U. B. Desai U. B. Desai

(1)

A Primer on Microfinance A Primer on Microfinance

U. B. Desai U. B. Desai

SPANN Lab.

Dept. of EE Dept. of EE IIT- IIT -Bombay Bombay

www.ee.iitb.ac.in/~ubdesai

(2)

Some Basic Question Some Basic Question

Why do we need finance?Why do we need finance?

credit is an instrument for investment and growth.

Why the special need for finance for the underserved communitiesWhy the special need for finance for the underserved communities??

Same as aboveSame as above

Shift in Perspective: From poverty alleviation to wealth generation Shift in Perspective: From poverty alleviation to wealth generation ------ microfinance will enable wealth generation

microfinance will enable wealth generation

Why do poor still go to unorganized financial institutions (moneWhy do poor still go to unorganized financial institutions (money y lenders,

lenders, shaukarsshaukars, ...)?, ...)?

We will look at this during the talkWe will look at this during the talk

Why is the spread of microfinance so slow?Why is the spread of microfinance so slow?

Commercial financial institutions are not ready to enter this arenaCommercial financial institutions are not ready to enter this arena

Why are commercial banks hesitant to enter microfinance?Why are commercial banks hesitant to enter microfinance?

We will explore this in the talkWe will explore this in the talk

(3)

Sept 2006 IT 625: ICT4SED 3

General Belief General Belief

Poor are too difficult to reach. Poor are too difficult to reach.

Small loans to poor is not a financially Small loans to poor is not a financially viable proposition

viable proposition

Financial institutions will loose money Financial institutions will loose money when they give

when they give microcredit microcredit to the poor to the poor

Microcredit Microcredit or or microloans microloans will only increase will only increase the debt burden for the poor

the debt burden for the poor

Do you agree? What is your opinion?

(4)

Microfinance (

Microfinance ( mFI mFI ) )

A clever scheme for A clever scheme for small

small - - savings and small savings and small - - loan for the underserved loan for the underserved

community community

A financial service for the A financial service for the poor poor

A financial approach A financial approach empowering the poor empowering the poor

Microfinance brings in Microfinance brings in incremental changes incremental changes

It does not bring in It does not bring in

dramatic changes like the dramatic changes like the ones that occur when a ones that occur when a company goes in for an company goes in for an

Microfinance may also be Microfinance may also be considered a tool to give considered a tool to give

poor people the poor people the

opportunity to participate opportunity to participate

fully in economic life fully in economic life

Will improve the village Will improve the village economy

economy

Facilitate increase in cash Facilitate increase in cash flowflow

Bring more villages into the Bring more villages into the market; monetize more

market; monetize more villages

villages

Help generate trade thru Help generate trade thru micro

micro- -enterprises enterprises

(5)

Microfinance: Interplay Among ..

Institutions: Institutions:

Access points for the poor to get financial services Access points for the poor to get financial services (e.g. SEWA,

(e.g. SEWA, Grameen Grameen Bank, Bank, Vikram Vikram Akula Akula ’ ’ s s SKS SKS Foundation

Foundation , , BASIX BASIX , etc.) , etc.)

These could be bank branches (could be virtual These could be bank branches (could be virtual

branches), socially oriented financial institutions, or a branches), socially oriented financial institutions, or a partnership between the two

partnership between the two

Funding Sources: Funding Sources: Domestic savings (~70%), Domestic savings (~70%),

“ “ private socially responsible citizens private socially responsible citizens ” ” (~30%) (~30%)

Infrastructure: Infrastructure: Here ICT can play a major role Here ICT can play a major role

(6)

Unorganized

Unorganized mFI mFI Institutions ( Institutions ( mFI mFI ) )

Exorbitant interest rates Exorbitant interest rates

On the low end 3% per month On the low end 3% per month (36% per annum)

(36% per annum)

can be much morecan be much more

Often collateral, like cattle, Often collateral, like cattle, jewelry, etc not returned jewelry, etc not returned

Often the poor get into a debt Often the poor get into a debt cycle for life!

cycle for life!

UmFI does not give loans for sustainability (for e.g. starting a micro-enterprise!)

Still the poor approach Still the poor approach UmFIUmFI ---- ---- Why?Why?

