Transcript Company analysis: Pfizer Inc.

Microcredit and Microfinance
Dr. Marco Elia, University of Turin - Italy
Belgrade, 28th November 2007
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Agenda
1. Introduction – What is Microfinance? The Institutionist
and the Welfarist approach
2. Microcredit and Microfinance
3. Commercial approaches implemented by international and
domestic banks in microfinance
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1. Introduction
What is Microfinance?
“The provision of small scale financial services to
low-income people excluded from the formal
financial system”
Almost general agreement on this definition
-Commitment to provide credit
-Common concern for low income people
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1. Introduction
Unity of commitments and concerns
It masks different approaches
Different types of institutions, borrowers, delivery systems put
(sometimes incorrectly) under the term “MICROFINANCE”
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1. Introduction
MICROFINANCE
SPECIALIZED FIELD THAT COMBINES BANKING
WITH SOCIAL GOALS
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1. Introduction
 Institutionist approach (WB, CGAP, USAID)
Focus on Financial self-sufficiency (FSS) and institutional
scale
 Welfarist approach
Direct poverty alleviation among the very poor
Jonathan Morduch(1998) “The Microfiance Schism”
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1. Introduction
THE INSTITUTIONISTS
 Emphasis: FSS and breadth over depth of outreach
 Center of attention: The institution
 Main success index: achieve Financial Self Sufficiency
(FSS)
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1. Introduction
THE WELFARISTS
 Emphasis: Depth of outreach
 Center of attention: Clients
 Accept and require subsidies
 Grameen Bank of Bangladesh
THE INSTITUTIONISTS HAVE CLEARLY WON THE DEBATE TO DATE
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1. Introduction
PRACTICAL IMPLICATIONS
 Different clients served
 Different methodologies
 Different institutional structures and financing
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1. Introduction
The Institutionist argument
 Recognition of scarcity (potential demand cannot be met only by
donors)
 Poverty reduction requires massive scale
 BEST PRACTICES: essential step for FSS, CAPITAL MARKET
ACCESS and MAXIMUM OUTREACH TO POOR CLIENTS
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1. Introduction
The Welfarists
 Depth over breadth of outreach
 FSS desirable, not necessary
 Concerns that “profit-making MFIs” will lose their “social mission”
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1. Introduction
Microfinance must be integrated into the formal financial system
Annual spending of the donor community on microfinance:
$800 million - $1 billion per year (CGAP, 2004)
Potential demand : 500,000,000 clients far exceeds the capacity
of donor funding (World Bank)
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1. Introduction
.. a short history
1960s – 1970s : credit provided to rural farmers by many state-run dev.
Institutions (RDIs)
RDIs almost always failed
 Grant mentality
 High transaction costs
 Heavy corruption
 Limited impact
BELIEF THAT LOW INCOME PEOPLE ARE UNBANKABLE
The Institutionist approach is partially an outcome of these
failures
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1. Introduction
June 2004: The Group of Eight (G8) endorsed the 11 key
principles developed by CGAP (a consortium of 28 public and
privaste member donors) at the meeting in Sea Island
(Georgia) They intent to build a base a basic principles to
support a diversity of approaches
2005 has been declared Year of Microcredit by the United
Nations
In 2006 Yunus and the Grameen Bank received the Nobel Peace
Prize
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1. Introduction
Furthermore must be highlighted that:
 Major innovations came from highly subsidized MFIs
 The relationship focus on the poor and profit orientation is not always
clear
 CGAP admits that the majority of the MFIs do not have the potential to
be FSS in the near future
 For certain target groups the benefits of ongoing subsidization may
exceed their costs
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Agenda
1. Introduction – What is Microfinance? The Institutionist and
the Welfarist approach
2. Microcredit and Microfinance
3. Commercial approaches implemented by international and
domestic banks in microfinance
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2. Microcredit and Microfinance
•
Lack of clarity in using the terms
•
The two ideas must be clearly differenciated
“ Microfinance is he provision of small scale financial services (Microcredit,
Microsavings, Microinsurance, money transfer) to low-income people”
MICROCREDIT IS A PART OF THE FIELD OF MICROFINANCE
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2. Microcredit and Microfinance
•
The term Microfinance was first introduced in the 1990’s as a
transformation, or extension, of the already popular and successful
poverty alleviating idea of microcredit
•
The “first generation” of institutions (NGOs) delivered almost only credit
•
Successful example of Bank Rakhyat Indonesia in providing savings
accounts poor people
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2. Microcredit and Microfinance
• Savings services are as important as loans
• All the financial services, and not just loans, help low income
people to smooth consumption, stabilize income and protect
against risks (Broadening of the concept of microfinance)
• Importance of money transfer services
• Training to client is a non-financial service
• CENTRAL ROLE OF CREDIT METHODOLOGIES
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2. Microcredit and Microfinance
Microenterprise Development, Microfinance and Microcredit
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Agenda
1. Introduction – What is Microfinance? The Institutionist and the
Welfarist approach
2. Microcredit and Microfinance
3. Commercial approaches implemented by international and
domestic banks in microfinance
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4. Commercial approaches
Direct (downscaling, MFI at the outset) vs. Indirect approach
(Loans to MFIs, partnerships, etc..)
Legal constraints mainly related to interest rates celings
Evidence from the current practice around the world show a
“dual approach”
The potential for grow is huge especially for additional
financial services besides credit (strategy of Bank Rakyat vs.
BancoSol)
The key constraint is the “lack of institutional and human capacity”
(CGAP, Key Principles of Microfinance)
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References
•Easton, T. (2005). The hidden wealth of the poor. Survey: Microfinance - The Economist,
November 3rd 2005
•Harper, M. and Arora, S.S. (2005). Small Customers, Big Market: Commercial Banks in
Microfinance. New Delhi, TERI Press
•Meyer, R. and Zeller, M. (2002). The Triangle of MICROFINANCE: Financial Sustainability,
Outreach and Impact. John Hopkins Press, Baltimore and London
•Morduch, J. (1999). The microfinance promise. Journal of Economic Literature, 37, 1569-1614
•Morduch, J. (2000) The Microfinance Schism. World Development Vol.28, No.4, pp. 617-629
•Shreiner, M. (2003). A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh.
Center for Social Development, Washington University in St. Louis
•Silverman, R. E. (2006). A New Way to Do Well by Doing Good – Microfinance Funds Earn
Returns on Tiny Loans To Poor Entrepreneurs Abroad. The Wall Street Journal, 5 January
•Yunus, M. (1998). Banker to the Poor: The Autobiography of Muhammad Yunus, Founder of
Grameen Bank. The University Press Limited, London
[email protected]
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