microfinance 101 session 1 - dr. stephen conroy

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Microfinance 101Microfinance 101Session 1Session 1

Stephen J. Conroy, Ph.D.Stephen J. Conroy, Ph.D.

Associate Professor of EconomicsAssociate Professor of Economics

University of San DiegoUniversity of San Diego

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I. Overview and Learning I. Overview and Learning ObjectivesObjectives

What is microfinance?What is microfinance? What is the formal lending institutions’ What is the formal lending institutions’

perspective? perspective? In-Class Exercise (Three Cases) In-Class Exercise (Three Cases)

How do MFIs differ from banks?How do MFIs differ from banks? Interest Rates and Lending PracticesInterest Rates and Lending Practices Stylized Facts about MFIsStylized Facts about MFIs

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I. Overview and Learning I. Overview and Learning ObjectivesObjectives

Banker to the Poor: Muhammad YunusBanker to the Poor: Muhammad Yunus In-Class Exercise #2In-Class Exercise #2

Creating a World Without Poverty: Creating a World Without Poverty: Muhammad Yunus (Part 2)Muhammad Yunus (Part 2)

BRAC—A Different ModelBRAC—A Different Model

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II. What is Microfinance?II. What is Microfinance? From From Armendariz and Morduch (2005Armendariz and Morduch (2005): “(A) ): “(A)

collection of banking practices built around collection of banking practices built around providing small loans (typically without collateral) providing small loans (typically without collateral) and accepting tiny savings deposits. . . .”and accepting tiny savings deposits. . . .”

From From U.N. International Year of Microcredit 2005U.N. International Year of Microcredit 2005 Web page: “Microfinance refers to loans, Web page: “Microfinance refers to loans, savings, insurance, transfer services, savings, insurance, transfer services, microcredit loans and other financial products microcredit loans and other financial products targeted at low-income clients.” targeted at low-income clients.” “ “MicrocreditMicrocredit is a small amount of money loaned to a is a small amount of money loaned to a

client by a bank or other institution. Microcredit can be client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or offered, often without collateral, to an individual or through group lending. .”through group lending. .”

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II. What is Microfinance?II. What is Microfinance? From From MixMarket.orgMixMarket.org::

“To most, microfinance means providing very “To most, microfinance means providing very poor families with very small loans (microcredit) poor families with very small loans (microcredit) to help them engage in productive activities or to help them engage in productive activities or grow their tiny businesses. Over time, grow their tiny businesses. Over time, microfinance has come to include a broader microfinance has come to include a broader range of services (credit, savings, insurance, range of services (credit, savings, insurance, etc.) as we have come to realize that the poor etc.) as we have come to realize that the poor and the very poor who lack access to traditional and the very poor who lack access to traditional formal financial institutions require a variety of formal financial institutions require a variety of financial products.”financial products.”

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II. What is Microfinance?II. What is Microfinance?

Mission StatementMission Statement from Grameen Bank: from Grameen Bank: http://grameen-info.org/index.php?option=com_easyfaq&task=cat&catid=80&Itemid=200

[“Grameen Bank provides financial [“Grameen Bank provides financial services to the rural poor of Bangladesh. services to the rural poor of Bangladesh. Those services include loans, saving Those services include loans, saving accounts, pension plans and loan accounts, pension plans and loan insurance. The overall goal of Grameen insurance. The overall goal of Grameen Bank is the elimination of poverty.”] Bank is the elimination of poverty.”]

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II. What is Microfinance?II. What is Microfinance? Mission StatementMission Statement from Compartamos: from Compartamos:

http://www.compartamos.com/wps/portal/!ut/p/c1/04_SB8K8xLLM9MSSzPy8xBz9CP0os_gADwNLcw93IwP_UHcXAyNjR6cgIy9TY29jM_1wkA6zeAMcwNFA388jPzdVvyA7rxwAsAPlcQ!!/dl2/d1/L2dJQSEvUUt3QS9ZQnB3LzZfUEgwOTdIRzIwT1VHRDAyM0FCUjJKNTNLSjM!/?mosHist=1

[We are a social enterprise committed to [We are a social enterprise committed to people. We create development opportunities in people. We create development opportunities in popular market segments that are based on popular market segments that are based on innovative and efficient models, distributed on a innovative and efficient models, distributed on a massive scale and on important values that massive scale and on important values that foster an external and internal culture. In this foster an external and internal culture. In this manner we are able to achieve permanent manner we are able to achieve permanent relationships based on trust and that contribute relationships based on trust and that contribute to a better world.]to a better world.]