Always available (always on!)Always available (always on!)

You get it when you really You get it when you really need it

need it

Quick disbursementQuick disbursement

Negligible transaction timeNegligible transaction time

Poor go for micro-Poor go for micro-loans just loans just before they rally need it before they rally need it

Loans Loans withoutwithout collateral_collateral

Dependence of lowDependence of low--income income households on informal households on informal

sources for loans is nearly 78 sources for loans is nearly 78

per cent.

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UmFI UmFI : Case of : Case of Solapur Solapur District District

Collateral based lendingCollateral based lending

Gold is typically the collateralGold is typically the collateral

Borrowers: small time office Borrowers: small time office clerks, peons,

clerks, peons, …… people who people who have permanent jobs

have permanent jobs

Collateral amount is 1.5 times Collateral amount is 1.5 times the loan value

the loan value

Loans taken for illness, family Loans taken for illness, family function, etc.

function, etc.

Interest is 3% per monthInterest is 3% per month

Default rate 80% --Default rate 80% -- most of most of the time gold is confiscated the time gold is confiscated

About 100 lenders each About 100 lenders each lending about a Rs.10

lending about a Rs.10 lakhslakhs; ; totaling

totaling Rs.10 Rs.10 crscrs..

Lending without collateralLending without collateral

Interest rates are around 3% Interest rates are around 3%

per month per month

Repayment is on a daily basisRepayment is on a daily basis

Hawker, vegetable vendors Hawker, vegetable vendors will go for such loans

will go for such loans

Often, most of the income Often, most of the income goes in loan payment

goes in loan payment

About 200 to 300 lenders in About 200 to 300 lenders in this category

this category

Each loaning about 5 to 10 Each loaning about 5 to 10 lakhs

lakhs

Totaling about 20 Totaling about 20 crscrs

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Some Facts Some Facts

There are an estimated 3,000 microfinance There are an estimated 3,000 microfinance initiatives

initiatives serving the world's poor serving the world's poor

scarcity of money and participation by commercial scarcity of money and participation by commercial financial institutions has limited their expansion.

financial institutions has limited their expansion.

More than 70 percent of them serve fewer than 2,500 More than 70 percent of them serve fewer than 2,500 borrowers each.

borrowers each.

Only 30 microfinance initiatives have grown to Only 30 microfinance initiatives have grown to serve more than 100,000 poor borrowers.

serve more than 100,000 poor borrowers.

The largest The largest mFI mFI , , Grameen Grameen Bank in Bangladesh, Bank in Bangladesh,

reaches more than three million borrowers currently.

A total of $4 billion has been disbursed since A total of $4 billion has been disbursed since Grameen

Grameen started giving loans in 1976 with seed loans started giving loans in 1976 with seed loans

starting as small as $35.

(9)

India

India … …

Earliest InitiativeEarliest Initiative

ShriShri MahilaMahila SEWA (Self SEWA (Self Employed Women

Employed Women’’s s Association)

Association) SahakariSahakari Bank Bank was set up in 1974

was set up in 1974

Since then, the bank is Since then, the bank is

providing banking services to providing banking services to the poor self

the poor self--employed employed

women working as hawkers, women working as hawkers, vendors, domestic servant etc.

vendors, domestic servant etc.

SEWA bank has 1,75,000 SEWA bank has 1,75,000 depositors; about 70% from depositors; about 70% from urban area, 30% from rural urban area, 30% from rural areas

areas

The deposit and loan portfolio The deposit and loan portfolio stood at

stood at RsRs 623.9 million 623.9 million ($13.86 million) and Rs133.6 ($13.86 million) and Rs133.6 million ($2.97 million)

million ($2.97 million) respectively.

respectively.

