Nongluck Suphanchaimat Faculty of Agriculture Khon Kaen University

1. Nongluck Suphanchaimat Faculty of Agriculture Khon Kaen University

2. Characteristic of the poor • Landless • Not belonging/ unentitlement • Food deficit/unable to produce enough for home consumption • Risk averse • Lack of capital

3. The poor have not been served by financial institutions due to high risks, high cost of management, lack of collateral. • The poor rely on informal sources because lack of collateral and easy access • Existing formal lending institutions cannot reach poor people with conventional way of working Lack of capital for investment may prevent poor people from new opportunities.

4. The year 2005 has been declared the International Year of Micro credit.“Microfinance has proved its value, in many countries, as a weapon against poverty and hunger. It really can change peoples’ lives for the better – especially the lives of those who need it most.”(Kofi Annan, quoted from The European Union’s Social Support Project in Thailand, Case Studies in Rural Development Banking, Volume 2, January 2005)

5. 1. Importance of capital in development 2. Conventional finance system 3. Microfinance overview 4. Experience Microfinance in Thailand

6. The Importance of finance Factor of production interest Capital Labor

7. Example of economic condition of the poor

8. Asset Debt Owner’s fund (Equity) Source of investment fund for entrepreneur • Debt • Equity • Debt • Equity

9. Source of capital Introductory Stage of work Source of Funds Informal Expansion Trading partner& bank Declining Own saving, bank and merging

10. Profit and loss (P/L)

11. What we learn from P/L statement? • The investor can earn 20% of the Laon amount. • Investor can pay interest easily from gross profit of 6,000 • Availability of loan fund enable investor to operate • How much is the loan repayment? • How much profit is available for living expenses.

12. Credit: Ability to borrow honest, good loan use record Credit consideration by 4 Cs - Characteristic - Collateral - Capacity - Condition • Sufficient to cover • requested loan refers to the ability of the business to generate revenues in order to pay back Loan fund, term of loan repayment schedule

13. Collateral • Repayment ability • Decision is made by bank officers • Mostly focus on business loan • Difficult to reach grass-root level

14. Types of Loan • Short termless than 1 year • Mediumless than 5 years • Long term loanmore than 5 years Classified by borrowing objectives • Production • trading, collection • services

15. Microfinance Services Microfinance is the provision of financial services such as 1. Deposits 2. Loans 3. Other Services Payment services Money transfers Insurance to poor and low-income households and their micro-enterprises

16. Microfinance services’ effect on poverty reduction • Credit: • increase opportunity to invest in technology, business expansion • less rely on informal sources leads to cost reduction • People empowerment through accessibility and belonging • Savings • Enhance people’s savings • Collective efforts to capital accumulation in local areas

17. Importance of Microfinance • As poverty reduction strategy: • Improve access to investment funds among the poor • Improve quality of life of the poor through increase consumption spending - Improve resource allocation, markets technology, enhance economic development

18. Microfinance services’ effect on poverty reduction Accumulation of the funds may lead to other financial services especially insurance services both life and crop insurances which help reduce risks

19. Savings • The poor can save - Existing concept : S = I – E - New concept : I – S = E • Ways to achieve: - increase income or reduce expenses

20. Saving methods Individual/personal savings Group Savings Savings in kinds; water, wood, trees, draft animal

21. Outcomes of the saving Financial discipline Build social trust • Savings can be used as loan • collateral Savings insure Loan

22. Micro credit • Micro credit is part of microfinance • Extension of small loans to the poor who lack collateral, steady employment and credit history • It allows the poor to engage in self-employment projects that can generate income lead to some saving and exit poverty • It gains credibility in banks, its success makes banks to recognize these micro credit borrowers

23. Conventional system collateral and repayment ability Decision is made by bank officers Neglect grass-root level Micro credit scheme trust and peer-pressure Use group responsibility decision-making can be made by people at village-level which can take into account local needs and concerns. Usually target to poor people and small scale enterprises Micro credit Source: Amphol Unves

24. Micro credit Classification of micro credit • Traditional informal micro credit, e.g. moneylenders, pawn shops, etc. • Micro credit based on traditional informal groups • Activity-based micro credit is provided through conventional or specialized banks, e.g. agricultural credit, etc. Source: Amphol Unves

25. Micro credit: Example

26. I. The Grameen Bank • Started out in 1976 . • In 1983 over 30,000 landless with repayment rate higher than previous rural credit programs • deals with groups of five borrowers who do not have the usual collateral • Provided small loan $30 to $50 per case • No restriction on spending and pay back on weekly income.

27. The Grameen Bank • small groups has begun to encourage them to merge together into thirty-person organizations • Monitoring done by dedicated young bank staffs who play both motivating and service role “bankers on bikes” • The borrowing groups serve to provide both confidence and structure. Non-payment by one member will affect the other. • borrowers can decide for themselves

28. Grameen credit’s features - Promotes credit as a human right • Targets the poor, particularly poor women • Based on trust, not on legal procedures and system • Provides service at the door-step • Borrowers must join group • Loans to be paid back in installments, e.g. weekly, bi-weekly

29. Grameen credit’s features • Put high priority on building social capital • Charity not an answer to poverty • Enable the poor to build on their skill to earn better income

30. Source of funds - deposit of clients - Inter-bank deposit - Long term debt - common stock - preferred stock - Retained earning Use of funds Individual lending account Cooperative lending account Government project II Bank of Agriculture and Agricultural cooperatives (BAAC)

