banking for the poor small loans -usually less than us$200 to start, establish, sustain, or expand...
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Banking for the poor Small loans -usually less than US$200 To start, establish, sustain, or expand very small, self-
supporting businesses. Recycling of loan dollars- each loan is repaid usually within
six months to a year No collateral Very client-friendly- go to their clients to provide loans and
receive payments, rather than requiring their clients to come to them
Focal centres- centre meetings Peer support system
Reach out to the very poor and deliver microfinance services to local clients daily
Educate local communities Collect weekly loan payments Assist clients in solving some of the life
challenges Social services, such as basic health care for
clients and their children.
• Microcredit refers specifically to loans and the credit needs of clients
• Microfinance covers a broader range of financial services that create a wider range of opportunities for success-
Example1. Financial services include savings, insurance,
housing loans and remittance transfers. 2. Entrepreneurial and life skills training, and
advice on topics such as health and nutrition, sanitation, improving living conditions, and the importance of educating children.
• High cost of making very small loans • Personally servicing each client every week. • Cost of managing the “center meetings” • The peer support group process• Providing information on social services, personal
development, health and other critical information
• High rate on borrowings by MFIs• MFI interest rates can range from 18 to 60
percent• Money lenders- charges between 120 and 300
percent.
Grameen bank experiences
Grameen foundation provides funding for MFIs through direct loans, grants, loan guarantees and other innovative financing techniques.
Funding from individuals, philanthropists, foundations, and governments and international institutions such as the world bank.
Traditional banks The interest paid by clients on microfinance loans
goes back into the program to cover costs and fund more loans.
• The Grameen Foundation provides microfinance support in partnership with MFIs.
• These MFIs provide tailor made products and services according to the needs of the community they serve.
• The support group comprises:a. Pool of consultantsb. Expert in-house professionalsc. Individual MFIs
• Microfinance support has two major constituents:a. Technical Assistance b. Social Performance Management
Objective behind the acta) Effectively target the poorest of the poor and women. b) Utilize cost-effective tools to measure progress out of poverty
for existing clients, thus advancing the goal of developing standards and metrics for social impact performance.
c) Increase efficiencies in the delivery of financial services. d) Achieve full cost-recovery and profitability, and utilize profits
to provide better and more economical services to clients. e) Use microfinance as a platform for broad social change by
delivering a wider array of financial and non-financial products and services in pursuit of poverty alleviation.
Technical Assistance to MFIs
Category
Characteristics Goals of Grameen Foundation Support
Tier 4
Mature microfinance institutions with strong financial and operational track records. Most are regulated.
Support the institutions to improve efficiency, expand the geographic breadth of program and the depth of program to reach all levels of poor, especially the poorest, with a wide portfolio of products and services.
Tier 3
Successful yet smaller, younger, or simply less well-known microfinance institutions that are at or near profitability. Mostly NGOs considering conversion.
Support the institutions to become sustainable and profitable, to expand in scale, and to transform into regulated entities.
Tier 2
MFIs approaching profitability, yet have a lack of capital, a weak MIS, or other needs. Nearly all are NGOs.
Support the institutions to improve capacity, build systems, establish policies and procedures in line with sound practices, and diversify sources of capital.
Tier 1
Start-ups or microfinance institutions operating in post-conflict/post-disaster settings.
Support the institutions to set up a microfinance program suitable to its context, focusing on making financial services available to the poor.
Objective behind the act
1. The goal of Grameen Foundation’s work is to ensure the partners are moving their clients out of poverty in five years and to foster good practices for measuring the progress of individuals’ movement across poverty lines.
2. MFIs must show results, yet many do not have the tools to evaluate how well they are fulfilling their mission of reducing poverty, reaching people excluded from financial services, empowering women, or promoting community solidarity.
Social Performance Management
Indonesian Experiences
Poverty Line More people live in poverty in the red economy than the blue economy
People care about relative incomes. Beyond the level of income & growth Beyond poverty
People care about poverty Beyond average income & growth. Beyond relative incomes
People care about growthBeyond poverty (and because of
poverty)Beyond relative incomes
People’s policy recommendations and political philosophies depend on whether Income distribution reflects talent or parental
wealth Individuals have equal opportunities Reducing income differences reduces growth
We study how only one set of policies
Source: Zeller and Meyer, 2002
INSTITUTIONAL INNOVATION
Financial Sustainability
Outreach
Impact
Macroeconomic and sectoral policy
The Triangle of Microfinance Paradigm
Kebijakan Pembangunan di Sektor Keuangan
Efisiensi Alokasi Sumberdaya
Stabilitas Sistem Keuangan
Pembiayaan Investasi
Tidak Rentan terhadap Risiko dan
Krisis
Meningkatkan Produktivitas dan
Kapasitas
Menciptakan Lapangan Pekerjaan
Pelayanan Keuangan untuk Masyarakat Miskin dan UMKM
Pertumbuhan Ekonomi
Sustainable Livelihoods
Penanggulangan Kemiskinan
Dampak Pelayanan Keuangan oleh LKM kepada UMKM terhadap Pengurangan Kemiskinan akan Semakin Efektif jika Permasalahan Informasi Asimetrik pada Penyaluran Kredit dapat
Diminimalisasi
SUSTAINABILITY
OUTREACH
IMPACT
A compelling picture: millions of poor and very poor households seek
capital to build small businesses But their lack of collateral restricts access to
loans. Innovative “microbanks” meet the demand
with more flexible collateral requirements They thus unleash untapped productive power.
