How does it work?

1. Welcome to class ofMicrocredit / Microfinancein Emerging MarketsDr. Satyendra SinghUniversity of WinnipegCanadawww.uwinnipeg.ca/~ssingh5

4. How does it work?

5. What is MicrocreditDifferent from Conventional Banks • 5 features • Loan size is small  b/w $100-$500  average $100 • Customers are rural poor, particularly women • Income activities  Self-employment, non-formal sector • No collateral required • Must have saving account linked to MC

6. Microcredit – Different from Informal $ Lenders • MC  No profit motives • NGO’s approach to poverty alleviation • Before the poor was blamed for personal failing • Now, poverty  deprive the poor of access to social resources human rights issue • Non-judgemental • MC leaders inspire social and economic revolutions in the EM by organizing the poor under the banner of MC organization (NGOs)

7. Microcredit (MC) – Small loans • Why is MC important? • Four billion poor people need access to financial services • Social justice • Only philanthropy is not enough • Women suffering the most • Development of informal sector  farmers, tailors… • Need to remove poverty in EM • ↑ Demand  $50 billion per year for MC • ↑ 15-30% growth annually • Moral responsibility of businesses

9. What is Microfinance: It is broadLoan, saving, insurance, money txfr…

11. Debate: Microfinance • Sustainability • ↑ interest is ok to cover admn cost and be profitable • Attract ↑ people to open MF venture • ↑ competition  ↑innovation • ↓ interest rate for clients • Able to serve the 3 b people • Poverty alleviation • ↑ interest is NOT ok because it exploits poor • ↑ profit will attract ↑ MF investors • Growth of new and uncertain sector • Profit-making venture

12. Microfinance (MF) Venture • Microfinance Profit-making venture • But serve the poor • Self-financed Savings/borrowing > lending • Share Capital  collected from the public • Equity Capital  supplied by owners of the MF venture • Owners have little equity capital • Public has little interest in investing in the business • Problem of seed capital  not profitable at outset • Assistance from private firms, donors agencies for seed capital • Donors World bank, development banks, CIDA, USAID…

13. Justification for Assistance to MF venture • 2 reasons for the justification • Social • Vast differences in wealth and education among people • MF Owners are not as greedy as banks (↑ interest rate from poor) • So, MF owners are different from traditional bankers • Economic • Need help/grants/seed  ↓ interest loan • MF entrepreneurs  able to deliver appropriate services & make $ • Infant industries  subsidize initial phase of operation • ↑ productivity  ↑ $  ↑ money mgmt skills  resource mgmt  ↓ transaction costs  ↑ MF entrepreneur’s skills to be market oriented  sound business decision  contributes to economy

14. Dr Yunus, President Clinton

15. Social Consciousness-Driven Capitalism Theory • Psychological Component  Dr. Md. Yunus • Capitalism  premise  we are selfish by nature  ↑ $ • So, ok to develop capitalist enterprise (financial return) if fair to customers (social return/consciousness) • This premise creates 3 types of entrepreneurs • Traditional capitalist  maximize financial return/profit • Philanthropic organisations  traditional credit/NGOs • Microfinance enterprises  combine both returns while making decisions subject to financial return cannot be negative social consciousness-driven capitalist enterprise • F

16. SHG Self Help Group  10-15 women

17. Social consciousness-driven Microfinance… • Reasons for investing in the MF • Large market size • Unfulfilled demand • ↑ return on investment despite ↑ admin cost • ↓ default rate of borrowers  1-5% • Success or failure is not linked to world political events • Appealing due to altruism • Helping poor directly and avoiding corrupt government • Feeling good by doing good • Investors may like the reasons to invest in MF venture

18. IShop4Microfinance These firms donate X% to microfinance venture

19. Social consciousness-driven Microfinance • But investors need to see sustainability of MF • Means of Entry Mainly motivated by ↑ rate of return • Equity stakes • For-profit orgn buys equity in MF  difficult  ↓ confidence • Securitization • Ability to securitize loans and sell  access to cheaper capital for MF venture  pass on the savings to clients • Service provision partnerships Insurance for loans • Donors self-sufficient  $ should exit • Capacity building  leverage other successful MF venture • Regulatory infrastructure  credit bureau, rating, legal framework

20. Supported by President Clinton www.kiva.orgHow Kiva works?