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Microfinance

Microfinance. Mark Myers and Ryan Schulze. Agenda. Overview of Microfinance Hand in Hand (HiH) Overview and History Four Pillar Model and Client Process Decision to Raise Lending Cap Interest Rates Academic Research on Microfinance Sustainability vs. Outreach

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Microfinance

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  1. Microfinance Mark Myers and Ryan Schulze

  2. Agenda • Overview of Microfinance • Hand in Hand (HiH) • Overview and History • Four Pillar Model and Client Process • Decision to Raise Lending Cap • Interest Rates • Academic Research on Microfinance • Sustainability vs. Outreach • Launching the MMRS Microfinancing Company

  3. OVERVIEW OF MICROFINANCE What is it? Access to credit for those who lack traditional access to banking services and resources “More than just a loan” Loans, yes, but skills and networks, too Mandate from HiH is … "to reduce poverty through enterprise development and job creation” How is it designed to work? More to come in slides to follow!

  4. 1.2 BILLION continue to live on less less than US $1.25 a day. That’s less than US $456.25 per year.

  5. CORE MISSION “Poverty alleviation through enterprise development and job creation”

  6. “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.”

  7. TARGET AREA Sub-Saharan Africa and central Asia Concentrated overwhelmingly in sub-Saharan Africa and central Asia, this ‘bottom billion’ remains largely untouched by the global project to eradicate poverty. These are Hand in Hand’s people.

  8. History of Hand in Hand (HiH) 2003 Conceptualized by Percy Barnevik and Dr. Kalpana Sankar. A chapter launches in India. HiH Afghanistan launches. Starts a theme of South-to-South knowledge transfer. 2007 2008 HiH Southern Africa launches. Operational in South Africa, Lesotho, Zimbabwe, and Swaziland. HiH Eastern Africa launches. Pauline Ngari signs on as CEO. 2010 2012 HiH India launches pilot in Cambodia. HiH India launches chapter in Myanmar. 2013 2013 HiH Eastern Africa partners with Care International Rwanda. Friends of HiH International launches in Boston, USA. 2014 2014 HiH Eastern Africa and CEO Pauline Ngari weigh decision to increase the lending cap of their Enterprise Incubation Fund (EIF) which stood at US $233.

  9. THE FOUR PILLAR MODEL

  10. 1. SOCIAL MOBILIZATION

  11. 1. Social Mobilization • Formation of Self-Help Groups (SHGs) • 15-20 members • Basic training in group dynamics, financial discipline, savings • Illiteracy - pictures, parables, activities, songs • Constitution and leadership • Group Saving and Lending • Methods: • Merry-Go-Round • Table Banking • Individual Savings: Operation Akiba Nyumbani

  12. Operation Akiba Nyumbani

  13. “...but the miracle of me owning a plot from the season one campaign is the best achievement in my life. I now own my own piece of land which is a great financial security.” - BETH, SEASON 1 OPERATION AKIBA NYUMBANI WINNER

  14. 2. BUSINESS EDUCATION

  15. 2. Business Education • Core competency of HiH • 24-week enterprise development training program to SHGs • Basic bookkeeping • Business operations • Marketing • Business creation through savings

  16. 3. ACCESS TO CREDIT

  17. 3. Access to Credit DIRECT INDIRECT HiH Enterprise Incubation Fund (EIF) Microfinance partners or government agencies

  18. Direct: Enterprise Incubation Fund (EIF) • Up to US $233 to start or expand enterprises • Designed for those ineligible or unable to receive credit elsewhere • Requirements: • Complete business training • Demonstrate entrepreneurial spirit and trustworthiness • Show consistent savings record and repayment history • Develop sound business plan

  19. Enterprise Incubation Fund (EIF) PRIVATE DONORS CORPORATE DONORS FOUNDATIONS INSTITUTIONS FOUNDATION Corporate Citizenship Trust

  20. EIF LENDING PROCESS Business Training & Plan Group Approval Group Co-Guarantee Applications to HiH Officials SHG Goals & Savings Clients demonstrate commitment to savings & participation within SHGs. Group lending is the first platform for lending. Complete 24-week business training within SHG and develop a sound business plan for enterprise. SHG approves the business plan and application. SHG becomes a co-guarantor for the applicant. Application reviewed by HiH Eastern Africa officials.

