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Understanding and Assessing the Demand for Microfinance

MicroSave Market-led solutions for financial services. Understanding and Assessing the Demand for Microfinance. for Broadening the Access to Microfinance : Challenges and Actors High Level Conference June 20, 2005 Presented by Graham A.N. Wright.

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Understanding and Assessing the Demand for Microfinance

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  1. MicroSaveMarket-led solutions for financial services Understanding and Assessing the Demand for Microfinance for Broadening the Access to Microfinance : Challenges and Actors High Level Conference June 20, 2005 Presented by Graham A.N. Wright

  2. Meet The Clients (1)Diversified and Informal Prudence Prudence from Karatina in Kenya is using the following: • 2 RoSCAs • 1 ASCA • Informal funeral insurance • Cash savings at home • In-kind saving • Loan from Faulu MFI

  3. Diversified and Informal Prudence (i) • RoSCA 1: 4 members daily contribution of $0.29. From this around $31.00 is paid out each month to each member in turn • Use: School fees for grandchildren • RoSCA 2: 4 members weekly contribution of $2.90. From this $11.60 is paid out each week to each member in turn • Use: Re-stocking business (small market stall selling basic commodities: salt, rice, biscuits, soap etc.)

  4. Diversified and Informal Prudence (ii) • ASCA: 40 members save $1.03 a week, and can borrow from the fund. The ASCA is liquidated annually in December. • Use: Celebrating Christmas (savings) and emergencies (loan) • Informal Funeral Insurance Fund: 100 members contribute $11.40 per month – covers immediate family • Use: Risk pooling for “repatriation” to village

  5. Diversified and Informal Prudence (iii) • Emergency cash in the home: $3-$5 • Use: Emergencies requiring immediate cash • A cow back in the village: looked after by Prudence’s brother • Use: Provision for old age/social capital maintenance • Working capital loan from Faulu MFI ($356) • Building a small room to rent out (to provide stable income for old age)

  6. Meet The Clients (2)Resourceful and Collaborative Amina Amina from Pathrail in Bangladesh is using the following: • Reciprocal borrowing and from lending to neighbours • A savings club (or ASCA) that is liquidated annually • Cash savings in a mud bank • Borrowing for business and emergencies from BURO, Tangail

  7. Informal Systems Continue to Dominate … • In Bangladesh the average "turnover" (the total transaction flows of money through financial instruments) per household was $839 in the year. • Only 15% of financial flows go through formal/semi-formal financial institutions • The products/services MFIs offer are typically: • Not adequately flexible or diverse in nature (most MFIs only offer one type of loan and no savings service) • Not adequately reliable(state banks require many trips/bribes and NGO-MFIs “keep changing their rules”) Source: Stuart Rutherford

  8. … But Present High Risk To Their Users

  9. When A Flexible/Reliable Institution Arrives … • Equity Bank offers a broad-range of financial services with a focus on customer service: • Basic savings account • Contractual savings account • (with emergency loan facility) • Business loan • Education/Medial loan • Agricultural loan • Salary advance • Money transfer • Through 20 branches and 6 mobile banking LandRover 4x4 vehicles that tour the countryside

  10. …the Results Are Breath-taking • All clients pay full cost for the services they receive Equity’s move to market-led financial services • … and Equity has received very limited donor subsidy - almost exclusively as technical assistance

  11. Broad Bank with Broad Based Clients Deposits by account size* $1-30 Average loan sizes** $30-70 $70-270 $1,400 7% $1,279 $270-$1000 9% $1,200 Over $1,000 $922 $1,000 11% $800 $600 $400 $201 $132 $200 9% 64% $0 Salaried Farmers Small/Micro Development *Overdrafts and new accounts with 0 balances excluded **Loans for medium businesses average $9,500 Source: Martin Holtmann

  12. Broad Services, Clients and Needs Poverty Line MFI’s Clients Destitute Poor Vulnerable Non-Poor Wealthy • Serving a range of clients allows cross-subsidy • Poverty is dynamic – need to think prevention as well as cure to protect the vulnerable • Above all we need to build inclusive financial systems

  13. Diverse Services Driven By Diverse Needs Household Formation Death (C, I) Birth (C,S,I) Ongoing Financial Needs Working Capital (C,S) Productive Assets (C,S) Investments (S,C) Asset protection (I) Health (C,S,I) Shocks (C,S,I) Old Age (I,S) Education (C,S) Marriage Ceremony (C,S) Source: Monique Cohen

  14. MicroFinance & MDGs • Thus microfinance has significant impact on the millennium development goals supporting: • Reduction of poverty (and vulnerability) • Increased education • Reduction of ill-health • Women’s empowerment • Offers this on a truly sustainable basis • … but is not a panacea

  15. Microfinance in Asia Characteristics of the market • Largest and most profitable MFIs: BRI, ASA etc. • Large numbers of weak MFIs • Cost efficient (best at 5% operating efficiency) • 528 million estimated clients • But … 200-400 million un-served in India and 200-400 un-served in China Average of 21 MFIs reporting to the MIX • Efficiency: 21.7 % Operating expense/loan portfolio • Risk: 2.5 % Portfolio at risk > 30 days • CGAP and Source: MBB 9, July 2003

  16. Microfinance in Africa Characteristics of the market • Many diverse institutional models • Most clients served by credit unions & coops • Rural and agricultural finance is particularly challenging • Only 8 sustainable institutions (MBB) • 25 million estimated clients – this may be an under-estimation • International and domestic banks starting to take an interest • Average of 21 MFIs reporting to the MIX • Efficiency: 50.3 % Operating expense/loan portfolio • Risk: 2.6 % Portfolio at risk > 30 days • CGAP and Source: MBB 9, July 2003

  17. Microfinance in Middle East and North Africa Characteristics of the market • Mostly NGOs • Heavy donor dependence • In infant stages of development • Mostly small working capital loans • 48 million estimated clients Average of 6 MFIs reporting to the MIX • Efficiency: 34.0 Operating expense/loan portfolio • Risk: 1.1% Portfolio at risk > 30 days • CGAP and Source: MBB 9, July 2003

  18. Conclusions • Microfinance can play a key, cost-effective and sustainable role in achieving the MDGs if … • We build flexible and reliable financial services that respond to the real, diverse needs of the poor and vulnerable non-poor • Billions of people are waiting for us to do so …

  19. MicroSaveMarket-led solutions for financial services Shelter Afrique Building, Mamlaka Road, P.O. Box 76436, Nairobi, Kenya Tel: 254 (0)20 2724801/2724806/2726397 Fax: 254 (0)20 2720133 Email: info@MicroSave.org Website: http://www.MicroSave.org

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