An Introduction to Microfinance: selected chapters from the Microfinance Handbook

1
An Introduction to Microfinance selected
chapters from the Microfinance Handbook

• 9/23/06

2
Background

• Microfinance arose in response to doubts about
  state delivery of subsidized credit to poor
  farmers
• Most programs accumulated large loan losses and
  required frequent recapitalization
• More market-based solutions required

3
Financial Systems approach

• Subsidized credit undermines development
• Poor people can pay interest rates high enough to
  cover transaction costs and the consequences of
  imperfect information markets
• Goal must be sustainability
• Because loan sizes are so small, MFIs must
  achieve sufficient scale to be sustainable
• Outreach and repayment rates can be proxies for
  impact, enterprise growth

4
Understanding the Country Context (Supply side)

• Suppliers of Financial Intermediation Services
• Formal financial institutions public/private
  banks, insurance firms, finance companies
• Semiformal credit unions, cooperative banks
• Informal NGOs, self-help groups, individuals

5
Understanding the Country Context (supply side)

• Effect of Government programs
• Often perceived as social welfare
• --gt forgive existing debts of the poor
• --gt Tremendous effect on private sector MFIs

6
Understanding the Country Context (supply side)

• Considerations when regulating MFIs
• Minimum capital requirements
• Capital adequacy (debt vs. equity)
• Liquidity requirements
• Asset quality (measures risk)
• Portfolio diversification

7
Understanding the Country Context (supply side)

• Economic and Social Policy Environment
• Inflation results in a real cost to MFIs that
  must be covered by interest
• Positive or stagnant GDP growth preferred
• Transition and political unrest leads to trust
  issues
• Existence of adequate infrastructure and social
  services

8
The Target Market and Impact Analysis (demand
side)

• Direct targeting
• Allocation of funds to a particular sector of the
  economy or population
• Dont really know what any given loan finances
• Commerce and consumption are not necessarily less
  valuable than production and income generation
• Naively transfers notions from the world of the
  wealthy to the world of the poor

9
The Target Market and Impact Analysis (demand
side)

• Indirect targeting
• Self-selection takes place by virtue of the
  design of microfinance services
• incentive compatibility unwanted clients will
  not be interested
• MFIs need to consider debt capacity as opposed to
  a credit need approach
• Debt capacity amount of addition debt a client
  can take on without running the risk of
  inadequate cash flow