  21. EIF LENDING PROCESS 2nd Loan 3rd Loan Indirect Lending Commercial Lending 1st Loan Up to US $116 and 6-month repayment period. Up to US $174 and 12-month repayment period. Up to US $233 and 12-month repayment period. HiH partnerships with other microfinance institutions or government agencies. Commercial banks or commercial microfinance providers.

  22. EIF Features

  23. Indirect: Microfinance partners and government agencies • Designed for those who had already borrowed up to the EIF loan cap or required funding higher than the cap • Requirements: • Same as those of formal lending institutions • Good credit history • Solid business track record • Sufficient collateral

  24. Interest Rates • EIF - 15% flat per annum • Used to cover costs of administering the loan • Microfinance industry interest rate in Kenya: • 21% per year from November 2009 to November 2012 (Kodongo and Kendi, 2013) • 18% per year in December 2011 adjusting downwards to 11% in December 2012 (Micro Finanzarating, 2013) • (Studies only include formal microfinance institutions regulated and covered under “The Microfinance Act 2006”) • Shylocks, or loan sharks, in Kenya: • Depending on data source, interest rates as much as 25 to 50 percent per year to as high as 10 percent per day

  25. FAULU MICROFINANCE BANK LTD KENYA WOMEN MICROFINANCE BANK LTD • 27 branches in Kenya • 35.36% weighted market share • 24 branches in Kenya • 47.92% weighted market share

  26. CHASE WHITNEY CAPITAL ONE REGIONS

  27. 4. MARKET LINKAGE

  28. 4. Market Linkage • Most challenging component of HiH model • Help entrepreneurs compete and thrive by providing knowledge and guidance on how to: • Find larger markets • Source cheaper supplies • Improve their branding, packaging, quality control • Scale up businesses • Collaborations with various ministries of government

  29. Accomplishments HiH International 2.07 MILLION MEMBERS participating in Self-Help Groups (SHGs). 2.08 MILLION BUSINESSES created by HiH entrepreneurs. 3.08 MILLION JOBS created because of businesses formed. 90% PROGRAM SPENDING More than 90 cents of every dollar raised is spent on programs.

  30. Accomplishments HiH Eastern Africa 197,229 MEMBERS participating in Self-Help Groups (SHGs). 235,236 BUSINESSES created by HiH EA entrepreneurs. 315,317 JOBS created because of businesses formed. US $7.81 MILLION IN LOANS from the Enterprise Incubation Fund (EIF).

  31. Challenges • Reliance on partners, like Kiva, to maintain liquidity and funding • Need for geographical growth of footprint in Eastern Africa • Pressure to increase the EIF loan cap from US$233

  32. Financial Self-Sustainability ARGUMENT FORINCREASING EIF LOAN CAP “If HiH EA were to pursue financial self sustainability (the firm’s ability to cover their operating and financing costs with program revenue) as a primary goal then the argument for a higher lending cap would be a strong consideration. So far we have had zero default on our loans, we have a total of 38,000 members and over 100 field officers with at least three years of proven track record. It is far more cost effective in terms of margins if we grew our impact by increasing the lending cap (loan size) with our existing clientele using the existing employees rather than venturing into uncharted territories.” - DANIEL MWANIKI, CFO, HiH EA

  33. Greater Borrowing Needs of Clients ARGUMENT FORINCREASING EIF LOAN CAP “Our group has a savings for over US$1,765. We had a stable membership for more than 5 years...We have clear documentation of our meetings, group lending and loan repayments to mention but a few. What we would like to see more of is an increase in the loan cap. Our members require loans much higher than the US$233 cap. We have accessed loans from the government of Kenya in the past and promptly repaid the money. Our businesses have grown considerably in the last couple of years. However, none of our members trust or meet requirements of commercial banks.” - CHAIR, RURII RABBIT FLAVORS (YOUTH GROUP)

