Microfinancing

Hope for Argentina’s Poorest

Microfinancing

   Small loans and small deposits for poor households left unattended by banks  Helps small farmers and self-employed Uncollateralised loans to borrowers without a constant source of income from a wage job  Increases costs for lenders to judge risk and enforce repayment Grameen Bank in Bangladesh  Professor Muhammad Yunus

Rural Financial Markets Matter      

Agriculture

 More than ½ of foreign exchange earnings

Sustained growth

 Increased domestic savings

Poverty is deep and wide

 Between 37% and 55% of 37 million

Efficient production is facilitated Equity is affected Investment is affected

 Creation of jobs (unemployment at 16%)

History of Populism



Access to credit is a right.

 Equity under democracy requires that voters get what they think they deserve.



Liberal democracy and capitalism defensible only if equal opportunity for all

 In education, financial services, etc.

Equity: Rich vs. Poor

 Government has responsibility to reduce the differences    Wealthiest 5%  Wealthiest 10%  25% of national income 40% Poorest 30%  7.5%  Government should provide redress for the poor

Purpose/ Challenge of Microfinancing

 To reach the poor in substantial numbers  To enable them to move out of poverty  To create financial institutions that are sustainable

The Savings Equation

∞ ∞ s(t) = -∑ E

t

∆Y(t + k) + ∑ E

t

∆0(t + k) k=1 (1 + r) k k=1 (1 + r) k ∞ +

γ

∑ Ω

t

(t + k) + ln(r - δ) 2(1+r) k=0 (1 + r) k

r

The Triangle of Microfinance

Macroeconomic and sectoral policy framework and socioeconomic environment Impact Institutional innovations Financial Sustainability Outreach To the poor

Outreach

   Breadth- serving more of the poor  May be able to use loans more effectively Depth- serving the poorest of the poor  May smooth their consumption Quality- making services affordable  Lack of access  May improve welfare, but not necessarily life out of poverty

Impact

 The alleviation of poverty  Food security and economic growth  Enhance through complementary services   Business or marketing services Training of borrowers

Financial Sustainability

   Need lasting financial institutions  Must have faith in permanence to entrust savings Crucial indicator of MFI performance  Will influence decision of being worthwhile in LR Forces MFIs to think about client demand  Induces to improve products, operations, outreach, etc.

Public Investment

   Failure of public development banks Justified from public policy perspective only if:   Comparison of social costs with social benefits Opportunity costs Subsidy dependence index

Material Conditions

     Transaction costs and risks  Rural, sparse populations • No market days   Lack of infrastructure High risk • Seasonal cycles • Not well-diversified Privatization of public development banks No national credit bureau No national pledge registry Constraints on loans

Argentine Macroeconomy

 Convertibility Plan of 1992  Tequila Crisis of 1994-95  Devaluation of Peso: Crisis of 2001

Fundación Emprender

      Argentina’s only significant MFI Patterned after Bolivia’s PRODEM Small, urban Outreach: deep, small, low quality Almost self-sufficient Not worthwhile social investment

Possibility of Microfinancing in rural Argentina?

Needs improvement first