VikramVikram Akula’Akula’ss SKS FoundationSKS Foundation (more recent)

(more recent)

BASIXBASIX

ICICI bank …ICICI bank …

MFIsMFIs are picking up in Indiaare picking up in India

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India

India … …

Today, there are about 60,000 Today, there are about 60,000 retail credit outlets of the

retail credit outlets of the formal banking sector in the formal banking sector in the

rural areas comprising rural areas comprising

12,000 branches of district 12,000 branches of district level cooperative banks level cooperative banks

over 14,000 branches of the over 14,000 branches of the Regional Rural Banks (

Regional Rural Banks (RRBsRRBs) )

over 30,000 rural and semiover 30,000 rural and semi-- urban branches of commercial urban branches of commercial banks

banks

besides almost 90,000 besides almost 90,000

cooperatives credit societies at cooperatives credit societies at the village level

the village level

On an average, there is at On an average, there is at

least one retail credit outlet for least one retail credit outlet for

about 5,000 rural people about 5,000 rural people

While there is no published While there is no published data on private

data on private mFIsmFIs operating operating in India,

in India,

the number of mFIsthe number of mFIs is is

estimated to be around 800.

Not more than 10 mFIsNot more than 10 mFIs are are reported to have an outreach reported to have an outreach of 100,000 microfinance

of 100,000 microfinance clients.

clients.

An overwhelming majority of An overwhelming majority of mFIsmFIs are operating on a are operating on a

smaller scale with clients smaller scale with clients

ranging between 500 to 1500 ranging between 500 to 1500 per mFIper mFI. .

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Sept 2006 IT 625: ICT4SED 11 MIX: Microfinance Information Exchange

MENA: Middle East and North Africa

B. Stephens and H. Tazi, Performance and Transparency: A Survey of Microfinance in South Asia, Microbanking Bulletin, April 2006

(12)

Typical Target Population for

Typical Target Population for MFIs MFIs

Rural Poor Women Rural Poor Women

Asset value less than Asset value less than Rs Rs . 20,000/ . 20,000/ - -

Per capita income is less than Per capita income is less than Rs Rs . 350/ . 350/ - - per month

per month

Live in poor housing conditions Live in poor housing conditions

(from

(from SHARE Microfinance Ltd.) SHARE Microfinance Ltd .)

(13)

Different type of Microfinance Institutions Different type of Microfinance Institutions

Institutions that offers financial services to low income Institutions that offers financial services to low income people at the prevailing market rates.

people at the prevailing market rates.

Most of these provide microcreditMost of these provide microcredit and accept small payments for and accept small payments for saving and repayment of loans.

saving and repayment of loans.

They do not take saving from the general public. They take They do not take saving from the general public. They take savings from their cliental

savings from their cliental –– mainly the low income group.mainly the low income group.

NGOs which are wholly involved in this or partly. The NGOs which are wholly involved in this or partly. The ones partly involved do several other work that is done ones partly involved do several other work that is done

by an NGO.

Credit Unions Credit Unions

Private commercial banks Private commercial banks

Non- Non - bank financial institutions (foundations, etc.) bank financial institutions (foundations, etc.)

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Often one classifies financial institutions like Often one classifies financial institutions like

National Bank for Agriculture and Rural Development National Bank for Agriculture and Rural Development (NABARD)

(NABARD)

Small Industries Development Bank of India (SIDBI) Small Industries Development Bank of India (SIDBI)

Rashtriya Rashtriya Mahila Mahila Kosh Kosh (RMK) (RMK)

as as mFIs mFIs ; ;

But, I feel ,they do not fit the bill, because they But, I feel ,they do not fit the bill, because they do not cater to the kind of income talked about do not cater to the kind of income talked about

earlier

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Appropriateness of mF Appropriateness of mF

mF works best for those who have identified an mF works best for those who have identified an opportunity and the credit can be used to exploit opportunity and the credit can be used to exploit

this opportunity to develop a sustainable source this opportunity to develop a sustainable source

of income.

Microfinance is not appropriate for Microfinance is not appropriate for

Extremely poor, Extremely poor, destitutes destitutes

There has to be some viable way of micro There has to be some viable way of micro - - loan loan repayment

repayment

People who are extremely poor may get into debt People who are extremely poor may get into debt trap with microfinance

trap with microfinance

Numbers vary, but some feel that one has to have Numbers vary, but some feel that one has to have 98% loan repayments rate for an MFI to succeed.

98% loan repayments rate for an MFI to succeed.

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Some Data on Financial Sector in Rural Some Data on Financial Sector in Rural

Areas (2002) Areas (2002)

For 630,000 villages we have For 630,000 villages we have 32,443 bank branches

32,443 bank branches

Of the ~67,000 bank branches Of the ~67,000 bank branches in India, ~32,500 or ~48 per in India, ~32,500 or ~48 per

cent are in rural India cent are in rural India

The average population served The average population served by a rural bank is approx.

by a rural bank is approx.