  34. Microfinance Industry Lending Cap ARGUMENT FORINCREASING EIF LOAN CAP “[HiH EA’s field officers] dealt with clients who not only had high enough savings to back higher loans but also clients with ventures that had a proven track record and strong trajectory for growth. The field officers found it difficult to explain to their entrepreneurs why and how their loans were perceived as high risk. The field officers were aware that they could appeal for a higher loan cap on a case-by-case basis, but they felt that a universally higher loan cap (the industry’s average cap was about US$400-500) would make their job more efficient.” - HiH CASE

  35. Interest Rates of Commercial Banks ARGUMENT FORINCREASING EIF LOAN CAP “We are not interested in dealing with for profit microfinance institutions or commercial banks based on other people’s experience. We have witnessed people lose everything they owe due to late payment or default on a loan.” - CHAIR, RURII RABBIT FLAVORS (YOUTH GROUP) “Who can handle the interest rates charged by the commercial banks?Who has the collateral? If you do not own land or a car you cannot get these loans...” - WAJIKO, A MEMBER OF KIBARA SHG “ But who wants those loans? The high interest rates will eat up all your profits.You will end up poorer if you get those loans.” - WAMBOI, A MEMBER OF GITHIKAGA FARMERS

  36. Maintaining Focus on Core Mission ARGUMENT AGAINSTINCREASING EIF LOAN CAP “HiH EA’s Enterprise Incubation Fund is designed to serve only the underserved and not to provide absolute microfinance solution...The $233 capping serves our niche market. HiH EA has no plan to serve the saturated market but rather to remain with the target that is financially excluded.” - PAULINE NGARI, CEO OF HiH EA

  37. Sticking with Core Competencies ARGUMENT AGAINSTINCREASING EIF LOAN CAP “It is also good to bear in mind that the HiH EA’s core business is enterprise development and training and not credit lending.” - PAULINE NGARI, CEO OF HiH EA

  38. Threat of Increased Loan Defaults ARGUMENT AGAINSTINCREASING EIF LOAN CAP “With higher caps comes higher returns but you should also be prepared for higher risks and higher defaults. Ultimately, what happens is the returns may be high but the net margins will be relatively thin due to write offs and bad debt provisions. In the end nobody gains, the investors will not necessarily have higher margins. The overall cost of lending will increase thus hurting the very people that you are trying to help. . .However, in the alternate scenario, if a member defaults on a $233 loan, a group of 15-20 members can contribute about $12-16 each to cover the debt.” - DANIEL MWANIKI, CFO, HiH EA

  39. Geographical Expansion in Eastern Africa ARGUMENT AGAINSTINCREASING EIF LOAN CAP “It is far more cost effective in terms of margins if we grew our impact by increasing the lending cap (loan size) with our existing clientele using the existing employees rather than venturing into uncharted territories. But that is not our priority. It is important for us to stay focused on our mission. In the next 2-3 years we plan to mobilize and train additional 108,000 members and grow our workforce by over 40 percent.” - DANIEL MWANIKI, CFO, HiH EA

  40. SHOULD HiH EASTERN AFRICA RAISE THE LENDING CAP OR NOT?

  41. ACADEMIC RESEARCH ON MICROFINANCE

  42. Hermes - Lensink Research NIELS HERMES ROBERT LENSINK Microfinance: Its Impact, Outreach, and Sustainability

  43. IMPACT OF MICROFINANCE

  44. Impact of Microfinance - Proposed Positives Scholarly Research has said that Microfinance benefits the “Core Poor” in that it: • Increases access to finance that can help reduce poverty substantially (Dunford, 2006; Littlefield, Morduch, & Hashemi, 2003) • Increases investments in income-generating activities and can aid in the accumulation of assets • Decreases vulnerability due to crop failure, illness, etc. • Increases health and education of the borrower

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