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Bankers without Borders®Introduction to Microfinance
A training module developed by Grameen Foundation and High Water Women
Contents
Microfinance clientsMicrofinance & its goalsMicrofinance & its goalsHousehold lifecycle needsKey operating principles of microfinanceEffective methodologies of microfinanceVideoMicrofinance landscapeMicrofinance InstitutionsMeasuring performance & success f fof microfinance institutions
Challenges to growth of microfinanceGrameen Foundation’s roleBankers without Borders
A borrower of Grameen Bank, Bangladesh
Bankers without Borders
2
Who does microfinance serve?
• Majority of world’s poor are working families
Annual Income (USD PPP)
According to the United Nations:1.2 billion survive on less than $1/day3 billion struggle on less than $2/day854 million suffer from hunger
Tier 1
Tier 2-3
(USD PPP) >$20,000
$1,500-$20,000
1.5 - 1.75 Bn
Tier 4
$1500
<$1500
4.0 Bn
Source: The Economic Pyramid. Source: Prahalad, C.K., and Hart. Stuart, 2002. The Fortune at the Bottom of the Pyramid. Strategy + Business, Issue 2006, 2006 – via “A Billion to Gain? A Study on global financial institutions and microfinance” Feb., 2006
Tier 5 <$1500
• 70% of microfinance clients are women– Good microenterprise skills and high repayment rate
I t i f ili d i t i b i
y g ,
– Invest in families and reinvest in businesses
3
A borrower from Uganda
What is microfinance & its goals?
An effective poverty reduction strategy via provision of small
Leasing and Supplier C ditprovision of small
uncollateralized loans to support income generating ventures
Consumer Credit,
Including Credit Cards
Mortgages and Home
Improvement Lending
Credit
Goals:• Reduce poverty• Improve quality of life of
Savings Healthcare
Loans to Poor Micro-• Improve quality of life of
borrowers & families• Provide borrowers with
access to a range of business development
Remittances BusinessTraining
entrepreneurs
business development, financial & non financial services
• Provide borrowers with t iti t b
Insurance Education
opportunities to become part of the formal economy
4
Household lifecycle Needs
Education, Marriage,
Birth
Working CaptialOld Age
Safe Place to Save
Microenterprise Loans
Pensions
Access toIllness
Remittancesand Transfers
Loans for Emergency
NeedsAccess to
Funds sent by relatives
Illness, Emergency Insurance
Death and Asset
Protection
Key operating principles of microfinance
• Cash flow-based• No collateral needed• No collateral needed• Suited to income-generating
activity & household life cycle needs• Disciplined repayment• Disciplined repayment
structure with suitable incentives• Group lending model
6Borrowers from India
Effective methodologies of microfinance
Group lending
– Typically US$50-$300 loans to self-y yselected group members
– Minimizes transaction costs / increases efficiency
– Joint liability model– Joint liability model • No need to quantify risk for clients
without credit history• Group collectively responsible for
repayment• In lieu of collateral / inadequate
collateral• Social pressure to repay loanp p y• Addresses information gap for loan
officers
7Borrowers from Cameroon
Effective methodologies of microfinance
Individual lending
T i ll US $1000 $10 000 & b l t i di id l– Typically US $1000 -$10,000 & above loans to individuals– Based on individual’s income / collateral / reputation– Uses cash flow analysis– Loan amounts may be higher with more flexible repayment termsLoan amounts may be higher with more flexible repayment terms– More costly to track loan repayments
8A borrower from China
Microfinance landscape
• Large global funding gap • Demand far exceeds supply
Potential and Actual Borrowers
3.5
Microfinance Funding Gap Current Supply (USD 25Bn)
Total Working Poor (3 Bn)
2
2.5
3
ns
Demand for Microfinance by Working Poor (1.5 Bn)
0.5
1
1.5
Bill
io
Untapped Demand forBorrowing(USD 250Bn)
0
Source: Meehan, CGAP via Deutsche Bank Research: Microfinance: An Emerging Investment Opportunity; Dec. 19, 2007
Source: Estimates based on Gonzalez and Rosenberg (2006) “The State of Microfinance” and CGAP Occasional Paper #8 (2004) via McKinsey “Optimizing Capital Supply in Support of Microfinance
(USD 250Bn)Actual Borrowers: 100,000
Emerging Investment Opportunity; Dec. 19, 2007
9
McKinsey Optimizing Capital Supply in Support of Microfinance Industry Growth”, Oct., 2006.
