SMALL LOANS, BIG DIFFERENCESLet’s explore MicrofinancePresentation to journalists on basics of MicrofinanceSaturday, October 1, 2011Malik Mirza, ACA, FCCAhttp://wisdomfrombooks.com

WHAT IS MICROFINANCE?

“Let us be clear: micro finance is not the charity.

It is the way to extend the same rights and

resources to low income households that are

available to everyone else. It is recognition that

poor people are the solution, not the problem.It is way to build their ideas, energy and vision.It is a way to grow productive enterprise and toallow communities to prosper” (Kofi Annan)

WHAT IS MICROFINANCE?

““The provision of small-scale financial services to poor and low income people such as savings, credit and other basic financial services (insurance, funds

transfer etc.”.

Micro-credit is part of ‘microfinance’

THE NATURE OF MICROFINANCE

A social mission A financial mission; or Both?

THE STORY OF MICROFINANCE

Traditional banking principle: The more you have; the more you get

1977 A professor from Chittagong

University teaching economics to his students

Students questioned: What we read is not in line with what we see around.

Research by students: 20 cents may let you to stop your business!

$ 27 lent to 42 people

THE STORY OF MICROFINANCE In 2006, one of the biggest news of

your lifetime arrived. Grameen Bank, in other words you, won the Nobel Peace Prize. You brought the nation a very big honour. Representing you, your Board Members travelled to Norway and brought back the Nobel Peace Prize. One of you, Mossammat Taslima Begum, from Pirghachi village in Chapainawabganj district, received the Nobel Peace Prize on your behalf. And she gave her acceptance speech on your behalf to the global television.

THE STORY OF MICROFINANCE The entire world watched and listened

to her words. Those who had earlier been chased out of their villages now had brought back this great honour for the nation. The entire nation felt proud of you. You have raised your heads in front of the nation. You will never lower your heads again; you will always keep your heads raised high and proud. You will never bow your heads to anyone – this pledge has become a part of each and every one of you.

Extract from letter by Professor Younus to shareholders of Grameen – May 2011

THE STORY OF MICROFINANCE This is a bank which is owned by

8.3 million poor, rural women. This Bank will remain committed to helping its borrowers' struggle to realize their dreams in life. We must ensure that as owners they remain in control of the Bank.

May 14, 2011 – Mr. Muhammad Yunus, a Nobel laureate moved out of the bank he created!

But the story of microfinance continues

WORLD STORY OF MF The practice of Microlending is not new. Credit

cooperatives and charities making loans to young entrepreneurs have been documented from 18th century in Europe. A notable example is the fund created by 18th century novelist Jonathan Swift. Swift donated £500 of his own wealth for lending to “poor industrious tradesmen in small sums of five, and ten pounds, to be repaid weekly, at two or four shillings, without interest.”

Another interesting historical example of microlending is the Irish Reproductive Loan Fund Institution, which came into existence following the scarcity in 1822. This fund, which received donations from charities in London, was established to make small loans (under £10) to individuals in small towns for “relief of the distressed Irish”.

POVERTY IN USA?• 46.2 million people living in

USA are poor.• The official poverty rate in

2010 was 15.1 percent — up from 14.3 percent in 2009.

• According to the Association for Enterprise Opportunity, 88% of businesses (25.5 million) in the US are microbusinesses (defined as 0-4 employees) and 70% of businesses have revenues of less than $100,000.

TRADITIONAL BANKING

Traditional banking is simple

It demands ‘collateral’ or ‘guarantee’

Size of loans is big and consumers are less

MICROFINANCE BANKING

• Loans are provided for variety of reasons including business

• Borrowers are large in numbers while loan amounts are very small

• Costs are relatively high

MF LENDING METHODOLOGY

Group focused i.e. group guarantee model; This works well in rural areas but has issues in urban areas as people don’t know each other too often

Individual with strong ‘personal guarantee’ from third party or any other form of collateral, as suitable to the financial instituion