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III. In-Class ExerciseIII. In-Class Exercise

In-class exercise: Business Loan CasesIn-class exercise: Business Loan Cases Divide into small groupsDivide into small groups Read each case and decide whether you Read each case and decide whether you

will make the loan—and under what will make the loan—and under what circumstances.circumstances.

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Bank:Bank: Assume you are a small bank. Each loan you Assume you are a small bank. Each loan you

originate costs you $10 to “wire” in the loan capital originate costs you $10 to “wire” in the loan capital from another bank, $50 in labor and overhead, from another bank, $50 in labor and overhead, loan capital costs of 5%, plus the original amount loan capital costs of 5%, plus the original amount of the loan.of the loan.

Each loan will generate the following revenue: a Each loan will generate the following revenue: a small origination fee to the borrower of $10, plus small origination fee to the borrower of $10, plus you can charge the client his/her expected return you can charge the client his/her expected return as interest rate. You should consider the risk of as interest rate. You should consider the risk of default in your decision (e.g., a 10%, 50%, 90% default in your decision (e.g., a 10%, 50%, 90% and 95% prob. of repayment).and 95% prob. of repayment).

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III. In-Class ExerciseIII. In-Class Exercise Case #1:Case #1: My name is Iwhiwhu and I live in Abraka town, delta State, Nigeria. My name is Iwhiwhu and I live in Abraka town, delta State, Nigeria.

I am a 34-year-old mother of three children. I have no formal I am a 34-year-old mother of three children. I have no formal education, though I was trained in domestic chores and farming as a education, though I was trained in domestic chores and farming as a girl. I have training in hairstyling, though, and used to own my own girl. I have training in hairstyling, though, and used to own my own hairstyling business from 1991 – 2001, but was unable to make hairstyling business from 1991 – 2001, but was unable to make much progress due to an unpredictable power supply. I got started much progress due to an unpredictable power supply. I got started selling fruits on the roadside for an initial investment of US$56. I selling fruits on the roadside for an initial investment of US$56. I want to rent a shop someday, however in the meantime, I would just want to rent a shop someday, however in the meantime, I would just like to expand my offering of fruits which will require additional like to expand my offering of fruits which will require additional capital. I would like a one-year loan for US$64. I have no collateral capital. I would like a one-year loan for US$64. I have no collateral to offer. I expect a 20% return on my investment.to offer. I expect a 20% return on my investment.

Will you give me a loan? Will you give me a loan?

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III. In-Class ExerciseIII. In-Class Exercise Case #2:Case #2: My name is Nancy and I am a 40-year-old entrepreneur who is living My name is Nancy and I am a 40-year-old entrepreneur who is living

her dream of owning her own business. I have been in business for her dream of owning her own business. I have been in business for 10 years running a party supply retailer (supplying everything from 10 years running a party supply retailer (supplying everything from party hats to helium tanks). I have a college degree. I have 10 party hats to helium tanks). I have a college degree. I have 10 years worth of financial data that show that I had a rough start, but years worth of financial data that show that I had a rough start, but have generated profits in excess of $150,000/year for each of the have generated profits in excess of $150,000/year for each of the past five years. Located in Escondido, I would like to expand my past five years. Located in Escondido, I would like to expand my business to include an offering of inflatable “jumpers” for little business to include an offering of inflatable “jumpers” for little children that can be rented out by the hour. This will cost me children that can be rented out by the hour. This will cost me $50,000 and I am requesting a loan for $40,000 (with $10,000 to be $50,000 and I am requesting a loan for $40,000 (with $10,000 to be financed from my own pocket). I am able to put up my two delivery financed from my own pocket). I am able to put up my two delivery vans (each worth $20,000) as collateral for the loan. My FICO vans (each worth $20,000) as collateral for the loan. My FICO credit score is 723 (this is the median FICO score from Fair Isaac ) credit score is 723 (this is the median FICO score from Fair Isaac ) and I expect a 25% return on my investment.and I expect a 25% return on my investment.

((http://en.wikipedia.org/wiki/Credit_score ) ) Will you give me a loan? Will you give me a loan?

