Microfinance 101 Session 2 - Professor Rob Gailey
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Transcript of Microfinance 101 Session 2 - Professor Rob Gailey
Measuring Success: Breadth, Depth, Length, and Positive Impact
MICROFINANCE 101: WEEK TWO
Robert Gailey, Point Loma Nazarene University
WELCOME!
2
Brief Outline for Tonight
How Financing Works
Different Approaches to Financing
Primary Goals of Microfinance Institutions
Key Terms and Definitions
Why Interest Rates are so Important
Important Books
Some useful websites
Question Time
Opening Questions
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- Why do people need financing?
- What do people finance?
- What mechanisms exist for people to access financing?
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Old Chinese Proverb: A Fishing Analogy
Give a man a fish(Traditional relief)
or
Teach a man to fish?(more progressive development)
but
He still needs the TOOLS to fish and ACCESS to the water
Difference between MED and MFWhat is the economic objective of an MED/MF
Intervention?To build a business/enterprise: For start-up,
expansion, or transformation.To provide lump sums of money: For people to use
for a variety of needs/wantsWhich tools are available to meet the economic
objective of the MED/MF interventionFinancial Tools: Involve some form of cash
transactionNon-financial Tools: Do not primarily involve a
cash transaction
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Typology of Financial Services
Group Lending
Village Banking(e.g FINCA)
ASCAsROSCAs
Loan fund provided from outside source
Loan fund generated within group
Grameen Model
Non-time-bound ASCA
Time-bound ASCA
Latin America Model
Solidarity Group Lending
Individual Lending
Financial ServicesMethodologies
Grouping
Source of funding
Size of groups
Accumulation
Time
Ownership
Major Distinction
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MF and MED Tool Matrix
Economic Objective Non-Financial Tools Financial Tools
Helping a Business/Enterprise start, expand, or be transformed (from micro to small-scale or small-scale to medium-scale).
Helping an individual or family meet their needs/wants for Lump Sums of Money for use in emergencies, life-cycle needs, opportunities, and cultural obligations.
Emergency, cultural, and life-cycle ROSCAs and ASCAs, MFIs, Insurance, Deposit Collectors, Money Lenders, Post Office Savings accounts, IDAs for education.
Health education, literacy education, and other non-financial forms of information dissemination.
Microfinance Institutions (MFIs), Business ROSCAs and ASCAs, Small Micro-Credit Programs, Business Insurance, Moneylenders, Venture Capital Investments, Loan Guarantees, Pre-Entrepreneurial Business Grants (such as Trickle Up Program).
Business Development Services (BDS), Livelihood and Vocational Training, Networking/Mentoring.
Primary Goals of Microfinance Institutions (MFI)
Breadth of Outreach (how many people served)
Depth of Outreach (how poor are people served)
Length of Outreach (serving people for many years)
Positive Impact (long-lasting and substantive)
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Vision of many MFIs
Providing many poor families with access to affordable financial services.
Creating indigenous sustainable institutions that can meet the long-term financial needs of their communities.
Improving social conditions—better health, sanitation, nutrition, education.
Key terms and definitions
Interest rate (flat or declining): Flat – same amount is paid each period. Declining –amount paid in interest decreases as amount owed (principle) decreases.
Operational Expenses: Salaries, electricity, vehicles, equipment, etc.
Costs of capital: Currency devaluation, inflation, loan default, & interest paid on borrowed funds.
Savings Balance: Total amount clients have in savings – what is owed back to clients by the MFI.
Portfolio Outstanding: Amount of money out in loans that is not yet repaid.
Financial
Key terms and definitions
Income: What comes in for products or services.
Profit: Generating something above what it costs
you. Revenue exceeds expenses.
Subsidy: Anything which doesn’t cover its costs
and must be covered by other sources (grants,
donations, free labor, etc.)
Financial
Repayment Rate (on-time and overall): How much is paid on-time and eventually.
Arrears: How much is due but has not yet been paid.
Portfolio at Risk: Value of portfolio outstanding that is in arrears.
Loan Loss (Default rate)/[Loan loss reserve]: How much of the loan portfolio is written off or how much is set aside to write off
Key terms and definitions
Institutional Health
Operational Self-Sufficiency: Income/Operating
expenses (+ costs of capital)
Financial Self-Sufficiency: Income/Operating
expenses + costs of capital (+ implicit subsidies).
Efficiency: Income up and/or expenses down
Key terms and definitions
Institutional Health
Setting the Interest Rate
Here is a formula that can be used by an MFI in order to determine the appropriate interest rate:
R = AE + LL + CF + K –II
1-LL
Where R is the interest rate, AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization rate, and II is investment income.
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Or, use my friend’s back-of-the-napkin excel program:
Setting the Interest Rate
However, in practice, MFIs usually do not set their rates based on this formula, but rather based on what the interest rates of other MFIs and lenders in an area are and what the operational expenses of the MFI are. MFIs charge interest for at least five reasons:1)To cover operating costs of administering loans (salaries, rent, etc.).2)To cover financial costs of the cash used for lending if borrowed by the MFI from an interest-charging resource or from another currency.3)To cover the risk of loans not being repaid.4)To cover the time-value of the money lent (inflation).5)To grow their program/portfolio.
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Rutherford (2000 + Summer 2009)The Poor and Their Money
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Collins, et al. (2009) Portfolios of the Poor
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Milway (2008) One Hen
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Useful Websites
Microfinance Gateway:
http://www.microfinancegateway.org/p/site/m/
Microcredit Summit: http://www.microcreditsummit.org/
MixMarket: http://www.mixmarket.org/
Microfinance Focus: http://www.microfinancefocus.com/
Microfinance Transparency:
http://www.mftransparency.org/
PLNU Microfinance Club Blog:
http://plnumicrofinanceclub.blogspot.com/