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MICROFINANCE AND NGOs

MICROFINANCE AND NGOs. By: Daniel Norman Mark Hogan. MICROFINANCE AND THE INTERNATIONAL MONETARY FUND. Overview. What is Microfinance? Why does it exist? Microfinance Institutions How does this differ from the IMF’s style of lending? The IMF’s opinion of microfinance Controversy.

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MICROFINANCE AND NGOs

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  1. MICROFINANCE AND NGOs By: Daniel Norman Mark Hogan

  2. MICROFINANCE AND THE INTERNATIONAL MONETARY FUND

  3. Overview • What is Microfinance? • Why does it exist? • Microfinance Institutions • How does this differ from the IMF’s style of lending? • The IMF’s opinion of microfinance • Controversy

  4. What is Microfinance? • The supply of financial services to the poor, or to those without access to banking services • Savings, Loans, Insurance, Remittance, Fund Transfers • Typically targeted towards empowering women • Muhammad Yunus • Almost all transactions are with very small amounts of money • Why is this so important?

  5. What is Microfinance?

  6. Why Do the Poor Lack Access to Formal Banking? • Lack of collateral • Insufficient savings • Little or no income • Too costly for banks • Moneylenders

  7. Microfinance Institutions (MFIs) • Institutions that provide microfinance products and services • Nonprofit organizations • Nongovernmental organizations (NGOs) • Commercial Banks • Rural Cooperatives – Member owned • Receive funds through donors, grants, loans, and financing activities • Have provided aid to an estimated 500 million people worldwide

  8. Overcoming Microcredit Obstacles • Repeated Lending -Breaking loans down into small frequent payments to establish trust in the borrower • Progressive Lending - Increasing loan disbursements gradually over time, so failure to repay an early loan causes borrowers to lose a larger loan in the future • Joint Liability -Members of a group take turns receiving loans and are jointly responsible if anyone defaults

  9. Sikiratou Salami • Loaned $725 on September 15, 2008 to replenish her stock of cosmetics • 2 month grace period, then expected to make 12 monthly payments of $60.42 • Paid all payments on time • Maintained business

  10. Microcredit and High Interest Rates • Unfortunately, those who take advantage of microcredit are usually subject to high interest rates • Every loan costs the lender a certain amount of money • Part of which is proportional to the sum being borrowed, and part of which is fixed • For example, suppose a woman in India decides to borrow $250 dollars to start a vegetable stand in her local town • To be repaid in 1 year

  11. Microcredit and High Interest Rates • Proportional Cost -Suppose it costs the MFI 5% to come up with the money -Suppose this MFI has experienced 2% defaults on loans of this size -7% total proportional cost • Fixed Cost -Suppose it costs the MFI $30 to process and assess the risk of the loan -On a loan of $250 this transaction cost is 12% • Total Interest Rate Charged -The lender must charge an interest rate of 19% to break even on this loan

  12. Hand in Hand • NGO • Founded in 2002 • Based in India • Goal: To eliminate child labor, promote education, and empower women • Total loan portfolio: $9 million • Number of borrowers: 82,118 • Average loan balance: $110

  13. Hand in Hand • Only lend to women • Consistently report negative profit margins, negative return on assets, and negative return on equity • They are unsustainable without donor support • Cause for concern

  14. Microfinance vs. IMF Lending • IMF has a top-down lending approach • They provide money to governments rather than to individuals • Hope to reduce poverty through policy implementation • MFIs employ a bottom up lending approach • Seek to reduce poverty through movements amongst individuals rather than governments

  15. Concerns from the IMF • Not commercially viable, and the ones that are do not target the very poor • Lack of efficiency • Inadequate regulation and supervision • Potential to lose sight of aid, in favor or creating large profits • Despite efforts, MFIs fail to aid hundreds of millions of people

  16. Support from the IMF • Potential to expand the customer base of commercial banks • Potential to circumvent imperfections in financial markets • Assist in moving away from aid-dependency and contribute to gender equalization

  17. Controversy Surrounding Microfinance • SKS Microfinance - $350 million I.P.O. • Money generated from this I.P.O. being directed away from microfinance activities • Yunus said, “you are sending a message to the people buying the IPO there is an exciting chance of making money off poor people.” • Average interest rates of 28% • Interests of SKS now lie in its shareholders, not the poor people that they are supposed to be helping

  18. Non-Governmental Organizations Mark Hogan

  19. Outline • What is an NGO? Why become one? How powerful are they? • Examples of large NGOs • IDA recap • World Bank – NGO collaboration • Personal experience

  20. What is an NGO? • Private organization that pursues activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services, or undertake community development • For short: Any non-profit organization independent from government

  21. Why become an NGO? • Allows groups to contribute to developments internationally or domestically without being established by a government or by an agreement among governments • Not necessarily bound under international law • Free from government interference • Less bureaucracy = more productivity • Though governments may contribute money to NGOs, they are prohibited from directly influence • Can be good and bad