15,000 15,000

Overall, 18 per cent of the Overall, 18 per cent of the rural population has bank rural population has bank

accounts. The comparative accounts. The comparative

figure in urban India figure in urban India

is almost 100 per cent is almost 100 per cent

The per capita deposit in rural The per capita deposit in rural areas is

areas is RsRs 2,0002,000

Dependence of low-Dependence of low-income income households on informal households on informal

sources for loans is nearly 78 sources for loans is nearly 78

per cent.

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Share of Different Sectors in GDP (GDP at factor cost, 1993-94 Prices) Rs. In crores

-- RBI, Handbook of Statistics on the Indian Economy

56%

1320733 739842

288266 292625

2002-03

55%

1265429 691016

272359 302054

2001-02

54%

1198685 649011

263797 285877

2000-01

46%

692871 319374

150383 223114

1990-91

43%

401128 171148

70687 159293

1980-81

38%

296278 113438

46151 137320

1970-71

Services%

Total Services

Industry Agri.

(18)

Breakup of Indian GDP Breakup of Indian GDP

GDP for India: $650 billion GDP for India: $650 billion

Rural GDP: $150 billion (25%) Rural GDP: $150 billion (25%)

56%

22%

Compare this with IT industry, which is

~ $ 20 billion

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Credit to Deposit (CD) Ratio for banks in India

• Rural CD ratio needs to brought upto 60%

• Low CD ~ a lot of cash is idling, or cash collected in rural areas is used to give credit to urban areas or invested elsewhere by the bank

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Different Financial Services under Different Financial Services under

Microfinance Microfinance

Deposit services Deposit services

Credit lines Credit lines

Term loans Term loans

Money transfers Money transfers

Crop and life insurance Crop and life insurance

… …

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Innovation in Microfinance Innovation in Microfinance

Development of finance products for the Development of finance products for the underserved

underserved

Management of credit risk Management of credit risk

minimization losses in giving credit minimization losses in giving credit

Exploit Technology Exploit Technology

Scalability: how to reach a vast, diverse, not Scalability: how to reach a vast, diverse, not easy to reach and geographically scattered easy to reach and geographically scattered

populace populace

Exploit technology Exploit technology

Efficient delivery of Efficient delivery of microcredit microcredit

Exploit technology Exploit technology

(22)

Gautum Ivatury:

Focus Notes, Jan 2006, CGAP

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Microcredit Microcredit

Delivery Delivery of of microcredit microcredit has to be done more and has to be done more and more efficiently

more efficiently

Here ICT can play a major role Here ICT can play a major role

Determination of a borrower's Determination of a borrower's willingness willingness and and ability

ability to repay a loan is critical if a to repay a loan is critical if a microlender microlender is to minimize credit risk

is to minimize credit risk

Willingness Willingness to repay a loan are complex and to repay a loan are complex and

determined by economic, legal and moral incentives determined by economic, legal and moral incentives

Legal systems and community pressure (for rural areas)Legal systems and community pressure (for rural areas) contribute to a borrower's

contribute to a borrower's willingnesswillingness to repay a loan to repay a loan

Ability Ability refers to a borrower having the financial refers to a borrower having the financial resources to make a scheduled loan payment.

resources to make a scheduled loan payment.

(24)

Three operational areas on which a Three operational areas on which a microlender

microlender should focus to minimize should focus to minimize credit risk:

credit risk:

loan design loan design

underwriting underwriting

loan servicing loan servicing

(25)

Micro

Micro - - Loan Design Loan Design

Balance between affordability needs of borrowers and Balance between affordability needs of borrowers and costs to micro

costs to micro - - lenders lenders

Revolves on the design of interest rates (Revolves on the design of interest rates (must cover operating must cover operating costs, credit risk and funding costs)

costs, credit risk and funding costs)

Interest are very critical to microfinance institution Interest are very critical to microfinance institution

mFImFI interest are not very low at presentinterest are not very low at present

15% to 36% per annum (SEWA charges 15% to 18%)15% to 36% per annum (SEWA charges 15% to 18%)

