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Microfinancing

Microfinancing. Hope for Argentina’s Poorest. Microfinancing. Small loans and small deposits for poor households left unattended by banks Helps small farmers and self-employed Uncollateralised loans to borrowers without a constant source of income from a wage job

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Microfinancing

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  1. Microfinancing Hope for Argentina’s Poorest

  2. Microfinancing • Small loans and small deposits for poor households left unattended by banks • Helps small farmers and self-employed • Uncollateralised loans to borrowers without a constant source of income from a wage job • Increases costs for lenders to judge risk and enforce repayment • Grameen Bank in Bangladesh • Professor Muhammad Yunus

  3. Rural Financial Markets Matter • Agriculture • More than ½ of foreign exchange earnings • Sustained growth • Increased domestic savings • Poverty is deep and wide • Between 37% and 55% of 37 million • Efficient production is facilitated • Equity is affected • Investment is affected • Creation of jobs (unemployment at 16%)

  4. History of Populism • Access to credit is a right. • Equity under democracy requires that voters get what they think they deserve. • Liberal democracy and capitalism defensible only if equal opportunity for all • In education, financial services, etc.

  5. Equity: Rich vs. Poor • Government has responsibility to reduce the differences • Wealthiest 5% 25% of national income • Wealthiest 10% 40% • Poorest 30% 7.5% • Government should provide redress for the poor

  6. Purpose/ Challenge of Microfinancing • To reach the poor in substantial numbers • To enable them to move out of poverty • To create financial institutions that are sustainable

  7. The Savings Equation ∞ ∞ s(t) = -∑ Et∆Y(t + k) + ∑ Et∆0(t + k) k=1 (1 + r)kk=1 (1 + r)k ∞ + γ ∑ Ωt(t + k) + ln(r - δ) 2(1+r) k=0 (1 + r)kr

  8. The Triangle of Microfinance Macroeconomic and sectoral policy framework and socioeconomic environment Impact Institutional innovations Financial Sustainability Outreach To the poor

  9. Outreach • Breadth- serving more of the poor • May be able to use loans more effectively • Depth- serving the poorest of the poor • May smooth their consumption • Quality- making services affordable • Lack of access • May improve welfare, but not necessarily life out of poverty

  10. Impact • The alleviation of poverty • Food security and economic growth • Enhance through complementary services • Business or marketing services • Training of borrowers

  11. Financial Sustainability • Need lasting financial institutions • Must have faith in permanence to entrust savings • Crucial indicator of MFI performance • Will influence decision of being worthwhile in LR • Forces MFIs to think about client demand • Induces to improve products, operations, outreach, etc.

  12. Public Investment • Failure of public development banks • Justified from public policy perspective only if: • Comparison of social costs with social benefits • Opportunity costs • Subsidy dependence index

  13. Material Conditions • Transaction costs and risks • Rural, sparse populations • No market days • Lack of infrastructure • High risk • Seasonal cycles • Not well-diversified • Privatization of public development banks • No national credit bureau • No national pledge registry • Constraints on loans

  14. Argentine Macroeconomy • Convertibility Plan of 1992 • Tequila Crisis of 1994-95 • Devaluation of Peso: Crisis of 2001

  15. Fundación Emprender • Argentina’s only significant MFI • Patterned after Bolivia’s PRODEM • Small, urban • Outreach: deep, small, low quality • Almost self-sufficient • Not worthwhile social investment

  16. Possibility of Microfinancing in rural Argentina? Needs improvement first

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