Showing papers on "Microfinance published in 1996"

Micro-finance evangelism, 'destitute women', and the hard selling of a new anti-poverty formula

Abstract: This article challenges the recent uncritical enthusiasm for the potential of micro-finance institutions to reduce poverty. It is argued that, although understanding about how to design anti-poverty financial intermediation has improved, the current campaign to increase resource allocation in this sector may undermine the very sustainability that is being sought. Further, studies of the impact of micro-enterprise credit suggest that it is not necessarily beneficial to very poor people. Interventions in the provision of financial services should not be made without locally specific analysis of the functions of existing savings and credit facilities. An emphasis on scale acts as a disincentive to such analysis, and increases the risk of the reemergence of a 'blueprint' approach to anti-poverty action.

Measuring the trade‐off between outreach and sustainability of microenterprise lenders

Abstract: The progression of microfinance NGOs from small, money-losing operations to large providers of banking services to the poor involves many risks. Unless these risks are managed successfully, the conflict between the objectives of outreach and sustainability becomes destructive to both. Several analytical tools based on accounting data and financial analysis can monitor progress toward sustainability with expanding outreach. These should be routinely applied by microfinance providers and the donors that sponsor them.

Bancosol: the challenge of growth for microfinance organizations

Abstract: This paper focuses on the difficulties inherent in the prudent management of growth of microfinance organizations and on potential limits to the increased efficiency, profitability, and sustainability expected from growth and large size. The paper addresses both positive and negative implications of rapid growth for microfinance organizations. The experience of BancoSol in Bolivia is used to illustrate these questions. Building upon the successful experience of PRODEM, BancoSol was chartered as a private commercial bank in 1992. The paper discusses the intangible assets inherited from PRODEM that gave BancoSol a head start and the additional advantages that resulted from formalization as a bank, in particular from the authorization to mobilize deposits. BancoSol shows outstanding success in terms of breadth, depth, and quality of outreach and in terms of sustainability. It is the microfinance organization with the largest number of clients in Latin America and it reaches poor clients who could never expect to gain access to conventional financial institutions. The paper discusses the incentive structure associated with a lending technology that has resulted in low loan arrears and the cost- effective supply of small loans. Success is explained by a strong concern with financial viability, development of a lending technology appropriate for the market niche, a long learning period, and upgrading into a formal intermediary. As it grew, BancoSol had to face a reduction of revenues as a proportion of productive assets and an increase in the average cost of funds, which combined reduced its operating margin by 13 percentage points. This challenge was fully met by reducing operating expenses as a proportion of productive assets. While growth of PRODEM had been mostly constrained by too rigid access to donor funds, growth of BancoSol has been constrained by threats on asset quality and by diminishing marginal economies of size. Portfolio efficiency has grown steadily. This growth has been the net outcome, however, of reductions in transactions efficiency and of increases in average loan size after transformation into BancoSol. The paper explores the sources of increases in average loan size and it concludes that mission drift has not occurred at BancoSol, which continues to focus on small loans to microentrepreneurs. The evolution in transactions efficiency is related, in turn, to sources of extensive (installed capacity) and intensive (productivity) growth. Extensive growth has been rapid at BancoSol and it tends to dampen productivity increases. Finally, the paper reviews the pressures from growth on the original informal culture of the organization and the gradual establishment of more formal structures.

Questioning the future of NGOs in microfinance

Abstract: A large number of NGOs are now involved in microfinance and more are making the move towards it; some even converting their finance operations to banks. This paper examines some of the motivations for this change and raises questions about the trade offs involved. The paper suggests that when credit systems air to be financially sustainable there is a strong bias to engage in credit only. The trade-offs involved have consequences not only for the soul of many NGOs (the tension between the imagery of compassion and that of capitalism) but in terms of outreach to the very poor, and in terms of impact and effect on the recipients. Credit-only approaches which adhere to sustainability criteria often miss the very poor. And as for those who are reached by micro loans, without other inputs than credit, many of these borrowers have difficulty making productive use of the loans; the result of lack of absorptive capacity, lack of confidence, lack of knowledge. NGOs who shift into sustainable credit programs may be losing their real competitive advantage in the world of development—their capacity to reach the very poorest and engage in a variety of activities that help people change, but which cannot necessarily be financially supported by the recipient of the assistance.