Note: RBI interest ceiling is 21%Note: RBI interest ceiling is 21%

On the other hand, for rural poor, it has been observed On the other hand, for rural poor, it has been observed that the amount of monthly payment is much more

that the amount of monthly payment is much more important than interest

important than interest

As long as they are comfortable with the scheduled payment As long as they are comfortable with the scheduled payment amount they do not worry too much about interest rates

amount they do not worry too much about interest rates

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Micro

Micro - - loan Underwriting loan Underwriting

The process of determining a borrower's The process of determining a borrower's credit worthiness

credit worthiness

ability ability and and willingness willingness to repay a loan to repay a loan

Most important from the Most important from the microlender microlender ’ ’ s s point of view

point of view

(27)

Micro

Micro - - Loan Servicing Loan Servicing

Loan servicing is the act of collecting payments and maintainingLoan servicing is the act of collecting payments and maintaining the the balance of a loan

balance of a loan

In commercial banking, loan payments are made by bank draft or by In commercial banking, loan payments are made by bank draft or by directly debiting payroll or a bank account.

directly debiting payroll or a bank account.

Things are not easy in the world of microfinance.Things are not easy in the world of microfinance.

The typical borrower does not have access to a bank account and often The typical borrower does not have access to a bank account and often does not receive a formal salary.

does not receive a formal salary.

This means that for many customers of microlendersThis means that for many customers of microlenders

making loan payments can be difficult andmaking loan payments can be difficult and

put them in the position of making the choice to take time off from work put them in the position of making the choice to take time off from work (and possibly get fired) in order to deliver a loan payment

(and possibly get fired) in order to deliver a loan payment

or choose not to make a payment. or choose not to make a payment.

Successful lenders will set up payment kiosks in communities. The Successful lenders will set up payment kiosks in communities. The kiosks are typically open before the typical work day starts and

kiosks are typically open before the typical work day starts and after it after it ends.

ends.

Another effective method, albeit more labor intensive is door-Another effective method, albeit more labor intensive is door-toto--door door collections.

collections.

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Micro

Micro - - Loan Servicing Loan Servicing … …

Provide positive incentives for payment. Provide positive incentives for payment.

Borrowers respond well to positive incentives for good payment Borrowers respond well to positive incentives for good payment history.

history.

MicrolendersMicrolenders and mortgage lenders have successfully used and mortgage lenders have successfully used

incentives such as payment rebates, small appliances and food incentives such as payment rebates, small appliances and food to achieve very high levels of repayment.

to achieve very high levels of repayment.

For example, one Mexican lender offered a free bag of corn meal For example, one Mexican lender offered a free bag of corn meal if a borrower made timely payments for six months. The result if a borrower made timely payments for six months. The result was a delinquency rate of less than 1%

was a delinquency rate of less than 1%

Be proactive in dealing with delinquencies. Be proactive in dealing with delinquencies.

Rather than wait until a loan goes into default, a Rather than wait until a loan goes into default, a microlendermicrolender should investigate a loan within weeks of it first becoming should investigate a loan within weeks of it first becoming delinquent.

delinquent.

Often, the cause of a delinquency is due to illness or Often, the cause of a delinquency is due to illness or unemployment.

unemployment.

If caught early enough a lender can give the borrower If caught early enough a lender can give the borrower

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Challenges Challenges

Establishing the idea of Establishing the idea of access to financial services as access to financial services as human right;

human right; just like health care, education etc. are just like health care, education etc. are basic rights (Mathew Bishop, Business Editor of The basic rights (Mathew Bishop, Business Editor of The

Economist) Economist)

Managing credit risks in Managing credit risks in microlending microlending operations operations

Convincing, for profit organizations like established Convincing, for profit organizations like established banks, non

banks, non - - bank financial institutions, that microfinance bank financial institutions, that microfinance is a good business opportunity and they should commit is a good business opportunity and they should commit

large capital to establish this business.