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III. In-Class ExerciseIII. In-Class Exercise Case #3:Case #3: My name is Adonis and I live in San Diego, California. I am a 32-My name is Adonis and I live in San Diego, California. I am a 32-

year-old Greek immigrant. I notice that the olives and olive oil here year-old Greek immigrant. I notice that the olives and olive oil here in California are not nearly as good as those in my native country. I in California are not nearly as good as those in my native country. I would like to start importing olives and olive oil from Greece and sell would like to start importing olives and olive oil from Greece and sell them here in farmers markets. I have some business experience them here in farmers markets. I have some business experience when I was in Greece, but I have no credit history in the US and when I was in Greece, but I have no credit history in the US and only a little bit of cash ($5,000), which I want to put into my new only a little bit of cash ($5,000), which I want to put into my new business. I would like a one-year loan for $20,000 to start my business. I would like a one-year loan for $20,000 to start my business. I do not have any collateral, though, as I said, I am business. I do not have any collateral, though, as I said, I am putting every cent I have of my own into this business. I have no putting every cent I have of my own into this business. I have no FICO credit score. I expect a 10 percent return on my investment.FICO credit score. I expect a 10 percent return on my investment.

Will you give me a loan?Will you give me a loan?

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Bank Decisions?Bank Decisions? Why?Why? Why not?Why not? Factors considered?Factors considered? What if the loan origination fees were What if the loan origination fees were

reduced to $0?reduced to $0? What if clients’ risk profiles were What if clients’ risk profiles were

known with certainty?known with certainty?


See spreadsheets for each caseSee spreadsheets for each case Discuss different assumptionsDiscuss different assumptions

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Take-Home Points from Exercise:Take-Home Points from Exercise:1.1. Banks prefer higher interest rates . . . at Banks prefer higher interest rates . . . at

least up to a point (look at Case 2) least up to a point (look at Case 2) **With the higher interest rate (25%) in Case 2, **With the higher interest rate (25%) in Case 2, Scenarios 3 and 4 generate positive net revenue Scenarios 3 and 4 generate positive net revenue for the bank. [Note: Even if loan amount were for the bank. [Note: Even if loan amount were only $4,000, Scenario 3 would still generate a only $4,000, Scenario 3 would still generate a $250 profit.]$250 profit.]

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Take-Home Points from Exercise:Take-Home Points from Exercise:• From borrower’s perspective: higher interest rates From borrower’s perspective: higher interest rates

would reduce profits and increase the risk of would reduce profits and increase the risk of business failure, possibly attracting very risky business failure, possibly attracting very risky ventures for loans—“ventures for loans—“adverse selectionadverse selection”.”.

• Adverse selection—the selection of the worst Adverse selection—the selection of the worst “types” of individuals into a market (e.g., highest-“types” of individuals into a market (e.g., highest-risk clients for insurance policies, highest-risk risk clients for insurance policies, highest-risk borrowers for loans, used car sellers with “lemons”borrowers for loans, used car sellers with “lemons”

• ““Akerlof’s Lemons” paper—asymmetric informationAkerlof’s Lemons” paper—asymmetric information

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Take-Home Points from Exercise:Take-Home Points from Exercise:2.2. Banks prefer lower-risk clients. Banks prefer lower-risk clients.

The higher risk of borrowers—i.e., lower The higher risk of borrowers—i.e., lower probability of loan repayment—the less likely the probability of loan repayment—the less likely the bank will be able to generate positive net bank will be able to generate positive net revenue. Note that defaults usually result in revenue. Note that defaults usually result in default on both the principal and interest—a default on both the principal and interest—a double-cost for lender. double-cost for lender.

**In none of these three cases does a probability **In none of these three cases does a probability of repayment < 0.90 result in positive net of repayment < 0.90 result in positive net revenue, even in Case 2revenue, even in Case 2

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Take-Home Points from Exercise:Take-Home Points from Exercise:3.3. Banks prefer larger loan size. Banks prefer larger loan size.

Because of fixed costs, larger loan sizes can Because of fixed costs, larger loan sizes can generate larger revenues.generate larger revenues.

**Take, for example, Case 2, Scenario 3: Ten **Take, for example, Case 2, Scenario 3: Ten loans of $4,000 each would generate only $250 * loans of $4,000 each would generate only $250 * 10 = $2,500, compared to $2,950 for one loan of 10 = $2,500, compared to $2,950 for one loan of $40,000 [this is due to fixed costs$40,000 [this is due to fixed costs

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So . . . Why would banks want to lend to clients So . . . Why would banks want to lend to clients at (a) relatively low interest rates with (b) at (a) relatively low interest rates with (b) high risk, and (c) in very small high risk, and (c) in very small increments??? increments???

