Models of access to finance 11 th September 2012

Models of access to finance11th September 2012 Ruth Stewart

Models of access to finance • Formal banking services • Access requires geographical proximity, social acceptability, skills / literacy, a certain level of wealth • Not-for-profit microfinance • Availability varies considerably worldwide • Interest rates depend on the client base • For-profit microfinance • Hard to distinguish • May be more accessible and better marketted • Money lenders, loan sharks etc • Always available, but this is what we are aiming to avoid From Google images

What do we mean by microfinance? • Credit is widely available (in any places) • Credit is not a grant/gift - it is a debt • Credit of cash or non-cash e.g. seeds, goats • Repayment requirements: weeklyor monthly • Penalties for late / non-payment & availability of other loans • Interest rates vary 20%-200% • For leasing – 2 types - who owns the asset at the end of the contract • In micro-savings models, money can be stored and withdrawn in a range of ways • Commitment and ordinary savings • Savings often linked to credit • Variety of insurance models available Ray Witlin / World Bank

Models of access to microfinance • Group or individual models • Women and / or men • Group-models tend to focus on women • Individual models tend to focus on entrepreneurs • More effective when not targetted at poorest • Funding: self / peers, NGO / church, commercial bank, government agency • Level of risk lower with self-funded groups, and with models that emphasis and support savings rather than credit

Related services • Finance can’t be considered in isolation • Effective use of financial services requires • Financial literacy • Business acumen • Access to markets • Advice on managing debt as well as credit • We simply don’t know if investment in financial services would be better spent else-where • Some people may benefit more from job creation, or investment in health care

What do we know about the impacts of microfinance? • Some people are made poorer, and not richer, by microfinance, particularly micro-credit clients. Wealthier entrepreneurs benefit. • There is some evidence that microfinance enables poor people to be better placed to deal with ‘shocks’, but this is not universal. • There is limited evidence that microfinance empowers women • There is some evidence that micro-credit damages children’s education – it isn’t a solution for long term problems. • Credit increases food security for some but worsens it for others. • Micro-savings may be a better model than micro-credit, especially commitment savings • The rhetoric around microfinance is problematic. There is an obligation amongst donors and policy-makers not to falsely raise expectations.

What do we know about the impacts of microfinance? • Micro-credit sometimes increases engagement in economic opportunities, but for wealthier clients and not poorer ones. • Credit can also increase income in some circumstances, but reduces it in others. • The longer people are involved in micro-credit the poorer they become. • There is not enough evidence to identify patterns in the exact circumstances in which microfinance has positive impacts for clients. • There is not enough evidence to allow us to conclude on whether financial interventions targeted at women are more or less effective for them.

“Credit is like a fire: it is useful to cook your sadza but if you are careless, it will burn your hut.” Insurance

Models of lending • Associations • Bank Guarantees • Community / village banking • Co-operatives • Credit Unions • NGOs • For profit banks • ROSCAS 8 models based on Microfinance Hub online

Microfinance Lending Model 1: Associations • Formed by the poor • To offer microfinance services to themselves. • Form on the basis of gender, religion, or political and cultural orientation • Gather capital and intermediate between banks, MFIs and its members Example: Self Help Groups, SHGs (India)

Microfinance Lending Model 2: Bank Guarantees • A donor or government agency guarantees microloans • Loans are made by a microfinance/commercial bank to an individual or group of borrowers • Compulsory deposits by borrowers are required Examples:AfriCap Microfinance Fund (Mauritius), Bellwether Microfinance Fund (India), Latin America Bridge Fund, Microfinance Credit Guarantee Facility (Pakistan)

Microfinance Lending Model 3: Community Banking/ Grameen Bank/ Village Banking • Formal versions of ‘associations’ • Created by members of a target community • By offering microfinance services, these banks seek to develop their communities. • Guarantees are provided by social collateral (peer-pressure) as services are distributed through 5-member groups where each member’s eligibility for loans is based on his / her peers’ performance. Examples:Grameen Bank (Bangladesh), MuCoBa (Tanzania)

