Microfinance and entrepreneurship

1. Microfinance and entrepreneurship

2. What livelihood problems to farmers face? (discuss) • Lack knowledge to improve efficiency, look after the environment longer-term, • Lack access to latest technologies (physical and mental), • Lack ability to own land, control use of land, and plan for long-term use of the land & own too little land (gets smaller over time), • Inability to fairly buy/sell land, • Lack of market information and bargaining power, • Lack of money to invest in improving their work

3. What is livelihoods? • Reliable and permanent sources of food, income, and employment. • Where and how people live (nomadic or sedentary, rural or urban, etc), resource management, agriculture, access to and ownership of land , waged labour, and how all these are affected by inequality (especially for women), conflict, climate change, and other natural disasters. • Over two thirds of the three billion people who live in poverty currently rely on small-scale agriculture for their food and wages.

4. What is livelihoods? • Millions of others depend on wages for their income. To make ends meet, families living in poverty often have to rely on seasonal agricultural labouring, home-based subcontracting, domestic work, or remittances from family members migrating for work. • But having a job doesn’t guarantee a way out of poverty. Waged jobs often trap workers in poverty, not only because of poor pay, but also because of the terms of employment - excessive hours, unstable contracts, or no provisions for illness, maternity, or incapacity.

5. What is the Problem? • Poor people need loans to increase their income • Poor people’s savings are not well used • Commercial banks not keen to give them money, thinking they will not be able to pay it back. They have no collateral (e.g. a house) which the bank can take instead • Commercial banks are more interested in high-margin middle and upper class clients. • Giving people money through aid is not the solution as it is not scalable or efficient (the money is not used as well if it is ‘free’ money) • Non commercial banks are inefficient and politically motivated

6. What is the Problem? • Typically, parents are busy working in the fields and have little time. Occasionally 1 parent (the male) may go to get cash-income work elsewhere; leaving the other parent (female) even more work to do (field, children/elderly, home) • Men do not spend extra income as well as women • Women do not have much control in the family or in communities, even though they do most of the work • Poor people lack the knowledge to increase their efficiency or their earning potential • Children are not suitably educated to increase income

7. Facts • Very little money can make a big difference to help someone to help themselves. The immediate need is to lift the family above the poverty line. • Poor people are inefficient. Use of more efficient technology or methods can increase their efficiency for minimal cost or effort. • The majority of very poor people live in the countryside and depend on the land. • Most low-income people do not have the ability to deal with economic shocks (e.g. drought, hospital bill)

8. A reminder -the local situation • Poor institutions: lacking in effective government, (trustworthy) businesses, healthcare, education etc. • Poor infrastructure: no communication or transport, few banks, only cash used. • Geographically disadvantaged: isolated (small) villages, far from towns or cities and often unable to trade etc. • Demographic challenges: migration, high birth rate, impact of HIV/AIDs. • ‘Atmosphere’: lack of hope, lack of motivation, lack of support

9. From Everyday Survival to Planning for the Future Access to financial services Increase & diversify incomes Build assets Mitigate risk Plan for the future Make choices Increase food consumption Invest in education & health Invest in housing, water, sanitation

10. What needs to be done? • Help poor people get access to money • Help poor people make the most of their savings (safe and liquid) • Help poor people spend the money (training/education) to improve their efficiency and increase their income • Help women contribute more

11. What is the difference between micro-credit and aid? • Giving people money (aid) is not an efficient use of money • If people have to repay money they will spend it better (sometimes, in order to earn more money than they spend) • If money is repaid it can be lent out again • If interest is charged the costs of lending/recovering can be met meaning the operation can be profitable and expand • Micro-credit already exists in the informal sector

12. Meeting the financial needs of poor people Savings Loans Right Product Right Price Right Time Insurance Cash Transfer Services

13. Solution 1. Get access to money (micro-credit) • Lending a small amount can make a big difference. A small loan can give a big payback: in fact MFIs often charge interest of up to 40%. • Individuals often do not have any tangible collateral; but within a community they have trust. Individuals often lend to their friends/family already. Using this concept individuals can vouch for their family/friends to help pay back a loan • Go to the clients directly (but this is very high-cost)

14. Solution 2. Improve use of savings • Most poor people keep their savings at home and use it in case of health emergencies etc, or they lend it to friends. Traditional banks are not suitable (location, transaction costs, trust etc). • Creating a local bank can maximise the use of this savings, which can be used locally. • Find ways of transferring money with lowest transaction costs. • Don’t use savings to cover for emergencies, use relevant insurance.

15. Solution 3. Training and Education • Poor people need help spending their money • This help is simple and basic and can be provided freely or cheaply • How to look after crops or animals better • When to plant or sell crops (or animals) for the best price • How to sew or make small crafts/goods • How to read and do basic maths to set-up or run a micro-enterprise • What they should invest their loans in • Training and education varies by MFIs and sometimes includes health, sanitation etc.

16. 2 key words: Sustainable and Expandable • Sustainable • The profit made from lending and saving money enables the MFI to be sustainable by covering its costs, especially the high labour and time costs as well as any advise/training/education etc (though sometimes these services cost extra). • Expandable • Money loaned out and paid back can be loaned out again so more people can benefit. • After repaying 1 loan, clients can take out greater loans • The systems and procedures can be easily adapted to other situations.

17. 2 more key words: Set-up and Scale • Set-up costs • Systems and procedures need to be set-up that make the process efficient (e.g. tracking of loans, calculations of interest, disbursement and collection) • Staff need to be trained and potential clients need to be informed • Initial loan money must be obtained • What should the MFI register as? Can it register? • Scale • The more money that can be loaned out then the more economies of scale can be obtained and greater profit is generated from the interest to cover overheads • The systems and procedures can be easily adapted to other situations, staff can train other staff etc.