[The short answer is: they wouldn’t!][The short answer is: they wouldn’t!]

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Further . . . Access to formal financial Further . . . Access to formal financial institutions may be hindered by:institutions may be hindered by:

• Government monopolies in the financial sectorGovernment monopolies in the financial sector• Gender discriminationGender discrimination• Racial discriminationRacial discrimination• Religious discriminationReligious discrimination• SES/Class discriminationSES/Class discrimination

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Case #1: Actual Outcome: Case #1: Actual Outcome: Actual Outcome:Actual Outcome: With this loan, Iwhiwhu was able to expand her With this loan, Iwhiwhu was able to expand her

business, followed by subsequent loans of business, followed by subsequent loans of US$96, $120, $200 and $240. In 2007, she US$96, $120, $200 and $240. In 2007, she made US$40/week in profits and saved made US$40/week in profits and saved $1.60/day through Olidara, an itinerant savings $1.60/day through Olidara, an itinerant savings collector. (collector. (Source:Source: State of Microcredit Summit State of Microcredit Summit Campaign Report 2007, Sam Daley-Harris)Campaign Report 2007, Sam Daley-Harris)

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Case #2: Actual Outcome: Case #2: Actual Outcome: Actual Outcome:Actual Outcome: Okay, this is a hypothetical story . . . but . . . say Okay, this is a hypothetical story . . . but . . . say

Nancy failed to consider that several other jumper Nancy failed to consider that several other jumper rental companies, with lower overhead, were able to rental companies, with lower overhead, were able to lower their prices and keep her from being able to lower their prices and keep her from being able to make this a viable part of her business. She closed make this a viable part of her business. She closed down the business and had to forfeit her two delivery down the business and had to forfeit her two delivery vans, which had been run down by delivering jumpers vans, which had been run down by delivering jumpers and were only worth $10,000/each. and were only worth $10,000/each.

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Case #3: Actual Outcome: Case #3: Actual Outcome: Actual Outcome:Actual Outcome: The agency loaned $5,000 at around 10%, which he paid off The agency loaned $5,000 at around 10%, which he paid off

within the first year. In 2007, the client had a $10,000 loan within the first year. In 2007, the client had a $10,000 loan at 12% (interest rates went up slightly), with 11 employees at 12% (interest rates went up slightly), with 11 employees and vendor booths at farmer’s markets. He also supplied and vendor booths at farmer’s markets. He also supplied hotels, restaurants and casinos with olives and olive oil from hotels, restaurants and casinos with olives and olive oil from Greece. His sales were still growing, despite a slowing Greece. His sales were still growing, despite a slowing economy. He also had a FICO credit score in the mid-600’s economy. He also had a FICO credit score in the mid-600’s in 2007. (in 2007. (Source:Source: personal communication with local MFI— personal communication with local MFI—thought name has been changed.)thought name has been changed.)

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IV. Difference of MFIs from Banks?IV. Difference of MFIs from Banks?

How do MFI’s differ from traditional lending How do MFI’s differ from traditional lending institutions (banks, savings and loans, credit institutions (banks, savings and loans, credit unions)?unions)? Smaller average loan size (high transactions costs—Smaller average loan size (high transactions costs—

e.g. origination fees—associated with microloans e.g. origination fees—associated with microloans generally made them unattractive to banks)generally made them unattractive to banks)

Lack of collateralization requirements (poor clients Lack of collateralization requirements (poor clients generally do not have wealth, hence, no collateral . . . generally do not have wealth, hence, no collateral . . . So generally these loans were denied by traditional So generally these loans were denied by traditional lending institutions.)lending institutions.)

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IV. Difference of MFIs from Banks?IV. Difference of MFIs from Banks?

What innovations have overcome these two obstacles (high What innovations have overcome these two obstacles (high transactions costs and lack of collateral)?transactions costs and lack of collateral)?

1.1. Group lendingGroup lending [creates social accountability and increases [creates social accountability and increases repayment rates—a social capital collateral, addressing “risk” repayment rates—a social capital collateral, addressing “risk” issue and “transaction cost” issue—one “group” origination.]issue and “transaction cost” issue—one “group” origination.]