The informal sector and microfinance institutions in West Africa

Abstract: This book examines the dynamics and constraints faced by informal sectors in 12 West African countries -Burkina Faso, Cape Verde, Chad, the Gambia, Guinea, Guinea-Bissau, Mali, Mauritania, Niger, Sao Tome and Principe, Senegal, and Sierra Leone- as well as the issues confronted by the microfinance institutions that serve them. Nine microfinance companies considered to be among the most effective in the region were selected and evaluated for their suitability for partnership with the Bank. The book sums up major findings of the country profiles and of the institutional case studies, and lays out a series of options for World Bank involvement. Among the major findings are that informal sectors are very large and appear to be growing rapidly, accounting for one-third to three-quarters of total employment in most countries. The majority of informal activity is rural and agriculture-related, although large-scale urban migration is changing this. Women, particularly poor women are major participants in all informal sectors. Key constraints include saturated and stagnated markets, lack of access to credit and savings services, weak technical skills, inadequate information, and poorly developed infrastructure. Low-income entrepreneurs rely mainly on family and friends, moneylenders and trade creditors and esusus and tontines for savings credit. A few access financial services from donor-supported nongovernmental organizations and credit unions, but virtually none interact with banks. Microenterprise assistance programs are scattered unevenly across the region: there are many in some countries and few in others. They range from very small, high-cost programs to fairly large, efficient institutions. The authors advocate that the Bank categorize microfinance delivery as a financial sector operation, and help these institutions increase their outreach and move toward sustainability, by working to strengthen the links between microfinance institutions and banks, underwriting the establishment of a regional training center, and developing effective management information systems, among other strategies.

Addressing some key questions on finance and poverty

Abstract: Lady Chalker, the United Kingdom's Minister for Overseas Development, raised a number of fundamental questions in her Opening Remarks to the conference on ‘Finance Against Poverty’. This paper suggests responses to her questions. Among them: (i) There are available guidelines for institutions providing microfinance, and industry standards are emerging; it is not necessary to await charismatic leaders. (ii) There is a clear role for government in microfinance development that includes both aspects of macroeconomic management and the development of a regulatory framework and system of supervision appropriate for institutions providing commercial microfinance. (iii) Experience demonstrates that institutions providing commercial microfinance can become self-sufficient within 2–3 years. (iv) The interest rates that must be charged on loans if the institution is to become profitable must cover all costs, both financial and non-financial. The working poor can afford these rates which are usually below one-sixth of the rates that the poor typically pay to informal commercial lenders. (v) Subsidized credit is capital constrained and can reach relatively few borrowers, usually the local elites; in contrast commercial microcredit, financed by locally mobilized savings, can attain broad coverage among the working poor. The paper also responds to questions about institutional staffing, the effect of microfinance on the poorest of the poor, the roles of donor agencies and banks, and the social and economic benefits of sustainable microfinance.

The view from the field: perspectives from managers of microfinance institutions

Abstract: By examining three different institutional frameworks and performances, this paper portrays the challenges and potential for microfinance programmes to solve some of the key constraints in the field today. Tracing the growth of BancoSol, a new, private Bolivian commercial bank dedicated almost exclusively to microenterprise, many lessons about the institutional development of profitable micro-lending organizations emerge. The Kenya Rural Enterprise Programme provides evidence of the complementary roles technical assistance and other NGO services play in the strengthening of both microenterprises and microfinance programmes. Finally, the long track record and diverse lending programmes of Thailand's Bank for Agriculture and Agricultural Cooperatives draw lessons in the criteria and methods of effective financial intermediation. Elements of success and differences among the cases are highlighted.