Microfinance Landscape
• 10,000 institutions worldwide, most small and local• Typical $100-$1,000 loan size (varies by region); 6 months to 3 years term;
weekly paymentweekly payment
Tier 1 – 2% of all MFIs (~100 institutions)• Profitable, mature MFIs with track record• Most are regulated• Access to diverse sources of funding
Tier 2 – 8% of all MFIs• Younger, more growth-oriented institutions• Successful: smaller and at or near profitability • Mostly NGOs considering conversion to regulated status • Most will progress upwards to Tier 1
II
I
Tier 3 – 20% of all MFIs• Approaching profitability • Shortfalls: weak management and/or MIS, lack of capital• Some will progress upwards
Tier 4 – 70% of all MFIs• Local/sectoral MFIs
III
IV Local/sectoral MFIs • MF is not necessarily the focus• Typically financed solely by donations
Source: Fitch adaptation, based on Meehan, Grameen Foundation USA Publication Series 2004, via “The Microfinance Sector: Its Success Could be its Biggest Risk”, Fitch Ratings, June 12, 2008.
IV
10
Microfinance Institutions
Unregulated* Regulated
• Foundations• NGOs
Ch it bl O i ti
• Banks• Credit Unions• Cooperatives• Charitable Organizations
• Associations• Cooperatives• NBFI (Non Banking
Financial Institution)
No one legal structure is better than the other
* Not regulated as a financial institution
11
Microfinance Institutions
Microfinance Institutions as regulated financial entities
• Can access commercial capital markets • Can lead to mission drift
Benefits Drawbacks
Can access commercial capital markets
• Increased Leverage
• Can offer savings to clients
Can lead to mission drift
• Impact on personnel of moving from NGO to for-profit culture
More costly due to capital needs &• Reduces MFI cost of capital
• Can increase client base and generate client loyalty
• More costly due to capital needs & higher monitoring requirements
• Regulatory constraints may beburdensomey y
• Better governance • Restrictions on Owner/Investor capital contributions
• Contractual obligations may prevent
12
• Contractual obligations may preventtransfer of assets to new entity
Measuring performance & success of microfinance institutions
Double Bottom Line
• Financial performanceFinancial performance– Operating and financial self-sufficiency; efficiency
• Social and poverty impact– Number of poor clients served– Client’s movement out of poverty– Progress Out of Poverty Index™ (Grameen Foundation)
13A borrower from Ghana
Grameen HeritageGrameen Bank
• Launched in 1976• Pioneered microfinancePioneered microfinance• 6.7 million borrowers• 96.4% women• Member owned (94%) &• Member owned (94%) &
profitable (2005: $17M)• 98.9% rate of recovery• Over $5 7 billion loanedOver $5.7 billion loaned• 10,000+ families cross
poverty line each monthGrameen FoundationGrameen Foundation
• Launched in 1997• Support replication of
Grameen Bank success
Dr. Muhammad Yunus
Founder of the Grameen Bank
2006 N b l P P i WiGrameen Bank success • Outside of Bangladesh
2006 Nobel Peace Prize Winner
Grameen Foundation
• Heritage & origin• Vision• Mission• Values• Structure
15
Video: Esperanza, DR
• http://www.youtube.com/watch?v=zaMlFoG3EGM&feature=player_embeddedp y _
Grameen Foundation Strategy
We are a solution center for the world’s poorest providing products and services through:products and services through:
Microfinance TechnologyMicrofinance Technology
Approach to Microfinance
Access to Capital
Breaking Barriers for
Microfinance
Access to I f ti
Access to T h lInformation Technology
Social Performance Management
Lead the successful integration of both social performance indicators into decision-making andperformance indicators into decision making and incentive structures in microfinance and technology institutions focused on the poor.
• Scale the use of PPI, as an industry standard for social performance measurement and managementp g
• Work with socially responsible investors and other stakeholders to adopt a double-bottom line framework
Financing
Playing a catalytic role to reshape MFI access to local and foreign capital and to provide optimal financing for MFIs - - assisting them to lifecycle growth efficiently and prudently.
