Microfinance theory and practice

8/22/2019 Microfinance theory and practice

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7thOctober 2013S-ENT, Session 6, Anirudh Agrawal CBS

7thOctober 2013

Fundamental concepts in

microfinance

Theory and Practice
http://www.cbs.dk/http://www.cbs.dk/


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7thOctober 2013

Review Session 4

Fair Trade

Theory of Change

Grounded to bring about social and environmental

impact

Labeling, branding : Creating a sense of exclusivity

Business Model

Consumers and market
http://www.cbs.dk/


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7thOctober 2013

Review Session 5 : Performance of

Social Enterprise
http://www.cbs.dk/


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7thOctober 2013

Review Session 5

SROI

Measuring the Theory of Change (social, public

and financial returns)

Best when few KPIs

Lack of structure/template/ high subjectivity (--)

Managing stakeholders (++)

Gaining legitimacy
http://www.cbs.dk/


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7thOctober 2013

SKS Microfinance Case

Discuss the role and compatibility of founders

and professional CEO in this case?

Discuss the organizational stigma associated

with SKS Microfinance?

Is for profit social business an Oxymoron?

Discuss the role of regulators when suicideswere reported, what happened?

Shouldsocial business go for IPO?
http://www.cbs.dk/http://www.cbs.dk/http://www.cbs.dk/


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7thOctober 2013
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7thOctober 2013
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7thOctober 2013

Financial Services Pyramid
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7thOctober 2013

Poverty Pyramid
http://www.cbs.dk/


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7thOctober 2013

What Is Microfinance? Microfinance is the offer of financial & non-financial services to

people excludedfrom the traditional banking system. The servicesare adaptedto the needs of the target populations.

FINANCEMICRO

Micro-entrepreneurs

Self-employed

Low income populations

Excluded populations

Business & educational loans

Savings

Micro-insurances

Remittances

Micro-entrepreneur training

Coaching & workshops on

health, hygiene, etc.
http://www.cbs.dk/


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7thOctober 2013

Microfinance Theory of Change

Financial Inclusion Provide Financial services to the marginalised

Protect the marginalised from loan sharks

Ethical Financial Practices Low or zero collateral Low interest rates

Additional services

Entrepreneurship training and consulting Housing loan

Insurance services at low cost
http://www.cbs.dk/


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7thOctober 2013

Types of Financing

Debt Financing

Equity Financing
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7thOctober 2013

Why high interest rate?

Moral Hazard

Information Asymmetry
http://www.cbs.dk/


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7thOctober 2013

Different Microfinance Products

Cost of burial replacement costs, natural calamity . (MF :Insurance)

Retirement plans, Health care plan..(MFPension plan,health insurance)

Equipment for agriculture activities, livestock, homeupgrade.. (MF: Medium term)

Social obligations like Marriage, Festivals.. (MF: Short term)

Housings, Wells, Capital intensive enterprise (MF: Longterm Loans)

Emergency loans like family disaster, natural calamity Short term loans to meet daily/weekly needs

Source: Insead case study 2009 (Santos and Anne Claire)
http://www.cbs.dk/


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7thOctober 2013

Activity 1

In groups of 3-4, discuss the target segment

for microfinance in Scandinavia?

Think about the background and the strata of

people that are financially excluded in Scandinavia

Who do you think can be benefited from

microfinance in Scandinavia?

What are their needs and how much microfinanceloans can they have?

Hint(Immigrants with no financial history)

B i B i t th B f th
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7thOctober 2013

Business Basics at the Base of the

Pyramid Akula (2008)

Scaling

Standardization of products and services

Adopt a profit oriented approach to signalcommercial capital

Use of technology

Focus on volume
http://www.cbs.dk/


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7thOctober 2013

Building Social Business Models:

Lessons from the Grameen Experience

Social Business Model

How products can be servitised to serve the

poor Grameen Phone, Grameen Veolia, Grameen

Danone (each using their own innovative ways to

reach out to the poor)
http://www.cbs.dk/


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7thOctober 2013

Building Sustainable Hybrid Organizations : The

Case Of Commercial Microfinance Organizations

How organizations can navigate competing

logics?
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7thOctober 2013

Design a Microfinance Business Model

In a group of 3-4, discuss to design a

microfinance business model?

Define the target customer/region

Target loan / person

Profit/Social business

Interest rate
http://www.cbs.dk/


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7thOctober 2013 S-ENT, Session 6, Anirudh Agrawal CBS7thOctober 2013

Difference Traditional banking industry

and Microfinance

Location

Salary

Stress

Interest Rate

Certainty about the future

Purpose, goals and values

Working hours, motivation

Outdoor time, real world impact

Working environment

Friends and Family

Source: Kiva
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Principles of Microfinance

Poor people need a variety of financial services, not just loans.

Microfinance is a powerful tool to fight poverty.

Microfinance means building financial systems that serve the poor.

Microfinance must pay for itself to reach large numbers of poor people.

Microfinance is about building permanent local financial institutions. Microcredit is not the best tool for everyone or every situation.

Interest rate ceilings making it harder for poor people to get credit.

The role of government is to enable financial services, not to providethem.

Donor funds should complement private capital, not compete with it. The key bottleneck is the shortage of strong institutions and managers.

Microfinance works best when it measures and discloses itsperformance.
http://www.cbs.dk/


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Points Against Microfinance

High interest rates

How to decide the optimum interest rate?

Lack of legal protection for the borrowers and

for the lenders

High operating costs and low margins

Lack of institutional structures, business

framework, data, operating procedures
http://www.cbs.dk/


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Way Forward in Microfinance Study

Fundamentals

Describe fundamental concepts in microfinance

Design client-focused services

Apply effective microcredit methodologies

Describe the effects of the local environment on microfinance

Financial analysis and Risk Analysis Read financial statements

Measure delinquency

Identify key financial factors

Identify effective interest rate practices

Measure financial viabilityInstitutional Analysis

Gauge institutional viability

Strengthen relations between donors and microfinance institutions
http://www.cbs.dk/http://www.cbs.dk/

Documents

Microfinance theory and practice