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Panel 11: Making Micro-Finance Work
Thursday, April 20th (3:35-4:35pm)
13th Symposium on
Development and Social Transformation
Women’s Development Micro-Finance Institutions in India
Kathryn Eissfeldt
Panel 11: Making Micro-Finance Work
13th Symposium onDevelopment and Social Transformation
Women’s Development MFIs in India
Kathryn Eissfeldt
April 20, 2006
PPA 756: Policy & Admin. in Developing Countries
Professor Jeremy Shiffman
Microfinance Terms
A microenterprise is generally a sole proprietorship that has fewer than five employees, has not had access to the commercial banking sector, and can initially utilize a loan of under $15,000. Most of the microenterprises have fewer than three employees, and the majority are operated by the owner alone.
A microenterprise development program is generally run by a non-profit organization that provides any combination of credit, technical assistance, training and other business and personal assistance services to microentrepreneurs.
A microloan is a very small loan to a microenterprise. Most microloan are under $10,000, with an average loan size of $5,640. Loan terms range from one year to 4.75 years. Programs charge market rates of interest, from eight to 16 percent. Loans are generally secured by non-traditional collateral, flexible collateral requirements or group guarantees.
Problem: Poverty, Women, and Credit
Women seen by traditional banking industry as “unbankable” without collateral
Resources in economy not maximized human capital of women’s entrepreneurship not fully realized
Cycles of poverty, effects on the family, bonded labor Less education
investment in next generation
History of Microcredit
1976: Bangladeshi economics professor Dr. Muhammad Yunus used own money and strategy to target poorest of the poor women during a famine in the region. – His approach was formalized in the Grameen
Bank model.– Still the world’s largest MFI, with 5 million clients
and 10,000 families escaping poverty monthly
History of Microcredit
Some attribute aid at end of WW II and Marshall Plan in Europe as foundations of microcredit movement.
First official loan (along modern lines):
Al Whittaker’s Opportunity International to Carlos Mereno of Columbia in 1971
Parallel development in Brazil in 1973: ACCION International changed its focus from infrastructure projects for the poor to microloans
History of Microcredit
2005: UN declared 2005 the International
Year of Microcredit
– Kofi Annan: “Microcrdit is a critical anti-poverty tool—a wise investment in human capital. When the poorest, especially women, receive credit, they become economic actors with power. Power to improve not only their own lives but, in a widening circle of impact, their families, their communities, and their nations.”
Microcredit Models
Grameen Bank– Begun in Bangladesh– Specifically addresses women– Most microcredit programs today
around world modeled on it Village Banking
– Begun in Latin America– FINCA– Lets customers make own decisions
Global Microfinance Accelerators– UNITUS
Testimonials
Ittamma Polkurthi: bonded laborer to plantation owner
Govindammal: turned family finances around with loans of $67 and $89
S.K. Pahima: MFI customer who now works for company as loan officer
INGO Program Localization as a Spin-off Strategy
Marta Bogdanic
Panel 11: Making Micro-Finance Work
13th Symposium onDevelopment and Social Transformation
Program spin offs as a strategy of Program spin offs as a strategy of International NGOs for Scaling-upInternational NGOs for Scaling-up
Croatian microfinance sector Croatian microfinance sector experienceexperience
Development and Social Transformation Symposium
April 2006
What is localization or a spin off?What is localization or a spin off?
Creation of local institutions that continue the work of the INGO
Crucial: perception of success between partner organizations
Public policy relevance: maximize use of public funds for the benefit of end users, third sector development and accomplishment of donor goals
Literature reviewLiterature review
In late 1980s partnership building identified as paradigm for international development cooperation (Ashman)
Policy guidelines (ICVA):
mutual respect
open communicationequity of partnerstrust developmentcooperative interpersonal relationsactive communicationmutual influencejoint learning
Croatian MF sector experienceCroatian MF sector experience
Success: establishment of mutually beneficial working relationship between INGO and local NGO in terms of power, goals, responsibility for future developments and potential for joint learning
Three MFIs established by INGOs, all localized as domestic operations
Different perception of success by the local MFIs
Issues identifiedIssues identified
Local legal environmentVision and mission alignmentLocal team buy-inAccountability
Lessons learnedLessons learned
Equality of partners
Joint responsibility for success of the operation
Accountable to each other, clients, beneficiaries, local community, donors
Evaluation of the Vietnam Bank for Social Policies
Phuong Lan Huynh
Panel 11: Making Micro-Finance Work
13th Symposium onDevelopment and Social Transformation
Vietnam Bank for
Social Policies
Subsidized Interest Rate:
Good or Harm for the
Poor?