31. BAAC’s Micro credit Practices and Experiences Non-farm Microcredit • 90% of rural households earn both farm and non-farm income. • Micro-entrepreneurs often rely on high interest rate of moneylenders’ loan and incur rising debt • In 1980s BAAC started credit services to SMEs covered also non-farm activities. Source: Amphol Unves

32. BAAC Micro-Finance Linkage Project • Savings mobilization, development of savings product tailored to meet poor households’ needs • Campaign and test non-farm micro-credit services to micro-entrepreneurs • Enhance BAAC’s staff competency and service culture to improve financial services for rural people Source: Amphol Unves

33. BAAC Micro-Finance Linkage Project • Create awareness of sustainable financial institution development pertaining to BAAC and Thailand’s micro-financing • Support branches efficient operation based on the profit center criteria. Source: Amphol Unves

34. Project Implementation • Credit services: • Maximum short-term microcredit size: 100,000 Baht • Loan Objectives: Primarily for working capital to maintain or expand businesses and/or to increase/diversify products - Loan repayment: Set on regular, monthly installments basis, tailored to match small non-farm entrepreneurs’ cash flow. Source: Amphol Unves

35. Project Implementation • Interest rate: 1% per month flat (on the initial loan principal), the borrower got a remittance of one/fourth of his interest paid if his installments is on schedule • BAAC dedicated specialized microfinance staff for this non-farm segment. • First loan disbursed on February 1998.

36. Project Implementation Scenarios • Performance: High portfolio at risk at first customers were unwilling to repay, lack of supervision, follow-up and enforcement How to solve? • Appointed Non-farm microcredit officers • PR activities to make the service known to customers. • Monitoring system: Follow-up on regularly monthly basis when installments got closer • Law enforcement: For willful defaulters Source: Amphol Unves

37. Project Implementation • Development • Microcredit supports economic activities, e.g. small-scale trading, food stalls, repair shops, food production, etc. • About 65% of borrowers were women • Portfolio management: to ensure profitable microcredit operation • Staff trained in relevance training courses. • Improved customer information/database • Branch management information system (B-MIS) on a profit center basis Source: Amphol Unves

38. Project Implementation Conclusions • Project supported BAAC for development of innovative financial products and approaches. • Innovations replicated by BAAC branches • Impacts on BAAC outreach are service quality and • extended BAAC depositor base • Non-farm loans gave lessons, experience resulted in risk minimizing design of loan procedures and support measures for the new market segment • Branch management information system (B-MIS) is a new tool to uplift financial performance • Savings are equally important than credit • Innovations must be sustainable and benefit the target groups & increase BAAC financial viability

39. BAAC Social Support Project: SSP • The project arose in response to sufferings of rural people after 1997 financial crisis • Aims: Help BAAC to improve microfinance services quality, strengthen rural microfinance & enterprise groups. • Core concept: Provide knowledge/skills on production to target groups first then provide to operation unit for expansion • In some case market facilitation is undertaken Source: Amphol Unves

40. 3. BAAC: Entrepreneur and General People Loan • Customers: Individuals (generally group-based) and Legal person • Loan Types: Working capital, investment loan • Loan Objectives: Promote and support • Customers’ product development in investment, production, processing, marketing • Strengthening community economy aim at creation of industrial, commercial and service enterprises to increase income, reduce costs • Community savings and self-reliance

41. BAAC: Entrepreneur and General People Loan • Credit Worthiness Analysis: • Customer: honest, good loan use record, knowledge & experience, financial status • Loan needs: Needs from business, work, project plan with fact & information from customers, comparison, general standard information • Income: Ability to generate income, sources of income to set appropriate installments repayment in line with cash flow • Repay ability: Income after costs (operation cost, household spending) (generally repayment amount not set more than 40% of income) • Repayment history • Collateral: stability, sufficiently covering requested loan

42. BAAC Entrepreneur and General People Loan • Loan term: not more than 18 month (on monthly repayment basis) for working capital loans, 15 years for investment loans • Interest rate: • Minimum Retail Rate (7.5%/year) for individuals differentiation is based on customers’ performance • Minimum Lending Rate MLR (5.5%/year) for legal persons (differentiation in rate is based on customers’ performance)

43. Microfinance Challenges • Banks incur high overhead cost, they incline to deal with better-off borrowers. • How to lower transaction costs to operate profitably? • The poor can save and repay debts. How can they be successful in their business? • Microfinance needs more than lending and savings? new services, e.g. insurance, housing loan are necessary.

44. III. Village Fund in Thailand

45. Structure of village Fundoperation in Thailand Gov’t Inform Money contract Village fund committee Committee (15) Bank of Agriculture Apply for loan lending Money Saving monthly basis Villagers

46. Work format 2/3 villagers elect VFcommittee Villagers buy shares to set up village fund account Each membercan apply for one year loan maximum amount 20,000 bht. Villagers apply loan to committee

47. Work format Committee screen applications Register village fund unit the district office Open account at the Bank Gov’t transfer grant to the account BAAC officer pay loan amount directly to villager

48. Eligible applicants • Reside in the village no less than 6 months • Be member of the savingfund • Have bought share with the village Fund

49. Government committee National Village Fund committee Office of the National Fund National Village Fund Supporting Sub- committee Province and district branches Urban Community Fund Village Fund Village Fund Source : Bulman (2007)

50. Microfinancefor village and urban Total 79,092 Funds - village 74,874 - urban 3,486 - military community 738