Trier University Presentation28th June 20108 Ju e 0 0
Financial Agents and InstitutionsChanging Approaches to Microfinanceg g pp
Dr Howard Jones, Senior Research F ll I tit t f C lthFellow, Institute of Commonwealth
Studies, University of LondonHoward Jones@sas ac [email protected]
My Own Introduction to “Microfinance”
Some initial pointsSome initial points
• Diversity of financial agents and institutions providing financial servicesp g
Di it f li t ’ fi i l i• Diversity of poor clients’ financial service needs
Di ersit in co ntries and conte ts• Diversity in countries and contexts
Lecture OutlineLecture Outline
• Financial Agents and Institutions: the Informal and the Formal Financial Sectors
Ch i A h t th P i i f• Changing Approaches to the Provision of Financial Services to the Poor
The Informal Financial Sector: Characteristics
Di ti i hi h t i ti f i f l fi• Distinguishing characteristics of informal finance (Ghate, 1988 & 1992)l k f l ti b th b ki th iti• lack of regulation by the banking authorities
• scale of operations of individual lenders small• informal lenders not part of a hierarchy• long history of informal finance• informal and formal finance form a continuum
rather than two separate financial sectors• neglect of and negative attitudes towards
informal agents by planners and policy makers
Indigenous Bankers and Moneylenders in India, 1921.
A Jain moneylender in the: difficulties in getting access to information on informal finance
Structure of Informal FinanceStructure of Informal Finance
Ghate (1992:24) provides the following classification• Ghate (1992:24) provides the following classification system for informal finance:First, group finance (user owned) is distinguished from g p ( ) gindividual financeSecond, individual finance is divided into intermittentlenders (eg friends neighbours relatives) and regularlenders (eg. friends, neighbours, relatives) and regularlendersThird, regular lenders are divided into those extending tied credit linked to simultaneous transactions in othertied credit linked to simultaneous transactions in other factor markets (eg. traders, landlords, employers) and specialist lenders such as moneylenders and
b kpawnbrokers.
Financial DualismFinancial Dualism
Th t fi i l t i t th f l• The two financial sectors co-exist: the formal and the informal
• The two sectors are not completely separate and• The two sectors are not completely separate and there are many linkages between the two
• One policy option is for formal and semi-formalOne policy option is for formal and semi formal financial institutions to learn from the informal sector and adopt their more "positive" practices
the mimicry option– the mimicry option• Another and more contentious policy option is to
link formal and informal agents to takelink formal and informal agents to take advantage of their respective comparative advantages
The Formal Sector and Provision of Financial Services to the Poor
Although financial services are seen as important• Although financial services are seen as important instruments in achieving poverty reduction significant sections of the population do not have access to banking i tit tiinstitutions
• Informal agents offer advantages to poor clients in terms of speed, minimal paperwork, small and multiple loan p , p p , pprovision, and embeddedness in local culture, but
• They generally provide short-term, low value and high interest finance within a highly localised area ofinterest finance within a highly localised area of operations
• While the generally high quality of financial services from NGO d th Mi fi O i ti (MFO ) iNGOs and other Microfinance Organisations (MFOs) is recognised their combined outreach in India for example is less than 0.5% of the population
Why banks have not (may still not) serve the poor
• Perceptions of high cost and high risk, especially for rural lendingp y g
• Lack of network and personnel to serve this sectorthis sector
• Interest rate controls• Bad experiences of Government
programmes e g in Indiaprogrammes e.g. in India.
Negative Attitudes towards Banks from the Customer perspective
• Lack of awareness of bank products• Feel income too low-banks not for themFeel income too low banks not for them• Don’t trust banks• Fear over loss of control• Identity requirements• Identity requirements• Terms and conditions• Bank charges and fees• Physical access• Physical access
Reasons for recent Commercial Bank entry into microfinance
A l k t• A very large market• Use of existing assets – branch infrastructure
Cross selling opport nities/grad ation to s al• Cross selling opportunities/graduation to usual products
• Freeing of interest rate regimes• Freeing of interest rate regimes• Corporate Social Responsibility• Profitability of Micro and small loans increasing• Profitability of Micro and small loans, increasing
competition in the prime market. • Champion(s) of microfinance within certainChampion(s) of microfinance within certain
banks.
