Welcome to class of Microcredit / Microfinance in Emerging Markets Dr Welcome to class of Microcredit / Microfinance in Emerging Markets Dr. Satyendra Singh Professor, Marketing and International Business University of Winnipeg Canada s.singh@uwinnipeg.ca http://abem.uwinnipeg.ca

How does it work?

What is Microcredit Different from Conventional Banks 5 features Loan size is small  b/w $100 - $500  average $100 Customers are rural poor, particularly women Income activities  Self-employment, informal sector No collateral required Must have saving account linked to MC

Microcredit – Different from Informal $ Lenders MC  No profit motives NGO’s approach to poverty alleviation Before the poor was blamed for personal failing Now, poverty  deprives the poor of access to social resources  human rights issue Non-judgemental MC leaders  inspire social and economic revolution in the EM by organizing the poor under the banner of MC organization (NGOs)

Microcredit (MC) – Small loans Why is MC important? 4bn poor people need access to financial services Social justice Only philanthropy is not enough Women suffer the most Development of informal sector  farmers, tailors… Need to remove poverty in EM ↑ Demand  $50 bn per year for MC ↑ 15-30% growth annually Moral responsibility of businesses

What is Microfinance: It is broad Loan, saving, insurance, money txfr…

Debate: Microfinance Sustainability Poverty alleviation ↑ Interest is ok to cover administrative cost & be profitable Attract ↑ people to open MF venture ↑ Competition  ↑ innovation ↓ Interest rate for clients Able to serve the 3-4 bn people Poverty alleviation ↑ Interest is NOT ok because it exploits poor ↑ Profit will attract ↑ MF investors Growth of new and uncertain sector Profit-making venture

Microfinance (MF) Venture Microfinance  Profit-making venture But serves the poor Self-financed  Savings > lending Share Capital  collected from the public Equity Capital  supplied by owners of the MF venture Owners have little equity capital Public has little interest in investing in the business Problem of seed capital  not profitable at outset Assistance from private firms, donors agencies for seed capital Donors World bank, development banks, CIDA, USAID…

Justification for Assistance to MF venture 2 reasons for the justification Social Vast differences in wealth and education among people MF Owners are not as greedy as banks (↑ interest rate from poor) So, MF owners are different from traditional bankers Economic Need help/grants/seed  ↓ interest loan MF entrepreneurs  able to deliver appropriate services & make $ Infant industries  subsidize initial phase of operation ↑ productivity  ↑ $  ↑ money mgmt skills  resource mgmt  ↓ transaction costs  ↑ MF entrepreneur’s skills to be market oriented  sound business decision  contributes to economy

Dr Yunus, President Clinton

Social Consciousness-Driven Capitalism Theory Psychological Component  Dr. Md. Yunus Capitalism  premise  we are selfish by nature  ↑ $ So, ok to develop capitalist enterprise (financial return) if fair to customers (social return/consciousness) This premise creates 3 types of entrepreneurs Traditional capitalist  Financial return/profit Philanthropic organisations  Social return/NGOs Microfinance enterprises  combine traditional and philanthropic activities/return in a way that financial return cannot be negative  social consciousness-driven capitalist enterprise F

SHG Self Help Group  10-15 women

Social consciousness-driven Microfinance… Reasons for investing in the MF Large market size Unfulfilled demand ↑ Return on investment (ROI) despite ↑ admin cost ↓ Default rate of borrowers  1-5% Success or failure is not linked to world political events Appealing due to altruism Helping poor directly and avoiding corrupt government Feeling good by doing good Investors may like the reasons to invest in MF venture

These firms donate X% to microfinance venture IShop4Microfinance These firms donate X% to microfinance venture

Social consciousness-driven Microfinance But investors need to see sustainability of MF Means of Entry  Mainly motivated by ↑ rate of ROI Equity stakes For-profit orgn buys equity in MF  difficult  ↓ confidence Securitization Ability to securitize loans and sell  access to cheaper capital for MF venture  pass on the savings to clients Service provision partnerships  Insurance for loans Donors  self-sufficient  $ should exit Capacity building  leverage other successful MF venture Regulatory infrastructure  credit bureau, rating, legal framework

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