Phuong Lan Huynh
What is micro-finance?
Microfinance is the supply of loans, savings, and other basic financial services to the poor. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services
Consultative Group to Assist the Poor (CGAP)
Why micro-finance?
In Asia, about 90% of the 180 million poor households do not have access to institutional financial services (Asian Development Bank)
Financial institutions do not want to work with the poor, because: higher lending costs involved in small transactions; higher risk for bad debts; and the poor's inability to provide marketable collateral for
loans.
Micro-finance in Vietnam
First introduced in Vietnam in 1980s through international development projects
Involvement of the Government of Vietnam started in 1990s.
Micro-finance is a part of poverty reduction program, government credit was channeled through various state-owned banks
Key credit providers for the poor
Formal sector: Vietnam Bank for Social Policies (VBSP) and Vietnam Bank for Agriculture and Rural Development (VBARD)– largest share of loans to the poor
Semi-formal sector: programs and projects sponsored by international NGOs and various mass organizations
Informal sector: relative, family members and money-lenders
Comparison of interest rate
Type of organization
% of borrowers Annual interest rate
VBSP 10% of the poor 6% - 13.8%
VBARD 10% of the poor 10.8% - 13.8%
Semi-formal 1.5% of the poor 9.6% - 18%
Money-lenders 50% of the poor Can be as high as 48% - 120%
Role of government
The role of government is to enable financial services, not to provide them directly. Governments can almost never do a good job of lending, but they can set a supporting policy environment
CGAP Key Principles of Micro-finance
Justification for government lending - Market imperfections and failure - Incomplete organizational infrastructure- => Government involvement to facilitate the
development and performance of financial markets to increase welfare and well-being of the poor
Gonzalez-Vega and Graham,Stiglitz, Krahnen and Schmidt
Why does Vietnam need VBSP?
Policy lending was performed by various state-owned commercial banks => affects the financial reform in Vietnam
A socialism country and sense of equality Lack of social security and risks involved
during reform process, farmers are more vulnerable, hence the GoV are under pressure to “defend the poor”
Government View on Micro-finance
“It is also a need to create a favorable and stable environment for credit and micro finance operations to help the rural finance system work with flexibility and in such a way that can most meet the poor’s needs. It is as well required to reform and renovate the rural credit and finance systems, diversify credit instruments to make them more attractive to private investment in agricultural product manufacturing and processing”
Vietnam CPRGS
Can VPSB sustain itself?
Lending rate: 6% annually VS
Deposit rate: 6.7% annually
Other lending costs as VPSB does not lend directly to the poor but through network of
mass organizations
How about the poor?
Create a subsidy-dependence attitude among the poor
Allow corruption and misuse of fund
And other MFI?
Ruling out current MFIs from the market
and discourage other commercial banks
and new MFIs to enter the market
What can be done? Reform to work towards financial self-
sufficiency while reaching the poorBecome more cost effective: use the models
of NGOs to deliver and monitor services Efficiency: staff, organization Appropriate interest rate: the poor can afford
higher interest rate as their loans are often small
Promote savings for the poor safety net
Panel 11: Building Food Security
Thursday, April 20th (3:35-4:35pm)
Kathryn Eissfeldt Women’s Development Micro-Finance Institutions in India
Marta Bogdanic INGO Program Localization as a Spin-off Strategy
Phuong Lan Huynh Evaluation of the Vietnam Bank for Social Policies
13th Symposium onDevelopment and Social Transformation