This narrative has driven the global expansion of microfinance and was highlighted by the 2006 Nobel Peace Prize committee.
Two divergent views:1. Credit as a human right (suggests universal
access to the very poor)2. Many very poor households have income that
is low and uncertain or in other ways they are not creditworthy (suggests seeking other solutions for them).
▪ Saving can serve very poor households and help them self-finance and better manage income.
▪ The best way to serve the very poor with finance is via savings and other non-credit services
We examine data from Indonesia, another important early site for microfinance.
Goals: understand how low-income households
use finance Identify potential for spreading
commercial microfinance to poorer households
QuestionsUses of credit? Does the microcredit
narrative fit?Role of collateral as a deterrent to
accessWho are savers?Many savers do not borrow. Are
they poor and not creditworthy?
0
2,500,000
5,000,000
7,500,000
10,000,000
12,500,000
15,000,000
17,500,000
20,000,000
22,500,000
25,000,000
27,500,000
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Year
Savings accounts
Loans (KUPEDES)
2005: 32.3 million
2005: 3.2 million
Poor and very poor?
The survey covers a randomized sample of 1438 Indonesian households in six provinces, completed by Bank Rakyat Indonesia in July/August 2002.
Coverage of six provinces: West Java, East Java, West Kalimantan, East Kalimantan, North Sulawesi, and Papua.
Provinces included 20.6 million households and 85 million people.
Enumerators were BRI loan officers and other professionals, offering the chance to assess the creditworthiness of both customers and non-customers using the standard procedures applied by the bank.
The study uses the household survey to revisit claims made largely on the basis of administrative data and anecdote.
The story that emerges differs in important ways from the narrative that dominates microfinance rhetoric.
Most important, loans for small business are important, but low-income households in the survey use loans for household needs about 30 percent of the time.
Despite the privileging of “microcredit for micro-enterprise” by donors, consumption credit appears as an important need, not as a minor concern.
Business: working capital of existing venture, Diversify income, Starting a new business, Purchasing new equipment, New business infrastructure (e.g., store or
warehouse), Business infrastructure improvement.
Household: Home improvement, Non-business land or building purchase, School tuition, Medical treatment, Loan repayment, Meeting daily needs or retirement needs, Vehicle purchase, Buying household goods, Ceremony or social expenditure, Holiday needs Jewelry purchase.
Below poverty
line
Per capita income is 1 to 3 times
the poverty line
Per capita income is
more than 3 times the
poverty line
Loan use
Business 49 55 57
Household 35 43 45
Other 23 6 7Observations 69 208 271
Below poverty
line
Per capita income is 1 to 3 times
the poverty line
Per capita income is
more than 3 times the
poverty line
Household enterprise?
73 70 69
Loan use if household has enterprise
Business 57 70 71
Household 27 26 32
Other 16 6 7
Observations 55 145 168
“BRI Unit Borrowers” have taken loans from the microfinance arm of Bank Rakyat Indonesia.
“Other formal bank borrowers” have taken loans from other “formal” sources including the BRI branch offices, Bank Central Asia (BCA), Bank BNI, a local development bank, Bank Danamon, Bank Mandiri, Bank Bukopin, a Sharia commercial bank, other private commercial bank, Bank Perkreditan Rakyat (BPR), or a Sharia rural bank.
“Microbank” borrowers have borrowed from a rural credit agency (BKD/TPSP/LDKP), credit union/cooperative, rural unit cooperative (KUD), BMT/BMM Islamic institution, “market bank,” local financing institution, or government bureau.
“Informal” sources include pawnshop service, joint venture, a self-managed institution, professional moneylender, family/relative/friends, or other informal source.
Below poverty line
Per capita income is 1 to 3 times the poverty
line
Per capita income is more than 3
times the poverty line
BRI Unit borrower
Business 55 64 60
Household 9 30 31
Other 36 6 8Observations 27 104 173
Other formal bank borrower
Business 74 44 25
Household 25 55 75
Other 1 1 1Observations 10 41 82
Microfinance borrower
Business 47 51 63
Household 47 40 22
Other 6 10 15
Observations 20 40 27
Informal borrower
Business 17 15 47
Household 63 83 38
Other 20 2 15Observations 18 36 23
Below poverty line
Per capita income is 1 to 3 times the
poverty line
Per capita income is more than 3 times the
poverty line
Desired loan use
Business 69 69 56
Household 24 26 39
Other 7 6 5
Observations 278 465 285
All households in the survey, whether or not they were borrowing, were scored by staff of Bank Rakyat Indonesia according to their feasibility for taking BRI loans.