Also convincing them that charity (funds donated by established Also convincing them that charity (funds donated by established organization) is not a sustainable way for growth

organization) is not a sustainable way for growth

Developing a market driven interest rate schedule for Developing a market driven interest rate schedule for the poor

the poor

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Challenges

Challenges … …

Reaching people in sparsely populated, diverse, not easy to reach, Reaching people in sparsely populated, diverse, not easy to reach, and geographically scattered areas

and geographically scattered areas

Last mile problem of reaching the rural poor.Last mile problem of reaching the rural poor.

Most important challenge is to exploit technology to reduce Most important challenge is to exploit technology to reduce transaction costs so that financial institutions will indeed tak

transaction costs so that financial institutions will indeed take up e up microfinance as one of their major service.

microfinance as one of their major service.

Reaching the poorest of the poor Reaching the poorest of the poor –– the destitute:the destitute:

Many ignore this segmentMany ignore this segment

Very difficult for a commercial institution to recover micro-Very difficult for a commercial institution to recover micro-credit given credit given to this segment

to this segment

Here Government will have to step in and develop a scheme for microHere Government will have to step in and develop a scheme for micro-- grants

grants

Make microfinance part of main stream financial marketMake microfinance part of main stream financial market

Data Collection Data Collection –– need to collect data that can indicate need to collect data that can indicate

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Rural ATM Providing ICT based Rural Banking

• Developed by the TeNet group of IIT-Madras

• To be deployed in village kiosks in collaboration with ICICI bank

• Low cost rural bank

• Deposits, withdrawal, and loans

• Cost of rural ATM: Rs40,000/=

• Conventional ATM costs:

Rs.7,50,000/=

• Uses extremely low cost finger print authentication system (Rs.50/=)

• Use of plastic ID cards “smart or otherwise” not viable in rural

areas

One Approach exploiting ICT

(32)

Approach Approach

Pickup advantages of the Pickup advantages of the unorganized sector and cull unorganized sector and cull

out the disadvantages out the disadvantages

Use cellular communication Use cellular communication technology!

technology!

India going thru a mobile India going thru a mobile revolution

revolution

Rural penetration of wireless Rural penetration of wireless connectivity is high as

connectivity is high as compared to wired compared to wired

connectivity connectivity

GPRS enabled Smart phones GPRS enabled Smart phones can be effectively used to can be effectively used to

automate

automate microcreditmicrocredit risk risk assessment, delivery and assessment, delivery and

repayment repayment

(33)

Exploit Cell

Exploit Cell - - phone, phone, Smart

Smart - - Phone Platform Phone Platform

Cost of deployment in Cost of deployment in urban areas:

urban areas:

Landlines – Landlines – Rs.20,000 Rs.20,000 per line

per line

Cellular Cellular --- --- Rs.5,000 Rs.5,000 per line

per line

Annual business of Annual business of handset reaching handset reaching

Rs.10,000

Rs.10,000 crore crore ($220 ($220 mil) mil) , comparable to , comparable to

color televisions color televisions – –

indicating indicating

affordability.

Only ~12 mil PCs in India

Another Approach

exploiting ICT

(34)

Proposed Models for

Proposed Models for on the field on the field assessment assessment of of Microcredit Microcredit Risk Risk

Model 1:

• Field Operator uses SMS enabled GSM phone

• Risk assessment is carried out on a central server

• SMS are used as a communication medium

Model 2:

• Field Operator uses GPRS/3G enabled Smart Phone

• Risk assessment is carried out on the phone itself

(35)

Microcredit

Microcredit risk assessment on risk assessment on cell phones

cell phones

(36)

Microcredit

Microcredit risk assessment on risk assessment on cell phones

cell phones

(37)

U. B. Desai U. B. Desai

A Primer on Microfinance A Primer on Microfinance

U. B. Desai U. B. Desai

SPANN Lab.

SPANN Lab.

Dept. of EE Dept. of EE IIT- IIT -Bombay Bombay

www.ee.iitb.ac.in/~ubdesai

www.ee.iitb.ac.in/~ubdesai

Some Basic Question Some Basic Question

General Belief General Belief

  Poor are too difficult to reach. Poor are too difficult to reach.

  Small loans to poor is not a financially Small loans to poor is not a financially viable proposition

viable proposition

  Financial institutions will loose money Financial institutions will loose money when they give

when they give microcredit microcredit to the poor to the poor

  Microcredit Microcredit or or microloans microloans will only increase will only increase the debt burden for the poor

the debt burden for the poor

Do you agree? What is your opinion?