18. To reach scale and impact, strong institutions must charge enough to cover their costs. Cost recovery is the only way a financially sustainable institution can continue and expand services over the long term. Lowering transaction costs Offering services that are more useful to clients Finding new ways to reach more of the unbanked poor. Achieving Long Term Scale and Impact Achieving sustainability means

19. 4. Empower the poor • Focus is usually on women • First, provide the motivation through a combination of fun and basic needs provision • Can facilitate group formation which helps with self-empowerment/self-help (knowledge sharing etc) • Second, provide the knowledge and tools for women to make small achievements (economic or not) • Third, support them to build these achievements and to help others

20. Re-cap of Micro-Finance ‘101’ • Micro-finance is not just micro-credit, but micro-credit in particular can be a very useful, simple way, to lift people out of poverty • Usually through improving current crops or animal yields • By lifting people out of poverty = empower them to improve their lives • Also need to empower them = lift them out of poverty!

21. Microfinance ‘102’ • What makes Microfinance different is the high interest rates that are charged and … • The high repayment rates because … • Microfinance has innovated to provide relevant financial services to the poor, including support services such as counselling (which combined are expensive to provide) but… • It is not the end solution to poverty which still depends on other factors: • Availability of water, teachers etc • Transportation links, Suitable land for planting • Good governance, peace etc

22. Case Study of MF in Plan China • There are tripartite agreements between Plan, the local Women’s Federation and an Association jointly established regarding support, operations and capital. • Plan China uses a three year plan for start up during which they provide decreasing subsidies to cover certain operations costs. • Loan officers are hired from the same district or village where they will work because they know everyone and their credibility. • Each loan officer is expected to have 300 clients but it depends on the location. CONFIDENTIAL

23. Cont (1) • Loan officers have an incentive scheme with a base salary of 57% of their total potential salary and a bonus of up to 43% based on new clients, active clients, loan management and loan quality. • The interest rate is fixed and operates on a declining basis. The current rate is 10.8% but could rise due to the recent increase in the Peoples Bank of China’s increase in the basic/prime rate. • The loan maximum for the first loan has recently been raised from 1000 Yuan to 2000 Yuan. If the loan performs well the client can increase the loan to 3000 Yuan the next cycle. CONFIDENTIAL

24. Cont (2) • At the end of February 2006 the program had 3020 clients, with a cumulative total of 6503 loans and an outstanding balance of 3.85 million Yuan. • 99% of the loans go to women. • There is a 100% repayment rate and currently there are no arrears. • A solidarity group method is used with installments of no less than monthly. CONFIDENTIAL

25. Cont (3) • Plan has developed its own MIS and full implementation is about to take place. • Due to its recent start up the capacity of the associations is not as strong as Plan would like. • The loan product needs work and diversification. • Limited capital is a significant an issue. CONFIDENTIAL

26. Case study in Jia County • Population 270,000. 91.4% are involved in agriculture. average per capita income is 1,600 Yuan • 61,200 (22.5% are below the poverty line and 20,800 are below the absolute poverty line). • works in 3 townships and 19 villages • 5 years of work they have delivered a cumulative 3571 loans valued at 4.5 million Yuan • The rejection rate on loan applications is under 10%. • Loan purposes are animals 40%, crops (potatoes, dates and beans) 30%, processing 20% and small business 10%. CONFIDENTIAL

27. Case study in Jia County -clients • In Jia Xian (town): • vending breakfast food on the street • selling vegetables in the market • selling clothes in a shop • In villages: • The women here have received training in handicrafts from the Women’s Federation. Woman asked for a loan for material for paper cutting and a machine for embroidery • women are involved in small businesses where they can sell in the city • Others are involved in animal raising and handicrafts • Other enterprises were breakfast food making, a small shop, pig raising and date processing CONFIDENTIAL

28. Case study in Jia County -challenges • Although the capital has increased from 279,000 to 1,522,200 Yuan there is still not enough capital to meet the demand. • More technical assistance is needed. The staff do not have professional working experience and need more training. They hope that Plan and others will provide that training. • The management structure needs more improvement with the change to becoming an independent association. • To continue reaching their goal of sustainability they need to keep learning and improve their loan products. • The area is prone to natural disasters and if one client fails it is likely they will all fail at the same time. CONFIDENTIAL

29. Case study - Pu Cheng • 5 loan products – • Crops 877 (59%), • Animal raising 314 (21.4%), • Processing 264 (18%), • Small business 1 (0.01%), • Education 10 (0.7%) • The operating cost is 6 Yuan per 100 Yuan lent • What do they spend the money on? • Seed, fertilizer and crop chemicals, bags to protect pears or apples, buy piglets, raise goats, donkeys, rabbits, make tofu etc • Example a kid goat can be purchased for 150 Yuan, if the feed is purchased the cost is 300 Yuan and at the end of 7 months it can be sold for 700 Yuan CONFIDENTIAL

31. Entrepreneurship opportunities • Providing MF supporting services • Setting up a microfinance organisation • Setting up a training organisation • Providing Basic services (Social Entrepreneurship/BoP) • Setting up a kindergarten • Selling soap, clean water etc • Providing communications • Providing transport • Typical Micro-Entrepreneurship • Making small crafts • Making clothes

32. Microfinance ‘103’. Discuss: • Process of: farmer  entrepreneur  SME • Role of government • Role of traditional banks • Role of external investors • High rates of interest • Need for tailored products to clients • Who is microfinance for and who is it not for

33. Microfinance and Entrepreneurship in Urban areas • What is the situation of migrant workers in urban areas? • What kind of business options are there? • What kind of marketing plans might work? • What support is needed to give to the clients? • What is the competition from other lenders? • What are the extra risks to the lender? • How will the current model (from Plan China case study) need to change to meet this need?