2.2. Early Repayment Early Repayment [Begin repayment of loan right away [Begin repayment of loan right away reduces risk.]reduces risk.]

3.3. Progressive lendingProgressive lending [increasing the loan size over time to the [increasing the loan size over time to the same clients establishes a “track record” with client—same clients establishes a “track record” with client—essentially what a credit rating (e.g. FICO score) does, though essentially what a credit rating (e.g. FICO score) does, though with only one source—the MFI itself addressing “risk” issues with only one source—the MFI itself addressing “risk” issues and larger loan size addresses “transaction cost” issues.] and larger loan size addresses “transaction cost” issues.]

4.4. Public repaymentsPublic repayments [creates social pressure and reduces risk [creates social pressure and reduces risk of default.]of default.]

5.5. Emphasis on female clientsEmphasis on female clients [associated with higher [associated with higher repayment rates addresses “risk” issues. Also addresses repayment rates addresses “risk” issues. Also addresses social justice issues.]social justice issues.]

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V. Interest Rates and Lending V. Interest Rates and Lending PracticesPractices

If microfinance targets poor clients, then interest rates If microfinance targets poor clients, then interest rates must be low.must be low.

Answer: Not exactly. . . . Answer: Not exactly. . . . Returns by microbusinesses range between 117 and Returns by microbusinesses range between 117 and

847 percent in studies from India, Kenya, Philippines—847 percent in studies from India, Kenya, Philippines—see International Year of Microcredit 2005 Web page.see International Year of Microcredit 2005 Web page.

Doubling the riskiness of borrowers (in terms of default Doubling the riskiness of borrowers (in terms of default rates) will lead to rates) will lead to moremore than a doubling of the interest than a doubling of the interest rate due to loss of principal (see example from rate due to loss of principal (see example from Armendariz and Morduch, Ch. 2, p. 31)Armendariz and Morduch, Ch. 2, p. 31)

Subsidized rates below (informal lender) market may be Subsidized rates below (informal lender) market may be disruptive (political favorites receiving loans in disruptive (political favorites receiving loans in Philippines case—see Armendariz and Morduch, p. 10)Philippines case—see Armendariz and Morduch, p. 10)

VI. Stylized FactsVI. Stylized Facts

Now some stylized facts about Now some stylized facts about microfinance institutions around the globemicrofinance institutions around the globe—and their reach—and their reach

Source: Source: State of the Microcredit Summit State of the Microcredit Summit Campaign Report 2009Campaign Report 2009, Sam Daley-Harris, Sam Daley-Harris

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VI. Stylized Facts—Progression over VI. Stylized Facts—Progression over Time of Total ClientsTime of Total Clients

YearInstitutions Reporting

Total Number of Clients Reached

Number of Poorest Clients

Reported1997 618 13,478,797 7,600,0001998 925 20,938,899 1,221,9181999 1065 23,555,689 13,779,8722000 1567 30,681,107 19,327,4512001 2186 54,932,235 26,878,3322002 2572 67,606,080 41,594,7782003 2931 80,868,343 54,785,4332004 3164 92,270,289 66,614,8712005 3133 113,261,390 81,949,0362006 3316 133,030,913 92,922,5742007 3352 154,825,825 106,584,679

Source: Daley-Harris, 2009, Table 5

VI. Stylized Facts—Poorest ClientsVI. Stylized Facts—Poorest Clients

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Microfinance Summit Campaign Microfinance Summit Campaign reached their goal on Dec. 31, 2007 reached their goal on Dec. 31, 2007 of serving > 100 million poorest of serving > 100 million poorest borrowers borrowers during the year. (Some during the year. (Some of this is due to existing MFI’s of this is due to existing MFI’s serving more of the poorest serving more of the poorest borrowers; some is due to new borrowers; some is due to new MFI’s reporting.)MFI’s reporting.)

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VI. Stylized Facts—Poorest Clients VI. Stylized Facts—Poorest Clients by Size of Institutionby Size of Institution

Size of Institution (in

terms of poorest clients)

No. of Institutions

Combined No. of Poorest Clients

Percent of Total

Poorest1 million + 7 28,098,014 26.36100,000 - 999,999 54 17,184,064 16.12

10,000 - 99,999 313 8,525,154 82,500 - 9,999 572 2,608,463 2.45

Fewer than 2,500 2,364 1,454,464 1.36Networks 6 48,714,520 45.7


VI. Stylized Facts--GenderVI. Stylized Facts--Gender

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Of the 106.6 million poorest clients reached in 2007, 83.2 percent (88.7 million) are women.

