1. Microcredit and Microfinance
Dr. Marco Elia, University of Turin - Italy
Belgrade, 28th November 2007

2. Agenda
Introduction – What is Microfinance? The Institutionist and the Welfarist approach
Microcredit and Microfinance
Commercial approaches implemented by international and domestic banks in microfinance

3. 1. Introduction
What is Microfinance?
“The provision of small scale financial services to low-income people excluded from the formal financial system”
Almost general agreement on this definition
Commitment to provide credit
Common concern for low income people

4. Unity of commitments and concerns
1. Introduction
Unity of commitments and concerns
It masks different approaches
Different types of institutions, borrowers, delivery systems put (sometimes incorrectly) under the term “MICROFINANCE”

5. SPECIALIZED FIELD THAT COMBINES BANKING WITH SOCIAL GOALS
1. Introduction
MICROFINANCE
SPECIALIZED FIELD THAT COMBINES BANKING WITH SOCIAL GOALS

6. Institutionist approach (WB, CGAP, USAID)
1. Introduction
Institutionist approach (WB, CGAP, USAID)
Focus on Financial self-sufficiency (FSS) and institutional scale
Welfarist approach
Direct poverty alleviation among the very poor
Jonathan Morduch(1998) “The Microfiance Schism”

7. Emphasis: FSS and breadth over depth of outreach
1. Introduction
THE INSTITUTIONISTS
Emphasis: FSS and breadth over depth of outreach
Center of attention: The institution
Main success index: achieve Financial Self Sufficiency (FSS)

8. THE INSTITUTIONISTS HAVE CLEARLY WON THE DEBATE TO DATE
1. Introduction
THE WELFARISTS
Emphasis: Depth of outreach
Center of attention: Clients
Accept and require subsidies
Grameen Bank of Bangladesh
THE INSTITUTIONISTS HAVE CLEARLY WON THE DEBATE TO DATE

9. PRACTICAL IMPLICATIONS
1. Introduction
PRACTICAL IMPLICATIONS
Different clients served
Different methodologies
Different institutional structures and financing

10. The Institutionist argument
1. Introduction
The Institutionist argument
Recognition of scarcity (potential demand cannot be met only by donors)
Poverty reduction requires massive scale
BEST PRACTICES: essential step for FSS, CAPITAL MARKET ACCESS and MAXIMUM OUTREACH TO POOR CLIENTS

11. 1. Introduction
The Welfarists
Depth over breadth of outreach
FSS desirable, not necessary
Concerns that “profit-making MFIs” will lose their “social mission”

12. 1. Introduction
Microfinance must be integrated into the formal financial system
Annual spending of the donor community on microfinance:
$800 million - $1 billion per year (CGAP, 2004)
Potential demand : 500,000,000 clients far exceeds the capacity of donor funding (World Bank)

13. 1. Introduction .. a short history
1960s – 1970s : credit provided to rural farmers by many state-run dev. Institutions (RDIs)
RDIs almost always failed
Grant mentality
High transaction costs
Heavy corruption
Limited impact
BELIEF THAT LOW INCOME PEOPLE ARE UNBANKABLE
The Institutionist approach is partially an outcome of these failures

14. 1. Introduction
June 2004: The Group of Eight (G8) endorsed the 11 key principles developed by CGAP (a consortium of 28 public and privaste member donors) at the meeting in Sea Island (Georgia) They intent to build a base a basic principles to support a diversity of approaches
2005 has been declared Year of Microcredit by the United Nations
In 2006 Yunus and the Grameen Bank received the Nobel Peace Prize

15. 1. Introduction Furthermore must be highlighted that:
Major innovations came from highly subsidized MFIs
The relationship focus on the poor and profit orientation is not always clear
CGAP admits that the majority of the MFIs do not have the potential to be FSS in the near future
For certain target groups the benefits of ongoing subsidization may exceed their costs

16. Agenda
Introduction – What is Microfinance? The Institutionist and the Welfarist approach
Microcredit and Microfinance
Commercial approaches implemented by international and domestic banks in microfinance

17. 2. Microcredit and Microfinance
Lack of clarity in using the terms
The two ideas must be clearly differenciated
“ Microfinance is he provision of small scale financial services (Microcredit, Microsavings, Microinsurance, money transfer) to low-income people”
MICROCREDIT IS A PART OF THE FIELD OF MICROFINANCE

18. 2. Microcredit and Microfinance
The term Microfinance was first introduced in the 1990’s as a transformation, or extension, of the already popular and successful poverty alleviating idea of microcredit
The “first generation” of institutions (NGOs) delivered almost only credit
Successful example of Bank Rakhyat Indonesia in providing savings accounts poor people

19. 2. Microcredit and Microfinance
Savings services are as important as loans
All the financial services, and not just loans, help low income people to smooth consumption, stabilize income and protect against risks (Broadening of the concept of microfinance)
Importance of money transfer services
Training to client is a non-financial service
CENTRAL ROLE OF CREDIT METHODOLOGIES

20. 2. Microcredit and Microfinance
Microenterprise Development, Microfinance and Microcredit

21. Agenda
Introduction – What is Microfinance? The Institutionist and the Welfarist approach
Microcredit and Microfinance
Commercial approaches implemented by international and domestic banks in microfinance

22. 4. Commercial approaches
Direct (downscaling, MFI at the outset) vs. Indirect approach
(Loans to MFIs, partnerships, etc..)
Legal constraints mainly related to interest rates celings
Evidence from the current practice around the world show a
“dual approach”
The potential for grow is huge especially for additional
financial services besides credit (strategy of Bank Rakyat vs. BancoSol)
The key constraint is the “lack of institutional and human capacity” (CGAP, Key Principles of Microfinance)

23. References marco.elia@unito.it
Easton, T. (2005). The hidden wealth of the poor. Survey: Microfinance - The Economist, November 3rd 2005
Harper, M. and Arora, S.S. (2005). Small Customers, Big Market: Commercial Banks in Microfinance. New Delhi, TERI Press
Meyer, R. and Zeller, M. (2002). The Triangle of MICROFINANCE: Financial Sustainability, Outreach and Impact. John Hopkins Press, Baltimore and London
Morduch, J. (1999). The microfinance promise. Journal of Economic Literature, 37,
Morduch, J. (2000) The Microfinance Schism. World Development Vol.28, No.4, pp
Shreiner, M. (2003). A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh. Center for Social Development, Washington University in St. Louis
Silverman, R. E. (2006). A New Way to Do Well by Doing Good – Microfinance Funds Earn Returns on Tiny Loans To Poor Entrepreneurs Abroad. The Wall Street Journal, 5 January
Yunus, M. (1998). Banker to the Poor: The Autobiography of Muhammad Yunus, Founder of Grameen Bank. The University Press Limited, London