  22. NGO Affluence • Perceived by many as the voice of the people • Citizens can push for action on policies such as women’s rights, education, environmental conservation, etc. • NGO advocacy credited for WB’s establishment of the environment assessment (EA) procedure in 1989 • Raise awareness, lobby, consult, and oversee • 48,000 NGOs, as of 2007, working on local, national, and international levels • WB deals with operational and advocacy NGOs • 2001 – over 15% of total overseas development aid channeled through NGOs

  23. Watchdog Example • August 1995 – Dam breaks at the Omai Gold Mine in Guyana releasing over 325 million gallons of cyanide into the Essequibo River • Canadian-owned mining company claims there is no threat to animal or sea life and the Deputy General Manager said that the “damage was only peanuts” • International NGOs intervened and deemed the site an “environment disaster area” • US press released information to public and EPA stated that $120M worth of cleanup was necessary • Robert Friedland, a primary investor, sells his share and flees questioning • What would have happened if NGOs did not intervene?

  24. Red Cross Red Crescent • Established in 1919 “to improve the lives of vulnerable people by mobilizing the power of humanity” • Mainly focus on disaster preparedness and response but have expanded into health and community care • Consists of 186 national societies • American, British, German, Sweden, and Norway members are the most active • Funded by investments of member societies and 93.5% of donations go directly towards program costs

  25. Oxfam • Founded in 1942 originally to convince the British government to allow food relief through Allied blockades to aid starving citizens of Axis-occupied Greece • Confederation of 14 organizations working in 99 countries to find last solutions to poverty and injustice • Combats famine and provides medicine and tools for people to be self-sufficient • Over half a million people in UK make regular financial contributions • Spent $771.75M in 2007-08 on development programs

  26. CARE • Cooperative for Assistance and Relief Everywhere – originally created by 22 American organizations to aid WWII survivors in Europe • Consists of 12 member countries • Expanded to mainly focus on working alongside poor women in order for families and communities to escape poverty • Operates in 72 countries using funds from individuals, government agencies, EU, and UN • 2006 expenses over $589M

  27. International Development Association (IDA) Recap • Branch of WB along with International Bank for Reconstruction and Development (IBRD) • Provides long-term, interest-free loans to world’s 80 poorest countries (39 of which in Africa) • Loans typically span 35-40 years • Lends $47B annually between IDA/IBRD • $16.5B maximum per country • IDA accounts for 40% of WB lending

  28. World Bank - Palestinian NGO Project

  29. Observations • WB is able to provide substantial loans with little to no interest • Grassroot NGOs are funded which give locals the resources necessary to pull themselves out of poverty • WB oversees how its funds are used • Palestinian NGOs actively pursue eradication of the issues at hand • Win-win situation

  30. My Experience – PPPF Africa at Villanova • NGO that collects used athletic shoes and sells them in African cities – proceeds go toward tools and training for poor rural farmers in Ghana • Promotes global efforts to recycle & reuse • 600 pairs of shoes = 12 months of hands-on Modular Organic Regenerative Environment (MORE) training for adopted families • Increases family’s productivity by 1000% • First year = over 250 pairs collected • PPPF = easy to work with • Villanova = lots of red tape

  31. Works Cited • http://www.kiva.org/about/microfinance • http://www.nytimes.com/2010/07/30/business/30micro.html • http://www.good.is/post/the-new-controversy-over-microfinance/ • http://cgap.org/p/site/c/template.rc/1.26.1302/ • http://en.wikipedia.org/wiki/Microfinance • http://www.imf.org/external/np/pp/eng/2005/012505.pdf • http://www.wikigender.org/index.php/Empowering_Women_through_Microfinance:_Evidence_from_India • http://www.kiva.org/lend/57967 • http://www.mixmarket.org/mfi/hih • http://www.mixmarket.org/mfi/hih/data • http://en.wikipedia.org/wiki/Hand_in_Hand_(Tamil_Nadu) • http://www.hihseed.org/upload/other/PDF/Annual_reports/Hand_in_Hand-Annual_Report_2008-2009.pdf

  32. Works Cited • http://library.duke.edu/research/subject/guides/ngo_guide/igo_ngo_coop/ngo_wb.html • http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/CSO/0,,contentMDK:20094287~menuPK:220444~pagePK:220503~piPK:220476~theSitePK:228717,00.html • http://www.care.org/about/index.asp • http://www.oxfam.org/en/about • http://www.ifrc.org/ • http://www.gdrc.org/ngo/ngo-types.html • http://en.wikipedia.org/wiki/Non-governmental_organization#Types_of_NGOs • http://www.uiowa.edu/ifdebook/ebook2/contents/part2-IV.shtml • http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/IDA/0,,contentMDK:22294364~menuPK:4752068~pagePK:51236175~piPK:437394~theSitePK:73154,00.html • http://www.ifrc.org/docs/rascas/ngrascas.asp • http://www.sparks-of-light.org/guyana.html • http://web.worldbank.org/WBSITE/EXTERNAL/PROJECTS/0,,contentMDK:20264002~menuPK:572065~pagePK:41367~piPK:279616~theSitePK:40941,00.html • http://www.passia.org/publications/research_studies/worldbank/executive.html • http://www.oxfam.org/sites/www.oxfam.org/files/oxfam-international-annual-report-2008-09.pdf

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