Money Matters: Reaching Women Microentrepreneurs With Financial Services

Abstract: For women microentrepreneurs, access to financial services matters. It is critical to their ability to make productive investments in their businesses. As part of IDB's efforts to strengthen women's roles in economic development, the Women in Development Unit undertook a study to analyze the kinds of financial services available to women microentrepreneurs. It examined the financial services offered by a range of institutions, including commercial banks, credit unions, and nongovernmental organizations, for six countries in Latin American and the Caribbean (Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, and Jamaica). Money Matters synthesized the results of this study, comparing financial services available among institutions within and across countries. It shows that, in addition to nongovernmental organizations, credit unions and some commercial banks, can and do provide appropriate savings, credit, and other financial services to microentrepreneurs in general, and to low-income women microentrepreneurs in particular. This book contributes to an improved understanding of the new field of microfinance.

An Assessment of the Capacity and Financial Performance of Microfinance Institutions: The Philippine Case

Abstract: The paper assesses the capacity and financial performance of a sample of microfinance institutions (Mils) operating in the Philippines. It has the following objectives: (a) explain the microfinance policy environment in the country; (b) evaluate the institutional and financial capacity and performance of MFIs; (c) determine the issues and constraints affecting capacity and performance; and (d) recommend measures to strengthen the MFIs. The motivating philosophy of this paper is that unless MFIs become viable and sustainable financial institutions, they can never fully realize their objective of reaching a greater number of poor people, much less sustain the effort over the long term. Banks rarely lend, if at all, to the poor, mostly because of information problems, high credit risk perception, lack of acceptable collateral and the high transaction costs of processing small loans. The government's response was to create a number of credit programs intended to provide the poor with access to financial services. The National Credit Council reports as many as 111 credit programs of which 13 are targeted to the ultra-poor. Despite the government's credit programs, the poor's access to microfinancial services persists. The private sector approach is to use MFIs such as credit nongovernmental organizations (NGOs),

Enabling environment and microfinance institutions: Lessons from Latin America

Abstract: Several examples of ‘graduation’ of microfinance institutions into the regulated financial system are found in Latin America. Although the best-known case is that of BancoSol in Bolivia, others have followed with less notoriety, either because they are too recent to allow an assessment of their regulated performance, or because the graduation process has been somehow stunted. Based on a few selected cases, the paper explores the ‘environmental factors’ that may have enabled, or hampered, the emergence of these specialized microfinance institutions in the regulated world. In addition to BancoSol, the analysis looks into the policy and regulatory elements surrounding the evolution of AMPES/Servicio Crediticio (a non-governmental organization) into Financiera Calpia (a regulated finance company) in El Salvador, and that of ADMIC (an NGO) into Finmicro in Mexico.

Microfinance market niches and client profiles in bolivia

Abstract: This paper presents and interprets descriptive statistics generated from data obtained in a survey of clients of five microfinance organizations believed to be among the best in Bolivia These lenders represent different combinations of organizational design, lending technology, and market area of operations Two are regulated financial intermediaries and three are NGOs Two operate in rural areas (PRODEM and Sartawi) and three operate in urban areas (BancoSol, FIE, and Caja Los Andes) Two offer individual loans and three grant loans through joint liability groups The paper discusses household-enterprise profiles of a sample of 622 clients and identifies terms and conditions of loan contracts with these organizations to evaluate the depth and quality of their outreach

The informal sectors of West Africa.

