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Copy of What is microfinance?

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Todd A. Watkins

on 10 April 2012

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Transcript of Copy of What is microfinance?

Microfinance History Founding In 1974, Mohammad Yunus provided small loans to a village in Bangaladesh

In 1983, he founded Grameen Bank. Its success inspired others to start their own microfinance institutions Economically Active Poor Extremely Poor Have some type of employment and aren't severly food deprived Individuals earning less than $1 a day

Goals Why won't banks lend to the poor? Loan Types:
Individual Loans
Group Loans
Solidarity Loans Providing small loans to the poor Economically Active Poor Extremely Poor Have a form of employment and are not food deprived Living on less than $1 a day http://en.wikipedia.org/wiki/User:Ultramarine Financial Non-Financial Loans
Savings Individual Group Village Banking http://knol.google.com/k/microfinance-entering-a-new-era# Microinsurance can consist of:
Life Insurance
Health Insurance
Property Insurance
Flood Insurance
Livestock Insurance How do individual, group and village loans compare with each other? Financing the poor = High Cost High Cost of traveling
MFI Agents travels to each borrower Administrative cost per Loan: Small Loans Bigger Loans Financing the poor = greater risk of default
Lower repayment rates MFI repayment rates for global level average = 97%. •"FAQs on Microfinance | FAQs on Microfinance." Microfinance Information Exchange | Reports, Research, & Analysis. Web. 24 Apr. 2011. <http://www.themix.org/about-microfinance/FAQ>. Low repayment rates for the poor is a MISCONCEPTION! Informal Financial Services Informal Money Lenders Informal Interest Rates Informal Savings Informal Group Savings ROSCAs ASCAs Informal Personal Savings
Is a different approach to savings by which the poor turns cash into a tangible object and holds it until a lump sum is needed. Rotating Savings and Credit Association
A goup of individuals who agree to meet for a defined period of time in order to save and borrow. Formed out of providing small loans to women in Jobra In the early 1970s, ACCION International began lending money in Latin America to reduce poverty In 1972, SEWA (Self Employed Women's Assiciation) began lending money in hopes of "improving income, employment, and access to social security" in India. Microinsurance is a financial arrangement to protect low-income people against specific perils in exchange for low premiums Other Non-Financial Services:
Business Development
Increase Self-Confidence "Microfinance and Non-Financial Services for Very Poor People." The Seep Network. Oct. 2006. Web. . Example of Social Empowerment & Self-Confidence Grameen Bank & Razya Banu, India
Razya & husband did not have a steady job nor income.
Grameen provided Razya a loan for her business
After Loan she was able to provide: School for her children
Furnish her modest home
Open a savings account & attain life insurance • "Razya Banu, India | Grameen Foundation." Grameen Foundation | Combining the Power of Microfinance and Technology to Defeat Global Poverty. Web. 25 Apr. 2011. . Why do the poor have such high repayment rates? The poor depend more on microcredit:
Need loans to live
Loans are necessary for food & medicine
Repayment help's with a progressive loan
Loans help smooth income & consumption throughout the year Why do the poor want loans? Since then... Microfinance Institutions have formed to meet the excess demand for small loans Some institutions are more established than others. This could be from having more funds or from existing longer MFIs were created to replace the inefficiency and the inadequacy of loans provided by the informal financial sector. Informal Lending & Informal Savings Moneylenders are able to charge such high interet rates because they have a monopoly.
They're the only one or one of the few who supply loans in the region.
Lack of supply for such a high demand gives them the ability to charge whatever rate they want Accumulating Savings and Credit Association
Allows some participants to mainly save and others to mainly borrow and for more than one person to borrow at a time. Armendariz, Beatriz, and Jonathan Morduch. The Economics of Microfinance. Cambridge, MA: MIT, 2005. Print. Cash Crop Livestock Land Savings Collector What are the Advantages & Disadvantages of informal Savings? Moneylenders = = High Interest Rates •"Estimated Repayment Rates by Institutions." U.S. Department of Education. Web. 27 Apr. 2011. <www2.ed.gov/policy/highered/reg/.../2009/ge-cumulative-rates.xls> Norris, Floyd. "Default Rates Easing, Except on Credit Cards." The New York Times. 21 May 2010. Web. <http://www.nytimes.com/2010/05/22/business/economy/22charts.html> Bajaj, Vikas. "Housing Lenders Fear Bigger Wave of Loan Defaults - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 4 Aug. 2008. Web. <http://www.nytimes.com/2008/08/04/business/04lend.html> Educational Loans Microcredit Credit Card/Auto Loans/Mortgages Microcredit Mortgages Microcredit How do the repayment rates/default rates compare with other loans? Final for savings MICROFINANCE does not only provide loans for the poor but savings as well or else it would be called MICROCREDIT. MISCONCEPTION of the poor & savings