Microfinance Lending Model 4: Cooperatives • Cooperatives are very much like ‘associations’ and ‘community banks’ except that their ownership structure does not include the poor. • A group of middle or upper class individuals form a co-op to offer microfinance services to the poor. Examples: Co-operative Bank (England), Cooperative Rural Bank of Bulacan (Phillipines)

Microfinance Lending Model 5: Credit Unions • In a credit union, members of a target community gather their money and make loans to one another at low interest rates. • Compared to community banks, credit unions are smaller and non-profit oriented, charging interest rates that merely allow sustainability Example: Unión ProgresistaAmatitlaneca (Guatemala), Vancity Credit Union (Canada)

Microfinance Lending Model 6: Non-Governmental Organizations (NGOs) • Unlike community-based models, NGOs are ‘external organizations’ • Activities range from offering microfinance services to improving the credit rating of the poor, training, education and research. • NGOs may also act as intermediaries between the poor and donor agencies (UN, ADB, World Bank) and operate locally, as well as globally (through a physical or online presence) Examples: ACCION International (headquarters in USA), KIVA (Headquarters in USA), Kashf Foundation (Pakistan)

Microfinance Lending Model 7: For-profit Banks • Commercial Banks, as well as specialized Microfinance Banks offer various financial services to the poor but the main purpose may be to secure a high return on investment. Unlike other models, the aim is social development as well as financial progress beyond institutional sustainability. • Examples: Bank Compartamos (Mexico), Khushali Bank (Pakistan)

Microfinance Lending Model 8: ROSCAs Rotating Savings and Credit Associations (ROSCAs) • ROSCAs are small groups, typically composed of women, where each member makes ‘regular cyclical contributions into a common fund’, • Given entirely to one member at the start of each cycle (weekly, monthly, quarterly). • The benefit of this model is the matching of a client’s cashflows with the loan, the ability to structure the deal without interest rates, and the absence of over-head costs.

What is the problem we are trying to address? • Avoid harm, do good • Help people to access mainstream financial services • Provide alternative financial services • Help people to manage their money (and their debt) better • Build community, empower women • Support economic empowerment www.celias.com

Issues to consider when considering increasing access We don’t know which model works best – but some carry more risk than others: credit/ interest and those which target poorest There is a need for good quality related services - financial and business advice Not everyone is an entrepreneur – targeting fewer with more money may be better There may be as much need for debt-alleviation services as there is for loans Clients aren’t always making good choices about how to spend their money Microfinance, particularly credit, causes harm as well as good

Thank you r.stewart@ioe.ac.uk

Use other MFI Social cohesion What we think is happening Use same MFI Micro-credit Micro-savings Women’s empowerment Able to repay loan and avoid increase in debt Able to save Default on loan, lose collateral and/or forced to borrow more Given to individuals or groups Long-term benefits Spend money differently 1. Invest in immediate future: a. Business b. Productive assets c. Adult education d. Workers’ health & nutrition 2. Consumptive spending with scope for productivity: a. Add on housing b. Assets which retain value 3. Invest in long- term future: a. Children’s education b. Children’s health and nutrition 4. Consumptive spending (non-productive): Assets which do not retain value Actual decreased income Actual increased income Determined by external factors: Entrepreneurial ability Appropriateness of business in context Competition from other MFI clients Gender and power relations Scope for increased income via business or employment Improved capabilities Better able to deal with shocks FOR CREDIT CLIENTS ONLY Inability to repay loan

Use other MFI Social cohesion What we think is happening Use same MFI Micro-credit Micro-savings Women’s empowerment Able to repay loan and avoid increase in debt Able to save Default on loan, lose collateral and/or forced to borrow more Given to individuals or groups Spend money differently 1. Invest in immediate future: a. Business b. Productive assets c. Adult education d. Workers’ health & nutrition 2. Consumptive spending with scope for productivity: a. Add on housing b. Assets which retain value 3. Invest in long- term future: a. Children’s education b. Children’s health and nutrition 4. Consumptive spending (non-productive): Assets which do not retain value Actual decreased income Actual increased income Determined by external factors: Entrepreneurial ability Appropriateness of business in context Competition from other MFI clients Gender and power relations Scope for increased income via business or employment Improved capabilities Better able to deal with shocks FOR CREDIT CLIENTS ONLY Inability to repay loan

