Ruth Stewart Models of access to finance 11 th September 2012.

Ruth Stewart

Models of access to finance

11th September 2012

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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

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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: weekly or 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withdrawn in a range of ways• Commitment and ordinary savings• Savings often linked to credit• Variety of insurance models available

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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.

Insurance“Credit is like a fire: it is

useful to cook your sadza but if you are careless, it will burn your hut.”

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Models of lending

1. Associations2. Bank Guarantees3. Community / village banking4. Co-operatives5. Credit Unions6. NGOs7. For profit banks8. ROSCAS

8 models based on Microfinance Hub online

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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 membersExample: Self Help Groups, SHGs (India)

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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)

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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)

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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)

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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 Progresista Amatitlaneca (Guatemala), Vancity Credit Union (Canada)

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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)

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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)

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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

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There is a need for good quality related services -

financial and business advice

Microfinance, particularly credit, causes harm as well as good

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

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

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Thank you

[email protected]

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What we think is happening

1. Invest in

immediate future:

a. Businessb. Productive

assetsc. Adult

educationd. Workers’

health & nutrition

Micro-credit

Given to individuals or groups

Scope for increased income via business

or employment

Able to repay loan and avoid increase

in debt

Able to save

Spend money differently

Social cohesion

Women’s empowerment

Long-term benefits

Micro-savings

2. Consumptive spending with

scope for productivity:

a. Add on housing

b. Assets which retain value

Improved capabilities

Better able to deal with shocks

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 increased income

Actual decreased income

Default on loan, lose collateral

and/or forced to borrow more

Use other MFI

FOR CREDIT CLIENTS ONLYInability to repay loan

Determined by external factors:

Entrepreneurial ability

Appropriateness of business in context

Competition from other MFI clients

Gender and power relations

Use same MFI

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1. Invest in

immediate future:


assetsc. Adult


health & nutrition

Micro-credit



or employment


in debt

Able to save


Social cohesion


Long-term benefits

Micro-savings



a. Add on housing








productive):






Use other MFI







Use same MFI

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1. Invest in

immediate future:


assetsc. Adult


health & nutrition

Micro-credit



Social cohesion


Micro-savings



a. Add on housing


3. Invest in long- term future: a. Children’s education



productive): Assets which do not retain value

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1. Invest in

immediate future:


assetsc. Adult


health & nutrition

Micro-credit



or employment


in debt

Able to save


Social cohesion


Long-term benefits

Micro-savings



a. Add on housing








productive):






Use other MFI







Use same MFI

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1. Invest in

immediate future:


assetsc. Adult


health & nutrition



or employment

Able to save



Long-term benefits



a. Add on housing








productive):




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What we now think is happening

1. Invest in

immediate future:


assetsc. Adult


health & nutrition

Micro-credit



or employment


in debt

Able to save


Social cohesion


Long-term benefits

Micro-savings



a. Add on housing








productive):






Use other MFI







Use same MFI

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1. Invest in

immediate future:


assetsc. Adult


health & nutrition


Scope for increased income

via business or employment

Able to repay loan and avoid

increase in debt

Able to save


2. Consumptive

spending with scope

for productivity:

a. Add on housing

b. Assets which retain

value








Entrepreneurial abilityAppropriateness of business in context



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1. Invest in

immediate future:


assetsc. Adult


health & nutrition

Micro-credit


Able to repay loan and avoid

increase in debt

Able to save


Micro-savings

2. Consumptive spending with scope

for productivity:

a. Add on housing

b. Assets which retain

value

3. Invest in

long- term future:




Actual decreased

income


and/or forced to borrow

more

Use other MFI

Use same MFI

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1. Invest in

immediate future:


assetsc. Adult


health & nutrition

Micro-credit



or employment


in debt

Able to save


Social cohesion


Long-term benefits

Micro-savings



a. Add on housing








productive):






Use other MFI







Use same MFI

Does microfinance increase engagement in economic opportunities?

Do microfinance-supported economic activities increase income?

Microfinance and economic opportunities

Increasing wealth/

Reduce poverty

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

Do microfinance-supported economic activities increase savings?


Increasing wealth/

Reduce poverty

Micro-leasing: no studiesMicro-savings: robust evidence shows increase in savings although not alwaysMicro-credit: best evidence shows decrease in savings, other evidence shows increase in savingsCombined credit and savings: slightly less-than-robust studies show no clear evidence of impact

Do microfinance-supported economic activities increase non-financial assets?


Increasing wealth/

Reduce poverty

Micro-leasing: no studiesMicro-savings: robust studies show only commitment accounts increase non-financial assetsMicro-credit: slightly less-than-robust studies show mixed impactsCombined credit and savings: slightly less-than-robust studies show mixed impacts

Do microfinance-support economic opportunities increase expenditure?


Increasing wealth/

Reduce poverty

Micro-leasing: no studiesMicro-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 mixedCombined credit and savings: slightly less-than-robust study shows mixed impacts

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Ruth Stewart Models of access to finance 11 th September 2012.

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