1. 1/16 LECTURE INTRODUCTION TO MICROFINANCE May 6th, 2009 Emilie Levy, Executive Director

2. 2/16 DEFINITION OF MICROFINANCE STAKEHOLDERS MICROFINANCE BEST PRACTICES SUSTAINABILITY AND RISKS SNAPSHOT OF MICROFINANCE TODAY Agenda

3. 3/16 Mrs. Israel, 48 years old Unemployed husband 4 children No savings Good cook Mrs. Israel decides to start a small catering service at home Mrs. Israel goes to the bank and makes a demand for a loan at her bank MRS. ISRAEL’S DEMAND IS REJECTED Case study

4. 4/16 Why are people excluded from certain financial services? Justification and definition of microfinance Lack collateral or guarantors A bad credit history Gap in the communication / lack of confidence in the Banks Doubt of the bank of the repayment capacity Lack of access to financial infrastructure and services in remoted areas WHAT IS THE ALTERNATIVE? MICROFINANCE

5. 5/16 Justification and definition of microfinance FINANCEMICRO 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.

6. 6/16 Microfinance is a tool against poverty by enabling the beneficiaries to : Create sustainable activities to increase their incomes Reduce external shocks Improve the living conditions of entrepreneurs and of their families Empower people and mainly the women Definition 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

7. 7/16 Yunus’ idea Prof. Muhammed Yunus Founder of the Grameen Bank, Bangladesh Introduction to Microfinance: History How did all start? On the field Prof. Yunus saw that Even poor people and women need loans They can have an activity and repay Set up financial institutions with a social mission Listen to the needs and constraints of the excluded & offer them adapted financial tools to empower themselves ( solidarity groups) Spirit: SUSTAINABILITY

8. 8/16 MICROFINANCE INSTITUTIONS (MFIs) (NGO, ASSOCIATIONS & BANKS) Commercial Banks COMMERCIAL BANKS & INVESTMENT FUNDS FOUNDATIONS & DONORS (incl. enterprises) GOVERNMENT & LOCAL BODIES SUPPORT ORANIZATIONS (e.g. PF) BENEFICIARIES Actors & Mechanisms

9. 9/16 2 2 Purchase of the ingredients Start of cooking & sale (Daily benefits amount NIS 100) 3 3 Weekly Repayment ( 86 NIS) Remaining money is used to buy food 4 4 Final Repayment 12 weeks later Demand for a 2 nd loan over NIS 1500 to buy a fridge) 1 1 Visit of Mrs. Israel to the MFI Meeting wit the Loan Officer Convinced, reception of a loan of NIS 1,000 (+ NIS 30 interest rate ) Regular contact and follow up between the MFI and the client Micro-credit Best practices (1/4 ): microcredit Mrs. Israel needs NIS 1,000

10. 10/16 Microfinance is not philanthropy! Clients need to pay for the services Microcredit clients need to repay the loans Interest rate to cover the costs Why is repayment important? Offer new loans and extend the client base Ensure correct functioning and growth of the institution Cover office & operational costs Cover for non-payments when they occur Avoid financial loss and loss of credibility for the institution  REPAYMENT ON TIME GUARANTEES THE SUSTAINABILITY OF THE PROGRAM Microcredit Best Practice (2/4 ) Repayment

11. 11/16 Prejudices The social mission should consist in a free loan Interest Rate, perceived as a burden to the client Reality Micro-credits allow for the creation or expansion of an income generating activity and the generation of profit Interest rates are no burden if the business plan is solid and good evaluation has been done Micro-credit Best practices (3/4 ): Interest Rate

12. 12/16 Methodology Regular follow up Requirement of good repayment for future access to a bigger loan Local loan officers familiar with local culture Adapted products and procedures Small and short term credits Repayment capacity assessment Adapted collaterals / group solidarity guarantee Business Development Services Compensation for lack of education of loan beneficiaries Microcredit Best practices (4/4): Key success factors

13. 13/16 Sustainability: the conceptual framework OUTREACH IMPACT How do we measure the impact? SUSTAINABILITY Why few MFIs are sustainable? Need to make trade-off sometimes Need to reduce the internal and external risks to maximize the success

14. 14/16 10,000 MFIs manage a global portfolio of US$30 Billions In a range from 150 US$ to 7,000 US$, the average loan size is US$ 450 150 Mio micro-credit active clients 300 Mio micro-saving active clients 50 Mio micro-insurance active clients Sources : CGAP, BIT, Microcredit Summit, PlaNet Finance Microfinance in the world today

15. 15/16 Development of MF in industrialized countries (e.g. Israel, France, USA) thanks to the adaptation of the tools and methodologies Commercialization of the stakeholders Use of new technologies as a new development tool New trends

16. 16/16 Thank you! www.planetfinancegroup.orgelevy@planetfinance.org