Use other MFI Social cohesion Use same MFI Micro-credit Micro-savings Women’s empowerment Able to repay loan and avoid increase in debt Able to save Default on loan, lose collateral and/or forced to borrow more Given to individuals or groups Long-term benefits Spend money differently 1. Invest in immediate future: a. Business b. Productive assets c. Adult education d. Workers’ health & nutrition 2. Consumptive spending with scope for productivity: a. Add on housing b. Assets which retain value 3. Invest in long- term future: a. Children’s education b. Children’s health and nutrition 4. Consumptive spending (non-productive): Assets which do not retain value Actual decreased income Actual increased income Determined by external factors: Entrepreneurial ability Appropriateness of business in context Competition from other MFI clients Gender and power relations Scope for increased income via business or employment Improved capabilities Better able to deal with shocks FOR CREDIT CLIENTS ONLY Inability to repay loan

Use other MFI Social cohesion What we now think is happening Use same MFI Micro-credit Micro-savings Women’s empowerment Able to repay loan and avoid increase in debt Able to save Default on loan, lose collateral and/or forced to borrow more Given to individuals or groups Long-term benefits Spend money differently 1. Invest in immediate future: a. Business b. Productive assets c. Adult education d. Workers’ health & nutrition 2. Consumptive spending with scope for productivity: a. Add on housing b. Assets which retain value 3. Invest in long- term future: a. Children’s education b. Children’s health and nutrition 4. Consumptive spending (non-productive): Assets which do not retain value Actual decreased income Actual increased income Determined by external factors: Entrepreneurial ability Appropriateness of business in context Competition from other MFI clients Gender and power relations Scope for increased income via business or employment Improved capabilities Better able to deal with shocks FOR CREDIT CLIENTS ONLY Inability to repay loan

Use other MFI Social cohesion Use same MFI Micro-credit Micro-savings Women’s empowerment Able to repay loan and avoid increase in debt Able to save Default on loan, lose collateral and/or forced to borrow more Given to individuals or groups Long-term benefits Spend money differently 1. Invest in immediate future: a. Business b. Productive assets c. Adult education d. Workers’ health & nutrition 2. Consumptive spending with scope for productivity: a. Add on housing b. Assets which retain value 3. Invest in long- term future: a. Children’s education b. Children’s health and nutrition 4. Consumptive spending (non-productive): Assets which do not retain value Actual decreased income Actual increased income Determined by external factors: Entrepreneurial ability Appropriateness of business in context Competition from other MFI clients Gender and power relations Scope for increased income via business or employment Improved capabilities Better able to deal with shocks FOR CREDIT CLIENTS ONLY Inability to repay loan

Does microfinance increase engagement in economic opportunities?

Micro-leasing: no studies Micro-savings: robust evidence shows only commitment accounts increase wealth Micro-credit: appears to increase income in some circumstances but reduce it in others (all evidence from slightly less-than-robust studies) Combined credit and savings: mixed impacts from slightly less-than-robust studies Increasing wealth/ Reduce poverty Microfinance and economic opportunities Do microfinance-supported economic activities increase income?

Micro-leasing: no studies Micro-savings: robust evidence shows increase in savings although not always Micro-credit: best evidence shows decrease in savings, other evidence shows increase in savings Combined credit and savings: slightly less-than-robust studies show no clear evidence of impact Increasing wealth/ Reduce poverty Microfinance and economic opportunities Do microfinance-supported economic activities increase savings?

Micro-leasing: no studies Micro-savings: robust studies show only commitment accounts increase non-financial assets Micro-credit: slightly less-than-robust studies show mixed impacts Combined credit and savings: slightly less-than-robust studies show mixed impacts Increasing wealth/ Reduce poverty Microfinance and economic opportunities Do microfinance-supported economic activities increase non-financial assets?

Micro-leasing: no studies Micro-savings: robust studies show no impact on business expenditure, increase in spending on food and private items Micro-credit: best evidence shows no impact, less reliable evidence mixed Combined credit and savings: slightly less-than-robust study shows mixed impacts Increasing wealth/ Reduce poverty Microfinance and economic opportunities Do microfinance-support economic opportunities increase expenditure?

Models of access to finance 11 th September 2012