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A Friendly Introduction to Microfinance

A Friendly Introduction to Microfinance. w ith Sanghmitra Gautam. The start of Microfinance . Why was there a gap in service? The first Microfinance loan: USD 27.00 lent to a group of 42 women in rural Bangladesh Each of the women made a profit of USD 0.02 . Before Microfinance .

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A Friendly Introduction to Microfinance

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  1. A Friendly Introduction to Microfinance with Sanghmitra Gautam

  2. The start of Microfinance • Why was there a gap in service? • The first Microfinance loan: • USD 27.00 lent to a group of 42 women in rural Bangladesh • Each of the women made a profit of USD 0.02

  3. Before Microfinance • Self-Help Groups (SHG) • ROSCAs (Rotating Savings and Credit Association) • Post Offices in India • ‘SUSU’ Collectors in Ghana • Community Banks (NABARD India)

  4. What did Microfinance bring? • Instutionalized the process of lending credit • Grameen Bank in Bangladesh (1983) • Transition from Microcredit to Microfinance • Financial self-sufficiency • Sustainable productivity from credit • Access to financial services

  5. Household Demand • Savings: • Education of children • Insurance against shocks (Health, Weather etc.) • Smoothing Household consumption • Loans: • Investment to increase productivity

  6. Supply ‘provide loans for investment in an income generating activity’

  7. Theory behind the policy • Why doesn’t the free market supply financial services? • The standard Principal – Agent Problem • Presence of Asymmetric Information • Transaction Costs • Adverse Selection (Screening/Signalling) • Moral Hazard (Monitoring) • Enforcement Costs (Repayment of loans)

  8. How does it work? • GROUP LENDING • Mechanism: Joint Liability Default Clause • Delegation of agency costs to the borrowers • Efficiency gains – borrowers can screen, monitor and enforce repayments at a lower cost • Enforcement of repayment via social sanction among peer members

  9. How does it work? • INDIVIDUAL LENDING • Mechanisms • Progressive Lending • Loans conditional on savings • Loans to Women • Public disclosure of borrowers’ repayment history • Non-Refinancing threat • Cross Reporting (MFIs)

  10. Many Faces of Microfinance • Loans for income generating activities • Small scale investment in machinery • Livestock (e.g. dairy farming) • Cash loans to smooth Household consumption • Seasonal liquidity constraints • Micro Insurance • Micro Savings

  11. Many Faces of Microfinance Recent Developments • M-Pesain Kenya • Loans to urban poor (Developed Countries) • Loans for health infrastructure – Clean water and sanitation

  12. THANK YOU

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