Microfinance

1. Microfinance By Amphol Unves, Team Manager, Capacity Building Office, Bank for Agriculture and Agricultural Cooperatives (BAAC)

2. Scope of the session • Microfinance overview • Microfinance main services; Saving and Credit • BAAC Practices on micro credit • Experiences sharing on microfinance from informal financial system

3. The year 2005 has been declared the International Year of Micro credit.“Microfinance has proved its value, in many countries, as a weapon against poverty and hunger. It really can change peoples’ lives for the better – especially the lives of those who need it most.”(Kofi Annan, quoted from The European Union’s Social Support Project in Thailand, Case Studies in Rural Development Banking, Volume 2, January 2005)

4. Microfinance Services Microfinance is the provision of financial services such as Deposits Loans Other Services Payment services Money transfers Insurance to poor and low-income households and their micro-enterprises

5. Formal Financial System Formal institutions – e.g. banks, cooperatives Informal Financial System Semiformal institutions/systems – e.g. non-government organizations, groups, special programs, funds Informal sources – e.g. relatives, money lenders, shopkeepers Sources of Microfinance

6. Importance of Microfinance • As poverty reduction strategy: • Improve access, provide services to enable the poor for consumption needs, risk mgt., assets, income generation, improve quality of life • Improve resource allocation, markets, technology, promote economy and development

7. Microfinance services’ effect on poverty reduction • Savings: more savings, income, technology, cope with risks, productive assets, growth • Effect on Poverty: more income, reduce risks, reduce poverty, empowerment • Credit: chances in investment, technology, business expansion, less rely on informal sources, cope with risks, profitability, growth • Effect on Poverty: more income, education, reduce poverty, empowerment

8. Microfinance services’ effect on poverty reduction • Insurance services: savings, reduce risks & impact, more investments • Effect on Poverty: more income, security • Payments/Money Transfer Services: trade and investments • Effect on Poverty: more income, consumption

9. Savings • The poor can save • Existing concept : S = I – E • New concept : I – S = E • Ways to achieve:increase income / reduce expenses

10. Saving methods • Individual/personal savings • Group Savings • Proportional deduction of loan amount • Shareholding • Savings in kinds

11. Savings mobilization • Competitive interest rate • Develop saving products • Provide incentives • Marketing campaigns

12. Savings’ Outcomes • Financial discipline • Build social trust • Savings as loan collateral • Loan insurance savings

13. Credit Credit consideration by 4 Cs - Characteristic - Collateral - Capacity - Condition

14. Micro credit • Micro credit : Part of microfinance • Extension of small loans to the poor who lack collateral, steady employment and credit history • It allows the poor self-employment projects that generate income, be better-off, and exit poverty • It gains credibility in banks, its success makes banks to recognize these micro credit borrowers

15. Microfinance: Lending Models • Individuals • Cooperatives • Association • Community/Village Banking • Intermediary/NGOs • Grameen model • Joint Liability Group • Peer Pressure • Bank Guarantees • Etc.

16. Grameen credit’s features - Promotes credit as a human right • Targets the poor, particularly poor women • Based on trust, not on legal procedures and system • Creating self-employment for income generating activities and housing - Borrowers must join group • Loans to be paid back in installments, e.g. weekly, bi-weekly

17. Grameen credit’s features (Con’d) - Provides service at the door-step • Enable the poor to build on their skill to earn better income • Simultaneously more than one loan • Obligatory and voluntary savings programmes • Put high priority on building social capital • Charity not an answer to poverty

18. Delivery-Models for Microfinance Microfinancing Organizational Approach Formal Microfinance Institution Approach Individualistic Cooperation Direct People Participation Indirect Institutions Solidarity Group Self Help Groups Cooperatives Money- lenders Point of Sale Joint Liability Group Grameen Group Cluster Federation Own staff Agent Refinance Model Securitization Model Equity Model

19. Mobile banking • Another method of service • Move to locate in the field for service accessible • Can be part or full operation

20. Microfinance Facts • Rural poor have farm or farm-related activities • Many run micro enterprises • The poor are not served by financial institutions because of high risks, high costs, low profitability, and not able to provide collateral. • The poor rely on informal sources because of lack of access to credit at reasonable price. • Microfinance services affect poverty, socioeconomic aspects but need to provide services to the not-served poor too • Microfinance services empowers the poor at the household, enterprise, and community level.