Abstract: This book chapter describes the informal sector in West Africa identifies the constraints to its development and discusses financing options. It is stated that in West Africa donors should continue to support microfinance and training programs for informal sector businesspersons. The obstacles to financing of microbusinesspersons should be removed. The most common nonfinancial obstacle is the lack of demand for products and services. The most common financial obstacle is the lack of working capital and the lack of an accessible source from which to borrow. Other obstacles for example include the small size of transactions the lack of collateral and inexperience and illiteracy among borrowers. Credit unions in West Africa that operate on sound business practices include the Reseau des Caisses Populaires in Burkina Faso which makes about 3700 loans (1994 figures) out of 64000 savings memberships. People use the credit union to secure their money in a safe place rather than as interest-bearing accounts. Banks have extremely limited operations if at all in Western Africa. Some nongovernmental organizations (NGOs) supply financial services to low-income populations in West Africa. Many NGOs provide services to the poor and often poor women but these finance programs are reliant on donor funding. Informal savings and credit clubs are popular and account for about 75% of loans to urban women and 50% of rural women in Niger. Options are available for suppliers credit and customer advances to established businesses. Money lenders fill in the gap where other financing is not available. The most common source of loans is from friends and family. Competition in most informal sector activities is strong but informal activity provides opportunity for the unemployed and underemployed seeking work in a deteriorating economy. Most informal sector activity is small in scale and labor-intensive.

Bancosol: The Challenge Of Growth For Microfinance Organizations

Abstract: This paper focuses on the difficulties inherent in the prudent management of growth of microfinance organizations and on potential limits to the increased efficiency, profitability, and sustainability expected from growth and large size. The paper addresses both positive and negative implications of rapid growth for microfinance organizations. The experience of BancoSol in Bolivia is used to illustrate these questions. Building upon the successful experience of PRODEM, BancoSol was chartered as a private commercial bank in 1992. The paper discusses the intangible assets inherited from PRODEM that gave BancoSol a head start and the additional advantages that resulted from formalization as a bank, in particular from the authorization to mobilize deposits. BancoSol shows outstanding success in terms of breadth, depth, and quality of outreach and in terms of sustainability. It is the microfinance organization with the largest number of clients in Latin America and it reaches poor clients who could never expect to gain access to conventional financial institutions. The paper discusses the incentive structure associated with a lending technology that has resulted in low loan arrears and the cost- effective supply of small loans. Success is explained by a strong concern with financial viability, development of a lending technology appropriate for the market niche, a long learning period, and upgrading into a formal intermediary. As it grew, BancoSol had to face a reduction of revenues as a proportion of productive assets and an increase in the average cost of funds, which combined reduced its operating margin by 13 percentage points. This challenge was fully met by reducing operating expenses as a proportion of productive assets. While growth of PRODEM had been mostly constrained by too rigid access to donor funds, growth of BancoSol has been constrained by threats on asset quality and by diminishing marginal economies of size. Portfolio efficiency has grown steadily. This growth has been the net outcome, however, of reductions in transactions efficiency and of increases in average loan size after transformation into BancoSol. The paper explores the sources of increases in average loan size and it concludes that mission drift has not occurred at BancoSol, which continues to focus on small loans to microentrepreneurs. The evolution in transactions efficiency is related, in turn, to sources of extensive (installed capacity) and intensive (productivity) growth. Extensive growth has been rapid at BancoSol and it tends to dampen productivity increases. Finally, the paper reviews the pressures from growth on the original informal culture of the organization and the gradual establishment of more formal structures.

Poverty and Microfinance in Bolivia

Abstract: A major accomplishment of development finance in recent years has been the expansion of the supply of tinancial services for the poor. Little information exists, however, about the extent to which micro finance actually reaches the poor. This study analyzed a sample of clients served by tive microtinance organizations in Bolivia. The data revealed that these organizations reach many rural and urban poor, but not the poorest of the poor. Group-based lenders reach a somewhat poorer clientele than those organizations making individual loans. The individual lenders, however, seem to be able to better adjust loan sizes to fit the creditworthiness of the client. Therefore, individual lenders appear to face fewer constraints in increasing loan sizes in response to client demand. The ability of these organizations to adjust to loan demand may be important in int1uencing their ability to retain clients as competition among organizations increases. POVERTY AND MICROFINANCE IN BOLIVIA' Sergio Navajas, Richard L. Meyer, Claudio Gonzalez-Vega, Mark Schreiner, and Jorge Rodriguez-Meza~

Microenterprise support programs in West Africa.

