SOCIAL FINANCE AND MICRO FINANCE

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Founding of the International Labour Organisation
- 1919

• Universal and lasting peace can be established
  only if it is based upon social justice
• The failure of any nation to adopt humane
  conditions of labour is an obstacle in the way of
  other nations which desire to improve conditions
  in their country.
• Poverty anywhere constitutes a threat to
  prosperity everywhere

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Decent work

• Fundamental rights in and through work
• Job creation
• Social protection
• Social dialogue

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The social dimension of finance

• Links between labour and financial markets.
• Impact of policies addressed at the financial
  sector.
• Access to financial markets.
• Financial institutions as vehicles for the
  attainment of social objectives.
• Scope for financial organizations based on
  self-help.
• The informality of many financial arrangements.

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The social dimension of finance

• Links between labour and financial markets.
• Impact of policies addressed at the financial
  sector.
• Access to financial markets.
• Financial institutions as vehicles for the
  attainment of social objectives.
• Scope for financial organizations based on
  self-help.
• The informality of many financial arrangements.

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Micro Finance

• The provision of financial services on a
  sustainable basis to the poor
• Now becoming a key feature of the global agenda
• Social summit 1995
• Monterey Finance for Development 2000
• PRSPs WDR 2000
• Working Out of Poverty
• A strategy that promises to pay for itself?

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The socio-economic benefits of microfinance are
threefold
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• Job creation
• Poverty reduction
• Empowerment

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The Need for Micro Finance

• legal status
• transaction costs
• information asymmetries

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The Need for Micro Finance

• legal status
• transaction costs
• information asymmetries

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Microfinance in developed and developing
countries A comparison

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Significance of Microfinance
In developing countries MFIs respond to a real
demand. In developed countries the demand is
much smaller and more segmented
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Significance of Microfinance

• MFIs reach a high proportion of women

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Significance of Microfinance
A growing number of MFIs in developing countries
have attained full financial sustainability,
i.e. they are free from subsidies.
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Significance of Microfinance
In developed countries, financial independence
is probably an unrealistic goal for most if not
all MFIs.
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Significance of Microfinance
MFIs worldwide are moving towards higher degrees
of cost recovery and subsidy independence.
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Developing countries
Developed countries

• Objectives
• Provision of credit to specific target groups
• Market size
• Eligible target population is a minority in the
  active population
• Market Density
• Low client density higher transaction costs
• Access
• Despite competitive financial sector,gradual
  disappearance of accessible high street banks
• Income alternatives
• Income packaging at a higher level with broader
  range of resources social safety net greater
  scope for planning
• Regulation
• Complex
• Operational Costs
• Relatively high
• Loan amounts
• Nominally and relatively small often less than
  5 per cent of GDP per capita
• Economies of scale
• difficult to achieve

• Objectives
• Provision of financial services to the poor on a
  sustainable basis
• Market size
• Majority of the population between 60 and 80
  per cent of households
• Market density
• Often high which lowers transaction costs
• Access to financial services
• Majority of population usually has no bank
  account pervasive informal finance
• Income alternatives
• Income packaging with limited sources and
  substantial instability (transfers, wages,
  entrepreneurial income)
• Regulation
• Less defined. Generally less constraining
• Operational costs
• Relatively low for clients and for MFIs
• Loan amounts
• Nominally small but relatively large often
  more than annual GDP per capita
• Economies of scale
• Exist

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IMPACT OF MICRO FINANCE

• Microfinance contributes to employment and income
  stabilization

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IMPACT OF MICRO FINANCE

• In developing countries, MFIs tend to focus on
  the group of clients near the poverty line

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IMPACT OF MICRO FINANCE

• Another aspect of employment quality is the
  stability of the income-earning opportunity.

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IMPACT OF MICRO FINANCE

• Self-employment induced through the provision of
  microfinance in developed countries may not
  necessarily be superior to prior wage employment

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IMPACT OF MICRO FINANCE

• For women in particular, self-employment
  whether part or full time is often a strategy
  to manage domestic and work duties

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The cost-effectiveness ofmicrofinance programmes

• In developing countries, microfinance is mostly
  (or at least increasingly) market-driven.
• In developed countries, the cost-effectiveness of
  microfinance programmes is a matter of comparing
  per capita subsidies with the welfare transfers
  that would otherwise be necessary.

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The cost-effectiveness ofmicrofinance programmes

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Concluding Points

• MFIs reach an impressive number of the
  poor
• most MFI still do not fully cover their costs,
  they still depend on subsidies.
• there is a case for subsidies, at least some form
  of subsidies
• but what makes up an efficient, poverty-oriented,
  subsidy-dependent micro-finance institution? 

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THANK YOU