21. Microfinance Facts • Formal sources has increased from • Expansion through linkage programs with semiformal sources • New institutions focused on microfinance • Microfinance programs by Gov. through non-financial institutions • Cooperatives, semiformal microfinance, e.g. NGOs provide microfinance services.

22. Microfinance Facts • Microfinance has developed to viable business. • The poor can and do save • The poor are creditworthy • MFIs can make profits at low transaction costs without relying on physical collateral

23. Experiences from Various Countries Quoted from APRACA Journal of Rural Finance, April-June 2007 volume.

24. Bank Rakyat Indonesia “Micro-finance not only provides credit facilities for MSMEs but also facilitates savings and remittance facilities and, therefore, is recognised as a pivotal element in the system of financial intermediation.” Bank of Ceylon, Sri Lanka “Micro-finance Institutions Act, which would empower the monetary board of the Central Bank of Sri Lanka to provide license, formulate regulations and supervise micro-finance institutions.”

25. Land Bank of the Philippines “Rural financial market has gone through stages of development and experience – from a policy environment characterised by credit subsidies and allocations, to a rebound of financial reforms.” Nepal Rastra Bank “The development of the formal micro-finance sector in the country dates back to 1974. …..which are regulated by the Nepal Rastra Bank and supervised by the Supervision Department. ”

26. Myanmar Agricultural Development Bank “In spite of the existence of four state-owned banks in the country, the development of private banking appears more impressive if we take into consideration the negative real interest rates, credit restrictions, and lack of banking habits among the people in the country.”

27. Bank for Agriculture and Agricultural Co-operatives “People in the lower income group have a demand for efficient micro-finance services that do not result in high transaction costs for the borrowers/clients…. .” National Institute of Bank Management, India “..Informal financial services has been an important feature of rural economy. A very high cost of financial services… has helped the growth of these informal financial services”

28. Bank Keshavarzi, Iran “Bank Keshavarzi’s reforms…focusing on resource mobilization through attraction of public deposits and offering diverse banking services and products rather than emphasizing on receiving resources…from the government.” Agriculture Promotion Bank, Lao PDR “..each regulation such as interest rate policy attract new entrants into rural finance and micro-finance, and ensures the creation of a sound financial intermediation system.”

29. “This is not charity. This is business: business with a social objective, which is to keep people get out of poverty.” Muhammad Yunus, quoted from APRACA, Journal of Rural Finance, July-Sept. 2007

30. BAAC’s Micro credit Practices and Experiences • Non-farm Micro credit • SMEs are backbone of Thai economy and important factors for jobs/income creation in rural areas. • Only lately that credit services for SMEs covered only non-farm activities. • 90% of rural households earn farm and non-farm income.

31. BAAC’s Microfinance Practice (Con’d) • Micro-entrepreneurs lack of access to credits since they lack of collateral and are high-risk (?) • Micro-entrepreneurs often rely on high interest rate moneylenders’ loan and incur rising debt. • BAAC was not allowed to provide non-farm credit. This led to lack of suitable products and staff knowledge, skills and experience. • BAAC has struggled for its Act amendment.

32. Micro-Finance Linkage Project Savings mobilization, development of savings product tailored to meet poor households’ needs • Campaign and test non-farm micro-credit services to micro-entrepreneurs • Enhance BAAC’s staff competency and service culture to improve financial services quality to rural people

33. Project Implementation • Credit services: • Maximum short-term microcredit size: 100,000 Baht • Loan repayment: Set on regular, monthly installments basis, tailored to match small non-farm entrepreneurs’ cashflow. • JLG was the prevailing form of security.