Abstract: This book chapter discusses the criteria for assessing the performance of microfinance institutions identifies some model programs and basic operating principles outlines changes in microfinance over the decade and describes some training activities for microbusinesspersons. Provision of microfinance services to the informal sector is important as a way to promote equity and economic growth. Savings programs help the poor plan for emergencies. Business loans permit strategies for increasing income. Financial services in most developing countries are fragmented and limited. Borrowers are handicapped by illiteracy few assets and immediate needs for cash. Microfinance services channel large savings amounts into loans. Poorly developed business skills can be a constraint to business growth. World Bank training programs have found that primary education is a strong predictor of microbusinesspersons success. Apprenticeship training programs are a key way to learn a trade since formal training institutes neglect the informal sector. Training may include technical institutes or business practices sessions for new borrowers. Microbusinesses should be treated as clients. The market should be used to determine the fees for services. Products should meet market demand. Services have shifted over the decade to the acceptance that the poor can be good credit risks. Financial services have been redefined to include the poor and have developed new lending ways for reaching low-income populations. Sustainability is expected. Savings services are now being emphasized. Key factors in program evaluation are outreach and sustainability. In West Africa microfinance services are unevenly distributed between countries and vary widely in types of services and operations. Scale in lending has not been achieved. There is room for improvement but the appropriate model for West Africa is in question.

KUPEDES : Indonesia's model small credit program

Abstract: This brief concerns the Kredit Umum Pedesan (KUPEDES), which is aimed at transforming banks into self-sustaining full-service financial units. A recent audit draws two major lessons from the KUPEDES experience. First, it is possible to create a microlending program that serves the poor and is profitable and self-sustaining. Second, developing a savings instrument for the poor is at least as important as providing them with loans. The audit highlights the main reasons for village bank's success : simplicity of loan design; effective management at unit level backed by close supervision and monitoring; appropriate staff training and performance incentives. By themselves, however, these factors would not have been enough for the program to succeed. The presence of an existing institutional network of village banks and a thriving economy that had spread to many rural areas were also critical. This brief complements the Bank's Operations and Evaluation Department (OED), Performance audit report (report no. 14511) dated May 19, 1995.

Regulation & supervision of micro-finance institutions : stabilizing a new financial market

Abstract: In 1995, ACCION International brought together officials from bank regulatory institutions in fifteen Latin American countries and the United States, along with development professionals, to address issues related to supervision and regulation of micro-finance institutions (MFIs). This conference represented a first step towards defining framework for prudential oversight of micro-finance institutions. Developing effective rules and tools to protect depositors - especially poor depositors - will require thoughtful innovation on the part of practitioners, regulators, and policy-makers.

Microfinance Strategies: Strategies for developing viable microfinance institutions and sustainable microfinancial services in Asia

Abstract: In most Asian countries including Vietnam, inadequate access of small farmers and microentepreneurs including women and the poor to effective financial services presents a major challenge. Such services must include facilities to deposit microsavings, access to microcredit for production, consumption and emergencies, and the provision of some basic insurance. Only viable financial institutions with sound practices will be able to respond to the evergrowing demand of the microeconomy for such services and to contribute to its growth.

