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DR. AMALIA G. DELA CRUZUniversity of Luzon
College of Business Administration1stSemester2011-2012
Microfinance
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Mrs. Israel, 48 years old
Unemployed husband
4 children
No savings
Good cook
Mrs. Israel decides to start a small catering service athome
Mrs. Israel goes to the bank and makes a demand for aloan at her bank
MRS. ISRAELS DEMAND IS REJECTED
Case study
CASE STUDY
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Why are people excluded from certain financial
services?
Justification and definition of 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 inremoted areas
WHAT IS THE ALTERNATIVE?
MICROFINANCE
Justification and definition ofmicrofinance
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Justification and definition of microfinance
FINANCEMICRO
Micro-entrepreneurs
Self-employed Low income populations Excluded populations
Business & educational loans
Savings Micro-insurances Remittances
Micro-entrepreneur training Coaching & workshops onhealth, hygiene, etc.
Justification and definition ofmicrofinance
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What is Microfinance?
It is a provision of a broad range of financialservices such as deposits, loans, paymentservices, money transfers and insurance
products to the poor and low incomehouseholds and their microenterprises
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-the provision of financial services to low-income clients orsolidarity lending groups including consumers and the self-employed, who traditionally lack access to banking andrelated services.
-a world in which as many poor and near-poor householdsas possible have permanent access to an appropriaterange of high quality financial services, including not justcredit but also savings, insurance, and fund transfers.
-Microfinance is a broad category of services, whichincludes microcredit. Microcredit is provision of creditservices to poor clients.
http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Solidarity_lendinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Self-employedhttp://en.wikipedia.org/wiki/Solidarity_lendinghttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Low-incomehttp://en.wikipedia.org/wiki/Financial_services7/31/2019 Microfinanceuniversity of Luzon
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Poor people borrow from informal moneylendersand save with informal collectors. They receiveloans and grants from charities. They buy insurancefrom state-owned companies. They receive funds
transfers through formal or informal remittancenetworks. It is not easy to distinguish microfinancefrom similar activities. It could be claimed that agovernment that orders state banks to open depositaccounts for poor consumers, or a moneylenderthat engages in usury, or a charity are engaged inmicrofinance.
http://en.wikipedia.org/wiki/Informal_economyhttp://en.wikipedia.org/wiki/Grantshttp://en.wikipedia.org/wiki/Charitieshttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Charitieshttp://en.wikipedia.org/wiki/Grantshttp://en.wikipedia.org/wiki/Informal_economy7/31/2019 Microfinanceuniversity of Luzon
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Important Features of the Definition
It is not just credit
It has a target market - the poor and lowincome households
It is linked to the microenterprise
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Principles in microfinance
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1. Poor people need not just loans but also savings, insurance and money
transfer services.2. Microfinance must be useful to poor households: helping them raiseincome, build up assets and/or cushion themselves against external shocks.3. Microfinance can pay for itself. Subsidies from donors and government arescarce and uncertain, and so to reach large numbers of poor people,microfinance must pay for itself.
4. Microfinance means building permanent local institutions.5. Microfinance also means integrating the financial needs of poor people intoa country's mainstream financial system.6. The job of government is to enable financial services, not to provide them.7. Donor funds should complement private capital, not compete with it.
http://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Insurance7/31/2019 Microfinanceuniversity of Luzon
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8. The key bottleneck is the shortage of strong institutions andmanagers. Donors should focus on capacity building.
9. Interest rate ceilings hurt poor people by preventing microfinanceinstitutions from covering their costs, which chokes off the supply ofcredit.10. Microfinance institutions should measure and disclose theirperformance both financially and socially.
Microfinance is considered as a tool for socio-economic developmentand can be clearly distinguished from charity. Families who aredestitute, or so poor they are unlikely to be able to generate the cashflow required to repay a loan, should be recipients of charity. Others
are best served by financial institutions.
http://en.wikipedia.org/wiki/Bottleneckhttp://en.wikipedia.org/wiki/Bottleneck7/31/2019 Microfinanceuniversity of Luzon
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Invigorating MICROENTERPRISES through
access to MICROFINANCE can lead to
economic growth and development on the
local and national level.
