Company analysis: Pfizer Inc'

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Microcredit and Microfinance
Dr. Marco Elia, University of Turin -
Italy Belgrade, 28th November 2007
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Agenda

• Introduction What is Microfinance? The
  Institutionist and the Welfarist approach
• Microcredit and Microfinance
• 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

• Introduction What is Microfinance? The
  Institutionist and the Welfarist approach
• Microcredit and Microfinance
• 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
  1990s 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

• Introduction What is Microfinance? The
  Institutionist and the Welfarist approach
• Microcredit and Microfinance
• 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
• marco.elia_at_unito.it