What is Microfinance

1
What is Microfinance?

• Nanci Lee and Alison Mathie
• November, 2009

2
Wealth creation means adding to the stock of
different types of assets or capital
3
Relationship between Financial Capital and Social
Capital
4
What is Microfinance?

• Small-scale savings, credit, insurance, money
  transfers, and any other financial services to
  those without access to formal financial services
• Microfinance plus. HIV-AIDs supports, legal
  literacy, political participation, community
  investments

5
Self-employed small farmers/fishers street
vendors
6
Saving up saving down lump sums
7
Accumlating Savings and Credit Groups (ASCAs)
8
Approaches to Microfinance

• Ideological Approach
• Community-based
• Poverty Alleviation
• Empowerment/ Rights
• Financial Systems Development

• Intended Impacts
• Local development ownership
• Reduce multi-faceted poverty
• Resources, assets and control over them - voice
• Link informal to formal sector

9
Village associations, Niger Example of
Community-Based

• Village association in rural, remote Niger
• Over 200,000 people in small groups of up to 20
  people
• Basis is voluntary savings that is pooled for
  loans, insurance
• Oral book-keeping system proven more effective
  than written
• Receive support from CARE to strengthen the
  groups book-keeping, risk assessment
• Hot and cold money
• Social capital is intertwined with financial

10
Small Groups Unlinked to Financial Sector
11
Grameen BankExample of Poverty Approach

• Formed in early 1970s- Mohammed Yunus
• Pioneer of microfinance
• Targets landless those with less than 1.5
  hectares of land
• 4.1 million borrowers bicycle bankers
• Source of funds member savings- some forced
  borrowing banks, foreign donors
• Credit focused- business loans housing kitchen
  gardens latrines
• Grameen phones
• Aims to build social capital also collateral
• Blind spot need for ongoing subsidies

12
SEWA BankExample of Empowerment/Rights Approach

• Trade union of self-employed women
• Over 200,000 members
• Source of funds is savings of members
• Collective organized strength
• Urban - individual
• Ruralself-help groups
• National advocacy- informal sector
• Social security (pensions health care literacy)
• Social capital is collateral and leverage

13
SEWA Members power in Collective action
14
Banco SolExample of Financial Systems

• Became first bank for the poor, 1992
• Before becoming a bank no savings
• 50,000 clients (groups individuals)
• US82 million loan portfolio
• Shareholders equity funds, other microfinance
  institutions
• Strategy is to cross-subsidize poor with profits
• Social capital is collateral

15
Trade-Offs Informal to Formal
INFORMAL
FORMAL
Other services
Flexibility
Management Autonomy
Larger loans
Proximity
Keep money safe
Ownership
Disadvantages savings safe? limited services
Disadvantages Are poorest of the poor able to
access? Costly bureaucratic
16
Innovations

• http//www.kiva.org