Bancosol: el reto del crecimiento en organizaciones de microfinanzas

Abstract: This paper focuses on the difficulties inherent in the prudent management of growth of microfinance organizations and on potential limits to the increased efficiency, profitability, and sustainability expected from growth and large size. The paper addresses both positive and negative implications of rapid growth for microfinance organizations. The experience of BancoSol in Bolivia is used to illustrate these questions. Building upon the successful experience of PRODEM, BancoSol was chartered as a private commercial bank in 1992. The paper discusses the intangible assets inherited from PRODEM that gave BancoSol a head start and the additional advantages that resulted from formalization as a bank, in particular from the authorization to mobilize deposits. BancoSol shows outstanding success in terms of breadth, depth, and quality of outreach and in terms of sustainability. It is the microfinance organization with the largest number of clients in Latin America and it reaches poor clients who could never expect to gain access to conventional financial institutions. The paper discusses the incentive structure associated with a lending technology that has resulted in low loan arrears and the cost-effective supply of small loans. Success is explained by a strong concern with financial viability, development of a lending technology appropriate for the market niche, a long learning period, and upgrading into a formal intermediary. As it grew, BancoSol had to face a reduction of revenues as a proportion of productive assets and an increase in the average cost of funds, which combined reduced its operating margin by 13 percentage points. This challenge was fully met by reducing operating expenses as a proportion of productive assets. While growth of PRODEM had been mostly constrained by too rigid access to donor funds, growth of BancoSol has been constrained by threats on asset quality and by diminishing marginal economies of size. Portfolio efficiency has grown steadily. This growth has been the net outcome, however, of reductions in transactions efficiency and of increases in average loan size after transformation into BancoSol. The paper explores the sources of increases in average loan size and it concludes that mission drift has not occurred at BancoSol, which continues to focus on small loans to microentrepreneurs. The evolution in transactions efficiency is related, in turn, to sources of extensive (installed capacity) and intensive (productivity) growth. Extensive growth has been rapid at BancoSol and it tends to dampen productivity increases. Finally, the paper reviews the pressures from growth on the original informal culture of the organization and the gradual establishment of more formal structures.

Microfinance Market Niches And Client Profiles In Bolivia

Abstract: This paper presents and interprets descriptive statistics generated from data obtained in a survey of clients of five microfinance organizations believed to be among the best in Bolivia. These lenders represent different combinations of organizational design, lending technology, and market area of operations. Two are regulated financial intermediaries and three are NGOs. Two operate in rural areas (PRODEM and Sartawi) and three operate in urban areas (BancoSol, FIE, and Caja Los Andes). Two offer individual loans and three grant loans through joint liability groups. The paper discusses household-enterprise profiles of a sample of 622 clients and identifies terms and conditions of loan contracts with these organizations to evaluate the depth and quality of their outreach. The interpretation seeks to establish connections between key characteristics of the clients and features of the lending technologies that lead to the matching of classes of borrowers with particular organizations and that influence the choice of market niches. Data on loan sizes suggest the existence of different but broadly overlapping market niches associated with three tiers of clients. The sharpest distinction is between urban and rural clients. The matching between clients and organizations also reflects a weak but positive correlation between levels of poverty and loan sizes. According to an index of basic needs fulfillment of their clients, these organizations can be ranked as: FIE and Caja Los Andes (first tier), BancoSol (second tier), and PRODEM and Sartawi (third tier). The same ranking is obtained when clients are ordered according to loan size, the ratio of loan size to the value of sales, and the value of monthly sales. The three tiers of clients are associated with different socio-economic features of their household-enterprises: sex, education, household size, access to electricity, water supplies, and sewage facilities, employment-generating capacity of the enterprise, informality and separation of household and enterprise, occupations and the like. The development of lending technologies that do not rely on standard financial statements and collateralizable assets is a formidable innovation that explains the outreach and sustainability of these organizations. Differences in the guarantees required for loans dominate distinctions in lending technology. Trade-offs between loan size, interest rates, and guarantee requirements attract different subsets of the clientele. Joint liability seems to be appropriate for very poor people, but group borrowers eventually outgrow this relationship. Caja Los Andes and FIE have shown that it is possible to supply individual loans to poor people and be profitable. Most clients are satisfied with the services received. The lowest satisfaction concerns loan sizes and loan-size rationing may be widespread. At least in urban areas, increasing competition will force these organizations to improve their services and adjust loan sizes. All of these organizations are expanding the frontier of microfinance by developing lending technologies for a much poorer clientele than is reached by collateral-based lenders. This is a formidable achievement.

Social Finance Working Paper #15: Assessing the efficiency and outreach of micro-finance schemes

Abstract: Describes and assesses micro-finance schemes operating in the Kalookan City, Quezon City and Marikina.