Do you agree? What is your opinion?

Microfinance (

Microfinance ( mFI mFI ) )

A clever scheme for A clever scheme for small

small - - savings and small savings and small - - loan for the underserved loan for the underserved

community community

A financial service for the A financial service for the poor poor

A financial approach A financial approach empowering the poor empowering the poor

Microfinance brings in Microfinance brings in incremental changes incremental changes

Microfinance may also be Microfinance may also be considered a tool to give considered a tool to give

poor people the poor people the

opportunity to participate opportunity to participate

fully in economic life fully in economic life

Will improve the village Will improve the village economy

economy

Help generate trade thru Help generate trade thru micro

micro- -enterprises enterprises

Microfinance: Interplay Among ..

Microfinance: Interplay Among ..

Institutions: Institutions:

Access points for the poor to get financial services Access points for the poor to get financial services (e.g. SEWA,

(e.g. SEWA, Grameen Grameen Bank, Bank, Vikram Vikram Akula Akula ’ ’ s s SKS SKS Foundation

Foundation , , BASIX BASIX , etc.) , etc.)

These could be bank branches (could be virtual These could be bank branches (could be virtual

branches), socially oriented financial institutions, or a branches), socially oriented financial institutions, or a partnership between the two

partnership between the two

Funding Sources: Funding Sources: Domestic savings (~70%), Domestic savings (~70%),

“ “ private socially responsible citizens private socially responsible citizens ” ” (~30%) (~30%)

Infrastructure: Infrastructure: Here ICT can play a major role Here ICT can play a major role

Unorganized

Unorganized mFI mFI Institutions ( Institutions ( mFI mFI ) )

UmFI UmFI : Case of : Case of Solapur Solapur District District

Some Facts Some Facts

There are an estimated 3,000 microfinance There are an estimated 3,000 microfinance initiatives

initiatives serving the world's poor serving the world's poor

scarcity of money and participation by commercial scarcity of money and participation by commercial financial institutions has limited their expansion.

financial institutions has limited their expansion.

More than 70 percent of them serve fewer than 2,500 More than 70 percent of them serve fewer than 2,500 borrowers each.

borrowers each.

Only 30 microfinance initiatives have grown to Only 30 microfinance initiatives have grown to serve more than 100,000 poor borrowers.

serve more than 100,000 poor borrowers.

The largest The largest mFI mFI , , Grameen Grameen Bank in Bangladesh, Bank in Bangladesh,

reaches more than three million borrowers currently.

reaches more than three million borrowers currently.

A total of $4 billion has been disbursed since A total of $4 billion has been disbursed since Grameen

Grameen started giving loans in 1976 with seed loans started giving loans in 1976 with seed loans

starting as small as $35.

India

India … …

India

India … …

Typical Target Population for

Typical Target Population for MFIs MFIs

  Rural Poor Women Rural Poor Women

  Asset value less than Asset value less than Rs Rs . 20,000/ . 20,000/ - -

  Per capita income is less than Per capita income is less than Rs Rs . 350/ . 350/ - - per month

per month

  Live in poor housing conditions Live in poor housing conditions

(from

(from SHARE Microfinance Ltd.) SHARE Microfinance Ltd .)

Different type of Microfinance Institutions Different type of Microfinance Institutions

Institutions that offers financial services to low income Institutions that offers financial services to low income people at the prevailing market rates.

Poor are too difficult to reach. Poor are too difficult to reach.

Small loans to poor is not a financially Small loans to poor is not a financially viable proposition

Financial institutions will loose money Financial institutions will loose money when they give

Microcredit Microcredit or or microloans microloans will only increase will only increase the debt burden for the poor

Rural Poor Women Rural Poor Women

Asset value less than Asset value less than Rs Rs . 20,000/ . 20,000/ - -

Per capita income is less than Per capita income is less than Rs Rs . 350/ . 350/ - - per month

Live in poor housing conditions Live in poor housing conditions

Deposit services Deposit services

Credit lines Credit lines

Term loans Term loans

Money transfers Money transfers

Crop and life insurance Crop and life insurance

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Three operational areas on which a Three operational areas on which a microlender