Transcript Document 7531995

13th Symposium on
Development and Social Transformation
Panel 11: Making Micro-Finance Work
Thursday, April 20th (3:35-4:35pm)
13th Symposium on
Development and Social Transformation
Panel 11: Making Micro-Finance Work
Women’s Development Micro-Finance
Institutions in India
Kathryn Eissfeldt
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 nonprofit 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
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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.
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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
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Village Banking
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Begun in Bangladesh
Specifically addresses women
Most microcredit programs today
around world modeled on it
Begun in Latin America
FINCA
Lets customers make own decisions
Global Microfinance Accelerators
–
UNITUS
Testimonials
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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
Child care
13th Symposium on
Development and Social Transformation
Panel 11: Making Micro-Finance Work
INGO Program Localization
as a Spin-off Strategy
Marta Bogdanic
Program spin offs as a strategy of
International NGOs for Scaling-up
Croatian microfinance sector
experience
Development and Social Transformation Symposium
April 2006
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 review

In late 1980s partnership building identified as paradigm
for international development cooperation (Ashman)

Policy guidelines (ICVA):
mutual respect
open communication
equity of partners
trust development
cooperative interpersonal relations
active communication
mutual influence
joint learning
Croatian 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
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Three MFIs established by INGOs, all localized as
domestic operations

Different perception of success by the local MFIs
Issues identified

Local legal environment
 Vision and mission alignment
 Local team buy-in
 Accountability
Lessons learned
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Equality of partners

Joint responsibility for success of the
operation

Accountable to each other, clients,
beneficiaries, local community, donors
13th Symposium on
Development and Social Transformation
Panel 11: Making Micro-Finance Work
Evaluation of the Vietnam Bank for Social Policies
Phuong Lan Huynh
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?

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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
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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
VBSP
% of borrowers
10% of the poor
Annual
interest rate
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
So
how does the subsidized
interest rate policy impact
the poor?
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?
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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 selfsufficiency while reaching the poor
 Become
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
13th Symposium on
Development and Social Transformation
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