The poor have no incentive to save
Extra income = Extra consumption Ways to Save: Informal Savings & Formal Savings Loans are often nothing more than one way of turning savings into lump sums 3 ways to save: On average, only half of the loans are used for business expenditures. The other half is used for household cash management needs Consumption Stabilization
Income smoothing for education fees, medical expenses, and cultural events (weddings and funerals)
Helps individuals avoid going further into poverty Saving Up Saving Down Saving Through Saving Up:
Can be seen in informal money collectors or formal savings
Make periodic deposits until Lump sum is needed Saving Down:
Can be seen in informal moneylenders and MFIs
First, a lump sum is given and then periodic savings is collected to pay of debt Saving Through:
Commonly seen in MFIs
Prior to obtaining a lump sum, the poor needs to make periodic deposits
Once they meet the requirement, the rest of the lump sum will be disburse
The poor will continue to make deposits until what was lent is payed off According to Rutherford, "The poor CAN save, DO save, and WANT to save money!" Typically under $1000 Reduce Poverty Women's Empowerment Economic Stability ® Robinson, Marguerite S. The Microfinance Revolution. Washington, D.C.: World Bank, 2001. Print. Some use the money to build assets which can be used as collateral to get bank loans at lower interest rates Why do the poor save? Business Use Services Nonbusiness Consumption Finance & Assets Business Use Finance New Business Buy Equipment Buy Vehicles Wedding Other Cultural Rituals School Fees Other Educational Needs Household Consumption Clothing Food Purchase Land Purchase Housing & Pay Loans Once individuals earn collateral, they are able to get loans from commercial banks at lower interest rates Increasing women's income levels and control over income leading to greater levels of economic independence
Access to networks and markets giving wider experience of the world outside the home, access to information and possibilities for development of other social and political roles
Enhancing perceptions of women's contribution to household income and family welfare, increasing women's participation in household decisions about expenditure and other issues and leading to greater expenditure on women's welfare
More general improvements in attitudes to women's role in the household and community http://www.gdrc.org/icm/wind/magic.html A model savings- and-loans club that could be run by poor individuals, mostly women, with initial help from outsiders. Goal: help poor individuals systematically turn their savings into useful large lump sums Rutherford, Stuart, and Sukhwinder Singh. Arora. The Poor and Their Money: Microfinance from a Twenty-first Century Consumer's Perspective. Warwickshire, UK: Practical Action Pub., 2009. Print STRUCTURE: begins with an injection of cash from a promoting NGO
The cash kicks off a cycle of saving and borrowing that enables the members to build their own funds
The NGO takes back the "cold money" and leaves
Creating an independent, self-financed and self-managed permanent village-level institution Village banks can consist of 20 to 30 individuals. According to Rutherford, village banks are not just financial services aiming to help the poor turn a series of small sums into large sums. Rather it is a small business promotion model, aimed at helping the poor overcome poverty through assisted investment in business ventures. 3 Basic Deposit Instruments: F Interest Bearing Liquid Savings Account
Useful for individuals, households & businesses that consider rapid access to at least some of their financial savings
Unlimited numbers of withdrawals & deposits are permitted
Low interest rates Semiliquid Accounts
Vary between liquid & fixed accounts in liquidity & returns
May pay interest on all accounts while restricting withdrawals
Provide opportunities for holders of very small accounts to obtain returns on their deposits.
Appropriate for people who want to maximize returns rather than liquidity Fixed Deposit Accounts
A lump sum is stored for a particular period with no withdrawals
High interest rates
Appropriate for individuals who are not constrained by liquidity Robinson, Marguerite S. The Microfinance Revolution. Washington, D.C.: World Bank, 2001. Print.
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