UNBANKED IN USA – 5 THINGS TO KNOW

• Microfinance in USA is not new, though the term ‘microfinance’ may be new

• Demand for microfinance in USA is strong• Reasons for ‘unbanked’ in USA are similar to

the rest of the world• There are several key differences between

Microfinance in USA and rest of the world• Several international organizations have

programs of microfinance in USA too

WORLD MF AND USA MF

US Other Markets

Group Loan

No, but Grameen America is testing a group model in New York City

Yes, common approach to underwriting loans

Loan Size Up to $50,000Usually no more than $1,000

Support Services Yes Usually no

MICROFINANCE INSTITUTIONS

The term "microfinance institutions (MFI‟s)" now, refers to a wide range of organizations dedicated to providing these services and includes non-governmental organizations, credit unions, cooperatives, private commercial banks, non-bank financial institutions and parts of State-owned banks.”

INSTITUTIONALIZATION OF MF

Formal institutions e.g. MFBs Semi-formal e.g. NGOs Informal e.g. relatives

A FEW KEY PRINCIPLES OF MF

• Poor people need a variety of financial services, not loans only

• MF is a tool for poverty alleviation; Microcredit might not always be the answer

• MF has to be a ‘sustainable’ operation which should result into creation of 'Financial system’ to serve the poor people.

• Government should provide an ‘enabling’ environment

PAKISTAN

Population: 150 – 180 mln Poverty: 30 – 35% Market size: 20 mln to 25 mln Outreach as of December 31, 2010: 2 mln

active borrowers (Number of loans outstanding)

MICROFINANCE IN PAKISTAN

NGOs Cooperative societies Dedicated NGOs called MFIs RSPs Microfinance Banks

MFIS IN PAKISTAN

MF IN PAKISTAN

WHO IS A POOR PERSON IN PAKISTAN?

An individual whose income (net of business expense) is less than Rs. 300,000/- on an annual basis is a poor person

(Prudential Regulation # 10, Microfinance as per the State Bank of Pakistan, January 1, 2011)

CHALLENGES OF EXPANSION – A CASE STUDY

Year: 2008 Institution: Kashaf Foundation Place: Tehsil Muridke, Punjab Issue: Group default Intervention: A politician! Request: Write off loans please….. To add fuel to fire – A news added: MFI’s

President has passed away A few people got the news ‘published’ in the

news papers Result: Huge Non Performing Loan!

CHALLENGES OF EXPANSION – A CASE STUDY

CHALLENGES OF EXPANSION – A CASE STUDY

MF players are clustered in same province to avoid loan defaults

More reliance on ‘group leaders’ Parallel loans by same borrowers Making terms and conditions easier for

borrowers

CHALLENGES FOR MICROFINANCE INSTITUTIONS

‘Fungibility’ of loans NGO or a sustainable MFI? Scale Financing of Institutions Human resource in the sector Education

NEWS ON MICROFINANCE?

THE NEXT BIG NEWS

Telecom companies granted Microfinance licenses

Telenor already ‘in’ with Tameer Bank Mobilink to launch Waseela Bank soon Others will follow the path Question: Would it bring improvement in

quality of lives?

THE NEXT BIG NEWS

Branchless banking culture Islamic microfinance

RESOURCES

International information www.microfinancegateway.org www.themixmarket.org www.cgap.orgPakistan’s information www.microfinanceconnect.info www.sbp.org

CONCLUSION

The bank which started with Tk. 856 given out as loans, today it disburses Tk. 1000 crore in loans every month. We can give interest free loans to over 100 thousand beggars to find ways to get out of the humiliating life of begging.

We have to remain united. The biggest enemy of an organization is internal division; suspicions and distrust among each other. We have to rise above all these and keep ourselves free of mutual distrust and suspicion. Grameen Bank is a bank based on trust; it is a bank based on discipline – we should never forget this.

CONCLUSION

You have learned over the years to rely on your own strength. That was the reason for your success. Don’t forget to rely on your own strength in the future. Grameen Bank must move on to greater success. You must move on to greater success. Please remember me in your prayers.

Please accept my salaam, and convey my salaam to all in your family. May the blessings of God be with you.

Yours faithfully, (Professor Muhammad Yunus)

THANK YOU