seasonal financing Emergency loans Leasing options

Microfinance vs. Microlending

Poor people borrow some of the time but save all of the time
Entrepreneurial Poor Self Employed Poor

credit

insurance

Entrepreneurial Poor People who are slightly below the poverty line. Self-Employed Poor Poor people who are meeting their basic needs by running microbusinesses
Laboring Poor Farm laborers, domestics and unemployed workers Very Poor People who have few (if any) assets very limited chances to earn money

savings

Laboring Poor

Very Poor

The Poverty Pyramid

The need of customer is more than credit.

*Source: FINCAs Poverty Pyramid

Key Financial Indicators for Micro Borrowers

Break-even point Analysis Indebtness Ratio Inventory Turnover (In Days) Repayment Capacity Return on Assets Working Capital

SWOT Matrix

SWOT Matrix- Microfinance

SWOT MATRIX - Microfinance

STRENGTHS WEAKNESSES

1. 2. 3. 4. 5. 6.

7. 8.
9.

Experienced senior management Team Robust IT system Clear and well defined HR policy Infusion of own equity - commitment from promoters Process innovation Clarity and good understanding of vision Transparency at all levels Plans for value added and livelihood support services (LDS) Shared ownership

1. Limited resources 2. Micro managing 3. Start up organisation; therefore, yet to institutionalise the standard processes 4. Attracting/Holding on to the staff till the time we become established players 5. Refine the processes for growth

OPPORTUNITIES

1. Huge Potential Market 2. Scope of introducing livelihood related services 3. Financial crunch is helping organisation to be cost conscious and effective 4. IT systems

THREATS 1. Financial crisis 2. Increasing competition 3. Increasing competition 4. Poor banking infrastructure 5. Political instability

Challenges & Opportunities

Challenges & Opportunities

Microfinance: Challenges & Opportunities

There are over 10,000 microfinance institutions serving in excess of 150m customers, 100m of them being the poorest families. Global demand is estimated at 500m families, so there is a long way to go. 250 of the largest MFIs are able to access capital on a fully commercial basis from investors like Citibank. Microfinance, if there is any doubt, has become big business.

Sustainability Vs. Profit

No one ever ended poverty by going bankrupt - John Hatch, FINCA The argument around sustainability is over. Organisations have proven that it is possible to serve the poor successfully while maintaining sustainability. Profit is sometimes a problematic word for the industry.

The Compartamos Effect

One specific criticism of microfinance becoming big business is that it now provides business-like rewards to senior management. There are worrying examples of organisations like SKS (India) and Compartamos (Mexico) undergoing IPOs that greatly enrich their staff and put the organisations on a solid trajectory away from pro-development lending.

Poverty Alleviation
A recent book by Milford Bateman asks the question Why Doesnt Microfinance Work?. In it, he uses the argument that in countries with lots of microfinance, e.g. Bangladesh, poverty persists. There are a lot of points in the book worth debating, but one thing is clear: microfinance alone is not intended to end poverty, it is just one of a set of tools.

Bring in Technology
Respondents seemed clear that many of the next wave of innovation in serving the poor will be dependant on leveraging technology. Mobile payment systems to extend reach rurally, and connecting MFIs into global payment systems to enable remittance transfers are both critical areas to explore.

Micro insurance
Just as with loans and savings, there is a role for the public sector to assist with building the institutional and intellectual infrastructure to support the development of healthy micro insurance markets in health and agriculture. This is particularly true of agricultural micro insurance as it is inherently linked to the climate change adaptation agenda.

Conclusions

We need to acknowledge the profit motive is firmly embedded in the microfinance industry. We need to win the battle to ensure focus is kept on providing financial services to the poor as a tool to assist them in their escape from poverty. We need to ensure we are creating and supporting innovation around technology and new product lines in micro savings and micro insurance.

Islamic Microfinance

Islamic Microfinance

Islamic Microfinance
Conventional MFIs deal in Money and charge and pay interest Islamic MFIs work within framework of Shariah

Halal and Haraam Prohibition of Riba, Gharar and Qimar Socially Responsible

Principles of Islamic Finance

Lending a virtuous act Not a business. Prohibition of Riba and Gharar; permission of trading. All gains on financing not prohibited. Deciding Factor: nature of transaction. Entitlement of profit: liability of risk of loss with the capital itself; (Al Kharaj bil Daman)

Profit to be earned by sharing risk and reward of ownership through pricing of goods, services or benefits. Time has value that can be discounted only through price; not in the form of interest, sometimes negative value as well.

Benefits of Islamic Microfinance

Shariah compliant Operations Customers Need focused Products Inherently more Prudent Utilization of Financing No Return on Default In-Built Internal Controls Overall Benefits to Economy Socially Responsible and Acceptable

Models of Islamic Microfinance

Different models of IMf can be used catering to requirements of different levels of poverty
Non-Profit based IMf raising funds from donations or community pools
Charity based Self Help Groups based Credit Union/Cooperatives model

Commercial operations using any Islamic mode of finance

Group based financing Individual financing

International Experiences

Islamic Mf services available in Bangladesh Iran Indonesia Australia Yemen Sudan Pakistan Syria Bosnia and Kosovo Malaysia Afghanistan India, etc.

IMF Regulations in Pakistan

IBD Circular No. 5 of 2007

Establishing Full Fledged Islamic Microfinance Banks (IMFBs)
Nationwide Province wide Region wide

Islamic Microfinance Services by Full-fledged Islamic Banks

Mode 1- Islamic Microfinance Counters at Existing Branches Mode II- Standalone Islamic Microfinance Branches & Mobile Banking Mode III- Establishing Independent IMFBs as Subsidiaries of Banks Mode IV- Developing Linkages with Islamic MFBs/MFIs

Islamic Microfinance Services by Conventional Banks

Mode 1- Islamic Microfinance Counters at Existing Branches Mode II- Standalone Islamic Microfinance Branches & Mobile Banking Mode III- Establishing Independent IMFBs as Subsidiaries of Banks Mode IV- Developing Linkages with Islamic MFBs/MFIs

Shariah Compliance Mechanism

Shariah Advisor in each IMFB

Fit and Proper Criteria Roles and Responsibilities

Essentials of Islamic modes SBP Shariah Board SBP Shariah Compliance Inspection

Success Stories in Pakistan

Akhuwat NSRP (under Musharaka facility from BoK) Muslim Aid Islamic Relief CWCD

Microfinance Sector in Pakistan

Microfinance Sector

Microfinance Sector in Pakistan

Loans: 279.4 million (USD, 2010) Active borrowers: 1.9 million (2010) Deposits Total value of all deposit accounts Deposits: 125.4 million (USD, 2010) Depositors: 867,834 (2010)

Economic Conditions conducive for Microfinance

Status: developing nation in Asia Population: 184 million, where 64% is rural Poverty Rate: 17.2%, i.e. 29.9 million people; not everyone below the poverty line are targeted, instead, the middle four (out of six) economic groups are served by MFIs. Unemployment Rate: 15.2% GDP per Capita: $2,600 (number 171 compared to other countries)

Microfinance ParticularsPakistan

Total MFIs: 30+ Total MFBS: 09 Total Deposits with MFIs: $52.3 million Gross Loan Portfolio: $144.5 million Number of Borrowers: 1. 83 million (updated figures for Dec, 2009) Average Loan Balance: $150.4 Average Interest Rates: 28% to 30% Portfolio at Risk: 11%; very high, Pakistan is facing a repayment crisis

Microfinance Products in Pakistan

Loans Savings Consulting and Training Insurance Fund Transfer Services Livestock Loan Other Agriculture Loans