34. Project Implementation - Interest rate: 1% per month flat (on the initial loan principal), the borrower got a remittance of one/fourth of his interest paid if he repaid all installments on time. - BAAC dedicated specialized microfinance staff for this non-farm segment. - First loan disbursed on February 1998. - Micro credit supports economic activities, e.g. small-scale trading, food stalls, repair shops, food production, etc. - About 65% of borrowers were women

35. Project Implementation • Performance: High portfolio at risk at first - unwillingness to repay, laxity of supervision, follow-up and enforcement What were done: • Appointed Non-farm micro credit officers • PR activities to make the service known to customers. • Monitoring system: Follow-up on regularly monthly basis when installments got closer • Law enforcement: For willful defaulters to prevent mounting moral hazard problem. • Loan Objectives: Primarily for working capital to maintain or expand businesses and/or to increase/diversify products • Non-farm loans gave lessons, experience resulted in risk minimizing design of loan procedures and support measures for the new market segment

36. Project Implementation Key success factors: • Credit for individuals through Joint Liability Groups (JLG) • Shift from wholesale to individual lending • Self-reliance under controlled interest rates condition: through savings mobilization from public, improved loan recovery, implementation of prudential regulations and provisioning rules. • Increase staff and branch productivity and efficiency with B-MIS and decentralization • Diversify credit services to farmers/non-farmers • Expand branch network • Venture into rural microfinance market segment • Savings are equally important as credit

37. Social Support Project: SSP • The project arose in response to sufferings of rural people after 1997 financial crisis • Aims: Help BAAC to improve microfinance services quality, strengthen rural microfinance & enterprise groups. • Core concept: Provide knowledge/skills on production to target groups first, followed by loan extension to operate group business

38. Social Support Project: SSP • It created BAAC staff and branches awareness • SSP integrated into BAAC’s work, e.g. in provincial poverty alleviation campaign, i.e. strengthening community organizations and capacity-building for farmers and rural communities • For Village Funds (born in 2002: government granted 1 mill.baht to each 77,000 villages, BAAC coached fund management). SSP campaigned strongly to use group development/microfinance methods (compulsory savings, etc.) to advance sustainability and utility of funds to villagers

39. Entrepreneur and General People Loan • Customers: Individuals (generally group-based) and Legal person • Loan Types: Working capital, investment loan • Loan Objectives: Promote and support • Customers’ products development in investment, production, processing, marketing • Strengthening of community economy aim at creation of industrial, commercial and service enterprises to increase income, reduce costs • Community savings and self-reliance

40. Entrepreneur and General People Loan • Credit Worthiness Analysis: • Customer: Fame, honesty, loan use record, knowledge & experience, financial status • Loan needs: Needs from business, work, project plan with fact & information from customers, comparison, general standard information • Income: Ability/opportunity to generate income, sources of income to set appropriate installments repayment in line with cash flow • Repay ability: Income after costs (operation cost, household spending) generally repayment amount not set more than 40% of income • Repayment history • Collateral: stability, sufficiently covering requested loan

41. Entrepreneur and General People Loan • Loan term: not more than 18 month (on monthly repayment basis) for working capital loans, 15 years for investment loans • Interest rate: MRR (7.5%/year) for individuals MLR (5.5%/year) for legal persons

42. Microfinance Challenges • Banks incur high overhead, they incline to deal with better-off borrowers. Should they not be expected to provide micro credit? • How to lower transaction costs to operate profitably? • The poor are skillful in survival. They save money, repay debts. Will they be successful in their business? • Microfinance needs more than lending and savings? Are new services, e.g. insurance, housing microfinance, and other financial services for the poor needed?

43. What to be careful? • 1. Financial Viability: If government-directed micro credit programs, NGOs, state-owned banks, cooperatives that provide microfinance services not financially self-sufficient, poor households cannot borrow/deposit, institutions cannot mobilize funds to serve clients and contribute to development. This is fundamental to reach the poor which in turn have a huge impact on poverty reduction. • 2. Micro credit given to the poor who do not have a capacity to repay can increase their poverty

44. “The key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The ladder of development hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung.” Jeffrey Sachs, quoted from APRACA, Journal of Rural Finance, July-Sept. 2007

45. Thank you E-mail address: jirasakm@yahoo.com ampholu@gmail.com