Fundamental concepts in microfinance Theory and Practice

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Review Session 4
Fair Trade
Theory of Change Grounded to bring about social and environmental impact Labeling, branding : Creating a sense of exclusivity Business Model Consumers and market

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Review Session 5 : Performance of Social Enterprise

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Review Session 5
SROI
Measuring the Theory of Change (social, public and financial returns) Best when few KPIs Lack of structure/template/ high subjectivity (--) Managing stakeholders (++) Gaining legitimacy

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

SKS Microfinance Case

Discuss the role and compatibility of founders and professional CEO in this case? Discuss the organizational stigma associated with SKS Microfinance? Is for profit social business an Oxymoron? Discuss the role of regulators when suicides were reported, what happened? Should social business go for IPO?
7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Financial Services Pyramid

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Poverty Pyramid

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

What Is Microfinance?
Microfinance is the offer of financial & non-financial services to people excluded from the traditional banking system. The services are adapted to the needs of the target populations.

MICRO

FINANCE

Micro-entrepreneurs Self-employed Low income populations Excluded populations

Business & educational loans Savings Micro-insurances Remittances Micro-entrepreneur training Coaching & workshops on health, hygiene, etc.

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Microfinance Theory of Change

Financial Inclusion
Provide Financial services to the marginalised Protect the marginalised from loan sharks

Ethical Financial Practices

Low or zero collateral Low interest rates

Additional services
Entrepreneurship training and consulting Housing loan Insurance services at low cost
7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Types of Financing
Debt Financing Equity Financing

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Why high interest rate?

Moral Hazard Information Asymmetry

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Different Microfinance Products

Cost of burial replacement costs, natural calamity . (MF : Insurance) Retirement plans, Health care plan..(MFPension plan, health insurance) Equipment for agriculture activities, livestock, home upgrade.. (MF: Medium term) Social obligations like Marriage, Festivals.. (MF: Short term) Housings, Wells, Capital intensive enterprise (MF: Long term Loans) Emergency loans like family disaster, natural calamity Short term loans to meet daily/weekly needs

7th October 2013

Source: Insead case study 2009 (Santos and Anne Claire)

S-ENT, Session 6, Anirudh Agrawal CBS

Activity 1
In groups of 3-4, discuss the target segment for microfinance in Scandinavia?
Think about the background and the strata of people that are financially excluded in Scandinavia Who do you think can be benefited from microfinance in Scandinavia? What are their needs and how much microfinance loans can they have? Hint (Immigrants with no financial history)
7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Business Basics at the Base of the Pyramid Akula (2008)

Scaling Standardization of products and services Adopt a profit oriented approach to signal commercial capital Use of technology Focus on volume

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Building Social Business Models: Lessons from the Grameen Experience

Social Business Model
How products can be servitised to serve the poor Grameen Phone, Grameen Veolia, Grameen Danone (each using their own innovative ways to reach out to the poor)

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Building Sustainable Hybrid Organizations : The Case Of Commercial Microfinance Organizations

How organizations can navigate competing logics?

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Design a Microfinance Business Model

In a group of 3-4, discuss to design a microfinance business model?
Define the target customer/region Target loan / person Profit/Social business Interest rate

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Difference Traditional banking industry and Microfinance

Location Salary Stress Interest Rate Certainty about the future Purpose, goals and values Working hours, motivation Outdoor time, real world impact Working environment Friends and Family
Source: Kiva
7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Principles of Microfinance
Poor people need a variety of financial services, not just loans. Microfinance is a powerful tool to fight poverty. Microfinance means building financial systems that serve the poor. Microfinance must pay for itself to reach large numbers of poor people. Microfinance is about building permanent local financial institutions. Microcredit is not the best tool for everyone or every situation. Interest rate ceilings making it harder for poor people to get credit. The role of government is to enable financial services, not to provide them. Donor funds should complement private capital, not compete with it. The key bottleneck is the shortage of strong institutions and managers. Microfinance works best when it measures and discloses its performance.

7th October 2013

S-ENT, Session 6, Anirudh Agrawal CBS

Points Against Microfinance

High interest rates
How to decide the optimum interest rate?

Lack of legal protection for the borrowers and for the lenders High operating costs and low margins Lack of institutional structures, business framework, data, operating procedures
S-ENT, Session 6, Anirudh Agrawal CBS

7th October 2013

Way Forward in Microfinance Study

Fundamentals Describe fundamental concepts in microfinance Design client-focused services Apply effective microcredit methodologies Describe the effects of the local environment on microfinance Financial analysis and Risk Analysis Read financial statements Measure delinquency Identify key financial factors Identify effective interest rate practices Measure financial viability Institutional Analysis Gauge institutional viability Strengthen relations between donors and microfinance institutions
S-ENT, Session 6, Anirudh Agrawal CBS

7th October 2013