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VI. Stylized Facts—Regional VI. Stylized Facts—Regional DistributionDistribution

Region

No. of Programs Reporting No. of Clients in 2007

Asia and Pacific 1,727 129,438,919Sub-Saharan Africa 935 9,189,825Latin America and

Caribbean 613 7,772,769Middle East and North

Africa 85 3,310,477Developing World total 3,360 149,711,990North America & W. Euro 127 176,958Eastern Euro & C. Asia 65 4,936,877Industrialized World

total 192 5,113,835 Global total 3,552 154,825,825


VI. Stylized Facts—Regional VI. Stylized Facts—Regional DistributionDistribution

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VII. Banker to the Poor VII. Banker to the Poor (Muhammad Yunus)(Muhammad Yunus)

In-Class Exercise #2 (Read the excerpts from In-Class Exercise #2 (Read the excerpts from Banker to the Poor)Banker to the Poor)

Who is Sufiya Begum?Who is Sufiya Begum? Describe the cycle of poverty Sufiya was locked Describe the cycle of poverty Sufiya was locked

into.into. How much money did she need?How much money did she need? How much was the total amount needed to free 42 How much was the total amount needed to free 42

people from this cycle?people from this cycle? What doesn’t Yunus give her the money right What doesn’t Yunus give her the money right

there?there?

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How much does Yunus set up the loans for?How much does Yunus set up the loans for? Power of compounding example.Power of compounding example. Why group lending?Why group lending? Why do borrowers need to pass a test?Why do borrowers need to pass a test?

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Yunus’ backgroundYunus’ background Sufiya Begum—stoolmaker of Jobra, Sufiya Begum—stoolmaker of Jobra,

Bangladesh, stuck in a poverty trap in1976 Bangladesh, stuck in a poverty trap in1976 (pp. 46 – 50)(pp. 46 – 50)

Banker’s concerns:Banker’s concerns: Small loan amounts won’t cover costs of the Small loan amounts won’t cover costs of the

loansloans Illiterate borrowers—can’t fill out formsIlliterate borrowers—can’t fill out forms No collateralNo collateral

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Grameen Bank is . . . born . . . sort of!Grameen Bank is . . . born . . . sort of! Repayment rates: > 98% repayment rate in Repayment rates: > 98% repayment rate in

Grameen; “The poor know this credit is their only Grameen; “The poor know this credit is their only opportunity to break out of poverty. They do not opportunity to break out of poverty. They do not have any cushion whatsoever to fall back on. If have any cushion whatsoever to fall back on. If they fall afoul of this one loan, they will have lost they fall afoul of this one loan, they will have lost their one and only chance” (p. 58)their one and only chance” (p. 58)

““Grameen assumes that every borrower is Grameen assumes that every borrower is honest. There are no legal instruments between honest. There are no legal instruments between lenders and borrowers” (p. 70).lenders and borrowers” (p. 70).

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Group lending model (p. 63) (support—Group lending model (p. 63) (support—emotional and financial if loan is not repaid)emotional and financial if loan is not repaid) Center chiefCenter chief Group chairpersonGroup chairperson Transparency (all group transactions in the Transparency (all group transactions in the

open)open) Serial lending—small loan cycle, gradually Serial lending—small loan cycle, gradually

increasing over time.increasing over time. 5% savings mandated with all loans.5% savings mandated with all loans.

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Tests about the program—orally given to deal Tests about the program—orally given to deal with illiteracy issue.with illiteracy issue.

““When she finally receives the twenty-five When she finally receives the twenty-five dollars, she is trembling. The money burns her dollars, she is trembling. The money burns her fingers. Tears roll down her face. She has fingers. Tears roll down her face. She has never seen so much money in her life” (p. 64). never seen so much money in her life” (p. 64).

Borrowers not told what to spend the money on. Borrowers not told what to spend the money on. If Grameen knew what to spend the money on, If Grameen knew what to spend the money on, they would have done it themselves instead of they would have done it themselves instead of lend it.lend it.