Growth Guarantee fund•Fully deploy $100 million in guarantees
Target: Tier 1 and 2 MFIg
Catalytic Debt•Capitalize and deploy $10 million in capital to early stage MFIs•Capitalize and deploy $10 million in capital to early stage MFIs
Target: Tier 4 MFIs
Human Capital ManagementStrengthen the alignment of human capital with overall business strategy.•Create scalable tools and practices
•Develop an online technical resource
D l i t t t f H C it l M t•Develop private sector support for Human Capital Management practices by enlisting volunteers
•Create a Corporate Advisory Group
Professional Development
Strategic HR management
Human Capital Management Development
Development development
Leadership
Solutions for the PoorestBreak Barriers, both real and theoretical, that are preventing the poorest from the participating in the microfinance and technology revolutions.
• Catalyze innovation for the poorest through the provision of angel investment to pilot promising innovations
gy
• Support the scaling or replication of products and services SavingsAgricultureRisk Mitigation
Approach to Technology
For Individuals
Innovate, Scale, and Replicate
TechnologyTechnology
F I tit ti FFor Institutions For Development
Technology for Microfinance
Technology as an enabler of sound management information, not as an end product:
• Prove the IT value proposition to MFIs to inspire appropriate technology investmentappropriate technology investment
• Develop and foster MFI capacity to create and execute technology strategies and extract business valuetechnology strategies and extract business value
• Catalyze the community of local technology providers to build a vibrant, sustainable marketplace of technology services for MFIs
24
Mifos Initiative Overview
Portfolio Transaction
Core technologyCore technologybackbonebackbone
Client Management
Portfoliomanagement
Transactiontracking
Reports
Technology that empowers
What Is Mifos?
Shared leadership and quality
control
Freely accessible by all
Sharing lessons & new features
controlAccess to source
code to modify & expand
CollaborativeCollaborativeOpenOpen Co abo at eCo abo at ecommunitycommunityaccessaccess
Village Solutions
• Village Phone– a micro-franchise business opportunity• Affordable access to telecommunications for poor rural• Affordable access to telecommunications for poor, rural
communities• Innovative, sustainable business model • Hybrid private / public partnership with the microfinance &
telecommunications sectors
AppLab
Should I harvest my pineapple for drying this week or will it rain?
0000
week – or will it rain?
From: 000020 May MbararaMorning: Sunny Afternoon: P t l d N t 3 d S
weather MbararaParty cloudy Next 3 days: Sunny intervals with moderate wet conditions
How do I control disease on my
t k ? “Information Hub” or “Community
Knowledge Worker”0000
matooke?
From: 0000To control banana diseases, crush sweet potato leaves and
27
gmatooke disease
mix with water to spray. Reply with 1. Wilt 2. Weevils 3. Pests 4. Help
Bankers without Borders®
• Create an efficient operational framework to mobilize the resources of private sector organizations and volunteers to p gsupport GF in fulfilling its mission
• Build the capacity of MFIs to manage and scale their organizations and strengthen access to capital and related services in order to expand their services to the poorp p
• Increase volunteerism in the microfinance industry
The BwB Process
1M k t
8P j t
9Market
Research
2 7
Project Management Evaluation
102Project
Development
7Project Training
10Recognition & Development
3Volunteer
Recruitment
6Onboarding & OrientationRecruitment
4 5
Orientation
Interviewing & Selection
Volunteer Agreements
Sample Volunteer Activities
Act as a mentor to MFI staff participating in two-course series on investment readiness
Field based activitiesDevelop an in-depth knowledge of the mobile banking pilot at a MFI
A i t i t f ti f MFI i t l t d i fiAssist in transformation of a MFI into a regulated microfinance bank: asset liability management, strategic business planning, risk management etc
Recommend hedging techniques & products, cost effective ways to remove currency risk from loan portfolio
US based supportDesign consulting skills training manual for all GF employees, consultants & volunteers
Create a content management database to serve the needs ofCreate a content management database to serve the needs of Village Phone Direct program
How to Stay Involved
• Regularly visit www.bankerswithoutborders.com to view the latest volunteer postings, and apply for specific opportunities.
• Keep your profile updated – make sure we have your resume!
P ti i t i T i i d Ed ti S i t f t• Participate in Training and Education Sessions – suggest future session topics or speakers.
• Contact us about organizing friendraising and fundraising events• Contact us about organizing friendraising and fundraising events.
• Give us your suggestions. How else can we tap volunteers to support the growth of microfinance?the growth of microfinance?
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