Creditworthiness increases with income. Nearly 40 percent of poor and very poor
households were deemed creditworthy by professional examiners (in the sense that the borrowers are likely to be able to repay loans and maintain good standing).
At all income levels, more borrowers were judged to be creditworthy than are currently saving or borrowing.
Below poverty
line
Per capita income is 1 to 3
times the poverty line
Per capita income is more than 3 times the
poverty line All
Borrower? 14 31 57 32Observations 330 617 485 1432
BRI 46 60 68 62
Other formal banks 11 14 33 22
“Micro” banks 26 20 8 15
Informal finance 25 15 9 14Sum 108 109 118 113
Number of borrowers 69 208 271 549
Below poverty line
Per capita income is 1 to 3 times the poverty
line
Per capita income is more than 3 times
the poverty line
Creditworthy 38 65 83
Currently borrowing from BRI 6 18 39
Observations 330 617 485
Dependent variable:
Borrower Feasible Saver
Saver only (conditional on
saving)
Per capita income 2.3 x10-7** 2.4 x10-7** 2.6x10-7** 6.3x10-8
Per capita income squared -3.3x10-14** -2.6x10-14** -3.410-14** 1.4-14
Fixed assets 6.0x10-10** 1.1x10-9** 1.5-9* 2.1-10
Fixed assets squared -6.9x10-19** -9.9x10-19** -1.29x10-18* -2.9x10-20
Share of assets with legal title 0.20** 0.20 0.23** -0.03
Share of assets with other documents 0.03 -0.11* 0.07 0.08
Household age 0.002* -0.0002 0.002* -0.003
Household education 0.02** 0.01** 0.03** -0.005
Household size 0.02** 0.008 0.02** -0.004
Adjusted R2 0.14 0.18 0.28 0.05
Observations 1393 1370 1393 703
.2
.4
.6
.8
0 2 4 6 8 10 Income per capita as fraction of regional poverty line
Creditworthy
Saver
Borrower
While much has been written on the potentially catalytic impact of giving legal title to assets (notably De Soto, 2000), the picture here suggests that the strongest claims are over-played.
The lack of collateral was cited as a deterrent by only about 10 percent of the households that are not borrowing from banks, and the professional assessments of the enumerators concur.
The insight of Bank Rakyat Indonesia, as with most microlenders, has been to find better ways to lend against household income, not against assets. Collateral thus plays a much smaller role in determining creditworthiness relative to traditional banking approaches.
Below poverty line
Per capita income is 1 to 3 times the poverty
line
Per capita income is more than 3 times
the poverty line
Security deficient 1.9 3.6 3.9
Income deficient 81.3 78.1 68.4
Poor character/history 1.7 0.3 0.04
Administrative problems/other 15.1 18.0 27.7
Observations 168 215 81
By the end of 2005, Bank Rakyat Indonesia served 3.3 million low-income borrowers and over 32.3 million low-income savers.
Given the mountain of success stories of borrowers who have grown their businesses through micro-loans, it is tempting to assume that the 29 million households that opt not to borrow are not creditworthy.
“Some households start extremely poor and gain employment. They may then open small savings accounts. Some households with savings accounts then add small loans…Some clients are able to expand and diversify their enterprises and to qualify for larger loans.” (Robinson, 2001)
The depiction might suggest that: savers are not borrowing because they are not yet in a
position to do so. households who save but do not borrow are likely to be
poorer than those who borrow it is on the saving side that BRI achieves its greatest
social outreach.
0.0
5.1
.15
.2D
en
sity
0 5 10 15 20Income per capita as fraction of rural poverty line
0.0
5.1
.15
.2D
en
sity
0 5 10 15 20Income per capita as fraction of rural poverty line
BRI BorrowersBRI Savers
0.9
.21.
281
.1 .5 1 2 5 10 15 25Income per capita as fraction of poverty line
BRI unit borrower BRI unit saver onlyBRI unit non customer
Among the households that save but that do not borrow, most are in fact creditworthy and most are not poor.
Why then don’t they borrow? Among poor households, one quarter of
savers (about half of the creditworthy non-borrowing savers) are creditworthy but report that they do not borrow because they are averse to debt.
Below poverty line
Per capita income is 1 to 3 times the poverty line
Per capita income is more than 3 times the
poverty line
Among savers:
Save but do not borrow 62 45 28
-- Creditworthy? 46 66 86
-- Creditworthy but averse to debt 24 26 55
Observations 330 617 485
The incidence of debt aversion is relatively stable across income groups and poses a further challenge to the notion that microcredit alone is a leading solution to poverty.
The limit to credit is not only given by the lack of creditworthiness among parts of the population; the limit is also given by the fact that many worthy households simply don’t want to borrow.
Indonesia survey shows:Consumption credit mattersCollateral is less of a constraint that
De Soto and others argueMany creditworthy households can
be found below the poverty lineMany opt out of credit due to debt
aversionPotential market opportunities?