Download Microfinancing

MICROFINANCING
Joanna Buickians
Narine Mirzakhanyan
Econ 490
Professor Castillo
Key Points
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Muhammad Yunus
Grameen Bank
Microfinancing
Micro-credit & Microbanks
Microfinancing Services
Women being targeted
Web Based Microfinancing
Borrowers & Lenders
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Muhhamed Yunus
“If society was structured for self-employment, there would be no
reason to fear being poor.”
- Dr. Muhammad Yunus
Yunus is the 1st Nobel Prize winner from
Bangladesh
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Founder of Grameen (Rural) Bank in 1976
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Started microfinancing by giving out a loan of
$27 to 42 women in a village in Bangladesh.
World’s Banker to the Poor
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Microfinancing
“say NO to poverty”
Supply of capital loans, consumer credit, savings,
insurance & other basic financial services to low income
households.
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• People need to run their businesses, build assets, stabilize
consumption & shield themselves against risks.
•It’s a service in which the poor people desire & are willing
to pay for.
•Loans are typically less than $125 made to the rural poor
who normally do not qualify for traditionally banking
credit.
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Microfinancing (continued)
• Microfinancing is very beneficial; it is a combination of
financial and non-financial education.
• Microfinancing used to be unknown, but it is now
worldwide.
• World Bank estimates that there are 7,000
microfinance institutions worldwide.
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Micro
-Credits & Micro-Banks
CREDITS
• The Grameen transactions take place at the village level, usually in a local hall or
temple.
• The borrowers will use a loan to buy tools and equipment to set up on their own.
BANKS
• Banks lend money to individual entrepreneurs in groups of five, each member
being responsible for their own loans before any one individual can re-apply for the
next level of funding.
• they use each other as collateral for their loans.
• This proven method has boasted over a 95% success rate in repayment and
flourishing businesses.
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Microfinancing Services
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Why Targeting Women?
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“One billion people in the world are illiterate
and two thirds of those people are women.”
- Muhammed Yunus
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Why Targeting Women? (continued)
• Microfinancing is a step towards uplifting women.
• The Grameen Bank has lend $$$$ especially to women so that they
can launch their own businesses.
• Women gaining control over their lives.
• Women achieving economic and political empowerment w/in their
homes
• About 90% of the people that are on micro-credit are women.
• Women are more reliable in paying back the money.
• Reducing domestic violence by giving women
independence.
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Web Based Microfinancing
CELLPHONES
• In poorer nations phones have help open up microfinancing.
• In Dev. Countries where bank branches and ATM are few/nonexistent,
cell phones make the financial services practical.
•Cell phones have the potential to take financial markets outside the
urban
areas.
INTERNET
• With $$$$ transfer one can do anything to help the poor and support
the economy.
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Web Based Microfinancing (continued)
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KIVA.ORG
• “Connects people to make chance”
• San Francisco based nonprofit that has taken a step further w/just few clicks of
the mouse, & now everyone can become a microfinancier.
• Includes photos of loan recipients & stories about borrowers, lenders can choose
aspiring small-business owner and make their own loans.
• Kiva has worked w/more than 20 microfinance institutions around the
world & enabled more than $1 million in loans for more than 2000 businesses.
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Borrowers & Lenders
• microfinance is provided by non-governmental organizations
(NGOs), cooperatives, non-bank financial intermediaries and
commercial banks.
• More than 10,000 microfinance institutions are in existence with a
loan portfolio exceeding $7 billion.
• most of them are very small w/ client’s base of less than 2,500
• Some 1000 million people access microfinance services globally.
• Clients are typically self-employed and w/a relatively stable source
of income.
• while most borrowers are women, studies indicated that many loans
awarded to women and paid back by them are in fact used by men.
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Global change through Microfinance
Case Study #1:
Microloans in Iraq
•Al’laur Abd Mottar:
microentrpreneur,
Iraq
•Business: used
$3,000 loan to start a
scrap metal business
Case Study #2
MFI helps Dedan Ireri in Nairobi,
Kenya
•Street begger, lost leg
•MFI gave him loan to start
business with his friends, it
failed
•Got a bicycle, worked as
messenger for MFI
It works best “when there are middle-class
entrepreneurs who have business savvy but
do not have access to capital”—USAID Rep
Gary Robbins
•Will be in 2008 Para Olympics
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General Information
Micro-entrepreneurs:
 Don’t need collateral
 Small and shorter loans
 Group borrowing
 Reputation and Peer pressure
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Some criticism
Microfinance Institution:
Higher operating expenses
 Rural costs are higher than urban
costs
 High transaction costs
 Because of the size of the loans
 Higher interest rates
Overall:
 Improves employment
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Different from traditional credit
http://www.microcapital.org/downloads/resourcepapers/IADB-VillagetoWallStreet.pdf
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Example: “Financing urban structure Nepal”
http://www.idrc.ca/openebooks/216-3/
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“Sustainable development continuum for organic microfarming”
http://www.idrc.ca/openebooks/216-3/
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The larger picture: Improves Employment
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Income-generation
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Risk-management and reduction of
vulnerability
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To start or expand micro enterprise activity
Helps entrepreneurs build assets and sustain
jobs
Microfinance also plays a role for vulnerable
persons to cope with and mitigate risk.
Building up emergency loans for
unpredictable expenses and income
droughts.
Empowerment:
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Mobilizing savings enables people to take
financial responsibility for their lives
http://moderato.files.wordpress.com/2007/
06/diego.jpg
As business income rises, businesses expand affecting the entire
community through employment and contribution to the economy
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Job Creation
MFI’s do increase jobs in agriculture and transportation,
however they decrease construction and manufacturing
http://www.dallasfed.org/research/swe/2006/images/0605b_c1.gif
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Some negative results…
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Depend on microcrediting for
subsistence
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Engage in "copycat" behavior
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Thus leads to more sellers
saturating the market as more
microcredit is made available.
low "barriers to entry."
Largely, subsistence activities with
no prospect of comparative
advantage.
Child Labor
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Child labor increases current income
but reduces future income
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“The enterprise…What enterprise?”
Credit
and financing does not directly lead to employment.
For the Lender:
The client‘s decision may diverge from
the agreed purpose.
 Lending to people closer to the poverty
line is risky
For the Borrower:
 Risk aversion restrains the propensity to
invest in new production technologies,
which would boost employment.
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Is this true?
Researchers find limited technological
innovation and increased labor
productivity as a result of micro loans.
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Is the future bright?
MFI’s are successful
 Increase profits and social prosperity
 Decrease risks, thereby increase loans and the
number of investors
 Number of lenders growing at 25% per year
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http://www.sinapiaba.com/links/arreas.html
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The Future
Source: http://www.microcreditsummit.org/pubs/reports/socr/EngSOCR2007.pdf
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Sources
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http://www.microcreditsummit.org/papers/Assocsession/Balkenhol.pdf
http://www.cgap.org/docs/DonorBrief_06.pdf
http://pdf.dec.org/pdf_docs/Pnacl633.pdf
http://www.nytimes.com/2007/11/18/weekinreview/18deparle.html?_r=1&scp=12&sq
=microfinance&st=nyt&oref=slogin
http://www.economist.com/world/la/displaystory.cfm?story_id=10650663&CFID=1555
8859&CFTOKEN=3526b3b503e0171b-859DC346-B27C-BB00-012713530EF5EF4C
http://www.ft.com/cms/s/0/0d21e542-e8c4-11dc-913a-0000779fd2ac.html
http://www.ft.com/cms/s/0/f39adbe2-dc02-11dc-bc82-0000779fd2ac.html
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QUESTIONS
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