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Terms of loan (see p. 68)Terms of loan (see p. 68) Women in Bangladesh (Purdah— “a range Women in Bangladesh (Purdah— “a range

of practices that uphold the Koranic of practices that uphold the Koranic injunction to guard women’s modesty and injunction to guard women’s modesty and purity” (p. 74). In the strictest sense, it purity” (p. 74). In the strictest sense, it forbids women to leave their homes or be forbids women to leave their homes or be seen by men except their closest relatives.seen by men except their closest relatives.

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Why lend to women???Why lend to women??? ““Not only do women constitute the majority of Not only do women constitute the majority of

the poor, the underemployed, and the the poor, the underemployed, and the economically and socially disadvantaged, but economically and socially disadvantaged, but they more readily and successfully improve they more readily and successfully improve the welfare of both children and men. Studies the welfare of both children and men. Studies comparing how male borrowers use their comparing how male borrowers use their loans versus female borrowers consistently loans versus female borrowers consistently show this to be the case” (p. 73)show this to be the case” (p. 73)

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Grameen is a sustainable business Grameen is a sustainable business model . . . Very successful, financially model . . . Very successful, financially ($100 million in loans by 1998).($100 million in loans by 1998).

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VIII. Creating a World Without VIII. Creating a World Without Poverty--YunusPoverty--Yunus

Social Business: two kinds:Social Business: two kinds: A for-profit business whose mission is to A for-profit business whose mission is to

provide a social benefit, not to be a profit-provide a social benefit, not to be a profit-maximizing business (PMB). In fact, Social maximizing business (PMB). In fact, Social Businesses should not earn profits. Any Businesses should not earn profits. Any retained earnings should be used to expand retained earnings should be used to expand the reach and scope of the business.the reach and scope of the business.

A for-profit business whose mission does A for-profit business whose mission does include profit-generation, but whose owners include profit-generation, but whose owners are the poor or disadvantaged.are the poor or disadvantaged.

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Why not a non-profit business (NGO)?Why not a non-profit business (NGO)? Because these businesses are generally not Because these businesses are generally not

sustainable—they rely on external donations.sustainable—they rely on external donations. Why not for-profit?Why not for-profit?

CSR is not sufficient to address needs of the CSR is not sufficient to address needs of the poorpoor

Why not government?Why not government? Ineffective, corruptIneffective, corrupt

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Grameen family of companies, including Grameen family of companies, including Grameen Danone.Grameen Danone.

Cross-subsidies from the for-profit side of Cross-subsidies from the for-profit side of Grameen . . . To subsidize risky social Grameen . . . To subsidize risky social business ventures . . . And provide business ventures . . . And provide microfinance zero-interest “loans” (grants) microfinance zero-interest “loans” (grants) to beggars.to beggars.

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IX. BRAC—A Different ModelIX. BRAC—A Different Model

Ian Smillie’s book about BRAC: Ian Smillie’s book about BRAC: Freedom Freedom from Wantfrom Want

BRAC model is to create income-BRAC model is to create income-generating business opportunities for the generating business opportunities for the poor. poor.

Microfinance plays a supportive, not Microfinance plays a supportive, not central, role, i.e., to help start-up BRAC central, role, i.e., to help start-up BRAC businesses and assist when there are businesses and assist when there are shocks (disease, weather, etc.). shocks (disease, weather, etc.).

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Chicken businessChicken business Feed (Need growers and processors of Feed (Need growers and processors of

chicken feed) (200,000 women involved in chicken feed) (200,000 women involved in this program by 1992)this program by 1992)

An army of “health workers” to vaccinate An army of “health workers” to vaccinate chickenschickens

EggsEggs

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““In its search, BRAC revolutionized the poultry In its search, BRAC revolutionized the poultry business in Bangladesh. Over the years, more business in Bangladesh. Over the years, more than 1.9 million women have joined BRAC’s than 1.9 million women have joined BRAC’s poultry program, but BRAC day-old chicks and poultry program, but BRAC day-old chicks and feed have served a much wider community as feed have served a much wider community as well. In 2006, its feed mills produced just under well. In 2006, its feed mills produced just under 40,000 tons of poultry feed, and in 2008, its 40,000 tons of poultry feed, and in 2008, its hatcheries turned out 12.8 million day-old chicks. hatcheries turned out 12.8 million day-old chicks. The business has helped poor women, and it has The business has helped poor women, and it has earned money for BRAC as well” (Smillie, p. 99). earned money for BRAC as well” (Smillie, p. 99).

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microfinance 101 session 1 - dr. stephen conroy

Economy & Finance