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What Microfinance is NOT Subsidized Credit Dole-out
Consumption/ Salary Loan Cure-all for poverty
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Who are the Clients?
Near PoorE-poor
Laboring
Ultra Poor
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Features of Microfinance Loans
Fit for those who can not accesstraditional sources of financing
Innovative Product Designs Use of collateral substitutes Short term loans
Frequent amortizations
Inclusion of savings Enterprise lending
Simple Documentation Requirements
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Benefits of Microfinance for
Microenterprises
Increase economic activity and income
Generate employment
Save and invest in the future
Guard against emergencies and shocks
Better invest in health, nutrition andeducation
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Myths, Misconceptions and
Barriers
Poor people can not pay market interestrates and can not save
Microfinance institutions are primarily civic-
oriented, non-profit organizations that cannot be sustainable and viable
Microfinance institutions can not access
commercial funds
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Myths, Misconceptions and
Barriers
High transaction costs of serving the poor
Regulatory barriers
Implementation of government directed creditprograms
Poor are intimidated by formal institutions
Lack of infrastructure and physical access toformal institutions
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New Paradigm of Microfinance
From beneficiaries to clients
From directed credit to market
approach From evolving programs to evolving
institutions
From donor dependence to financiallyself sufficient institutions with access tocommercial funding
K S F f
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Key Success Factors forMicrofinance 4 Cs
Clearly identified market
Capable and committed staff
Creative methodologies and technologies Commitment to standards and best practices
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Best Practices for Microfinance
Appropriate Products for Clients (flexible,accessible, simple in process anddocumentation, appropriately priced, andpermanent)
Appropriate Delivery Clear Organizational/ Institutional
Structure (Governance)
Adequate Risk Management (Use ofPortfolio-at-Risk, Zero Tolerance forDelinquency)
Subscription to Performance Standards
L di Mi fi
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Leading MicrofinanceMethodologies
Group Methodology -
Microfinance services areprovided in the context of agroup.
S E l f G
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Some Examples of GroupMethodolgy
Grameen Methodology
7-8 groups of 5 women forming 1 center
Disbursement and collection through center
Loans are provided on a rotation basis (2-2-1)
Collateral substitute (i.e. JSS, peersupport/pressure)
ASA (A i ti f S i l
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ASA (Association for SocialAdvancement)
7-8 groups of 5 women forming 1 center
Disbursement and collection through center
Simultaneous disbursement of loans
Collateral substitute (i.e. peersupport/pressure)
L di Mi fi
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Leading MicrofinanceMethodologies
Individual Methodology - single
client lending where repaymentand schedules rely solely on theindividual (cash-flow, character
based lending)
S E l f I di id l
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Some Examples of IndividualMethodology
MABS approach (Microenterprise Access toBanking Service)
USAID funded technical assistance to rural
banks that want to engage in microfinance Individual loans are granted based on the
character and household cashflow
Culture of zero tolerance for delinquency
Wh C I A
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Where Can I AccessMicrofinance?
Banks (Rural, Thrift, Some Commercial
NGOs
Cooperatives
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BSP Initiatives
Anchored on the General Banking Law of2000, Sections 40, 43 and 44
Recognizes the peculiar characteristics ofmicrofinance in the requirements, termsand amortization of loans and other creditaccommodations.
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Policy and RegulatoryEnvironment
Issuance of 13 Circulars governing thepractice of microfinance in the bankingsector provides incentives like
rediscounting, recognize microfinanceloans (no collateral, loan documentations,etc), allow for branching, promote bestpractices
Modification of Manual of Examination toinclude microfinance operations
Member of the Technical Workin Grou
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Training And Capacity Building
Creation of a Microfinance Committeeand Microfinance Unit
Establishment of a Core Group of BSPMicrofinance Examiners
Inclusion of microfinance in the Basic
Rural and Thrift Banking Courses Conduct of training for banks on
microfinance best practices
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Promotion And Advocacy
Regional tour to promote microfinancebest practices to practitioners and
potential players
BSP as Chair of the PhilippineCelebration of the UN International Yearof Microcredit
Microentrepreneur of the Year Awards
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DR. AMALIA G. DELA CRUZ
Thank you.
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