The three main approaches to provision of microfinance
• The Development Finance Approach of the 1960s to the 1970s
Th Mi dit A h f th f th• The Microcredit Approach of the of the 1980s to the 1990s
The Financial Ser ices Approach of 2000• The Financial Services Approach of 2000 to the present day
The Development Finance Approach (Rutherford, 2003)
1960s -1970s• Target: MenTarget: Men• Uses of Credit: Farming• Key Products: Cash and in kind loans• Delivery of Credit: State Development• Delivery of Credit: State Development
Institutions and Cooperatives• Financed From: Public Subsidies
A tribal (Bhil) household in Southern Rajasthan, India
The Microcredit Approach (Rutherford, 2003)
1980s – 1990s • Target: WomenTarget: Women• Uses of Credit: Micro-enterprise• Key Products: Micro-loan• Delivery of Credit: Solidarity groups• Delivery of Credit: Solidarity groups• Financed From: Grants and soft loans
The Financial Services Approach (Rutherford, 2003)
2000 – 2010• Target: Poor householdsg• Uses of Finance: Any• Key Products: Current accounts savings• Key Products: Current accounts, savings,
loans, insurance, pensions, money transferFinanced From: Deposits loans and retained• Financed From: Deposits, loans and retained earnings
• In the background – informal money management
References: GeneralReferences: GeneralHELMS B (2006) A f All B ildi• HELMS, B. (2006) Access for All. Building Inclusive Financial Systems, Consultative Group to Assist the Poorest, Washington D.D.: Theto Assist the Poorest, Washington D.D.: The World Bank.
• JOHNSON,S.& B.ROGALY (1997) Microfinance ( )and Poverty Reduction. Oxford: OXFAM
• PADMANABHAN, K. P. (1988), Rural Credit: Lessons for Rural Bankers and Policy MakersLessons for Rural Bankers and Policy Makers. London: Intermediate Technology Publications
• Rutherford S “Microfinance’s shifting ideals”• Rutherford, S. Microfinance s shifting ideals , ADBI, 2003-12-5.
References: Informal FinanceReferences: Informal Finance
• Ghate, P.B. (1988) ‘Informal Credit Markets in Asian Developing Countries’, Asian Development Review, Vol. 6, No. 1, pp. 64-85.
• Ghate, P.B. (1992), Informal Finance. Some ( )Findings from Asia, Asian Development Bank: Oxford University Press.
• Jones, J.H.M. (2008), “Informal Finance and Rural Finance Policy in India: Historical andRural Finance Policy in India: Historical and Contemporary Perspectives” Contemporary South Asia, 16, 3, 269-285.South Asia, 16, 3, 269 285.
References: Formal FinanceReferences: Formal FinanceH M Wh C i l B k N t E t i th• Harper, M. Why are Commercial Banks Not Entering the Micro-Finance Market. www.alternative-finance.org.uk
• Jenkins H (2000) Commercial Bank Behaviour in MicroJenkins, H. (2000) Commercial Bank Behaviour in Micro and Small Enterprise Finance, Development Discussion Paper No. 741, Harvard Institute for International D l tDevelopment.
• Jones, J. H. M., Williams, M., Nilsson, E. & Thorat, Y (2007) “Training to Address Attitudes and Behaviour of(2007), Training to Address Attitudes and Behaviour of Rural Bank Managers in Madhya Pradesh, India: A Programme to Facilitate Financial Inclusion”, Journal of I t ti l D l t 19 841 851International Development, 19, pp. 841-851.
References: Formal Finance continuedReferences: Formal Finance continued….
McKEE K (1989) "Microlevel Strategies for Supporting• McKEE, K. (1989), "Microlevel Strategies for Supporting Livelihoods, Employment, and Income generation of Poor Women in the Third World: The Challenge of Si ifi " W ld D l t V l 17 N 7 993Significance", World Development, Vol.17,No.7, pp. 993-1006.
• McGREGOR, J.A. (1988), "Credit and the Rural Poor: , ( ),The Changing Policy Environment in Bangladesh", Public Administration and Development, Vol.8, pp. 467-482. 8
• Valenzuela, L. (2002) “The Experience and Challenges of Commercial Bank Downscalers” in Drake, D. and E. Rhyne (eds ) The Commercialisation of MicrofinanceRhyne (eds.) The Commercialisation of Microfinance. Balancing Business and Development. Kumarian Press.
