Microfinance 101

Introduction

Welcome to Microfinance 101: Course Aim

Course Aim

This course is the first in the Microfinance Curriculum and aims to provide you with an understanding of the principles of microfinance and how it enables financial inclusion and aids those living in poverty.

Welcome to Microfinance 101: Topics

This course will cover the following topics:

  • Module 1: What Is Microfinance & Financial Inclusion?
  • Module 2: The Need for Microfinance
  • Module 3:  Microfinance as a Risk Mitigator and an enabler for financial inclusion 
  • Module 4: Current Trends in the Microfinance Industry

Welcome to Microfinance 101: Learning Objectives

Learning Objectives

  1. Identify the key principles of microfinance
  2. Explain why microfinance is needed 
  3. Describe the use of microfinance as a strategy to overcome poverty and enable financial inclusion
  4. Define current trends in the sector

Module 1: What Is Microfinance & Financial Inclusion?

What Is Microfinance?

Microfinance is the provision of financial services to those living in a state of poverty

 

 

What Is Financial Inclusion?

  • Financial inclusion is developing financial markets that responsibly serve more people with more products at lower cost
  • Financially inclusive markets are comprised of a broad, interconnected ecosystem  delivering financial products safely and efficiently to customers living in poverty
  • Financial Service Providers include banks, financial cooperatives, moneylenders, payment networks, agent networks, insurance providers and microfinance institutions
  • Financial inclusion efforts today are as a result of building on the work microfinance providers have done over the last few decades

Refer to the following sources for a more in depth look at the definition of Financial Inclusion Consultative Group to Assist the Poor or Center For Financial Inclusion

 

How does Microfinance Relate to Financial Inclusion?

  • The 1970’s saw the introduction of small amounts of credit (micro-credit) as a means to help those living in poverty engage in productive activities and increase their income
  • Micro-credit demonstrated that families in the informal economy are valuable customers and that it is possible to serve them in large numbers in a sustainable way
  • Over the years, we learned that these households need access to the full range of financial services to meet their life cycle needs, financial services that microcredit alone cannot provide
  • Today, “microfinance” generally refers to a broad set of financial services tailored to fit the needs of those living in poverty

Source: Consultative Group to Assist the Poor (CGAP)

 

Financial Inclusion 2020

Financial Inclusion 2020

Financial Inclusion 2020 is building a shared roadmap for action, working in partnership with other organizations with specialized expertise. The Center for Financial Inclusion has a track record of promoting dialogue among decisionmakers and developing a shared language and vision, with an eye toward turning vision into action. FI2020 builds on existing resources and industry efforts for financial inclusion, and incorporates geographic diversity and the perspectives of a range of stakeholders.

Source: Center For Financial Inclusion

Individual vs Group Lending

Individual lending implies loan to individual clients

Group lending implies loans to individual members in the group

 

 

Characteristics of Individual vs Group Lending

Individual Lending strategies retain the monitoring role with the MFI, where incentives to borrowers include exemption from additional risk, gain in privacy and time saving.

Group Lending strategies transfer monitoring to borrowers, where joint liability ensures strong incentives to members to help their peers succeed.

Characteristics of a Microfinance Loan

Key Terminology

Click on each of the terms to reveal their definition

Module One: Summary

Module One took you through the definitions of Microfinance, Financial Inclusion and how they are interconnected.

Microfinance being the provision of financial services to those living in a state of poverty.

Financial inclusion meaning that a full suite of quality financial services is provided to all who can use them, by a range of providers, to financially capable clients.

Module One also covered the characteristics of a Microfinance Loan, these being:

  • Type of Client

  • Loan Amount

  • Loan Term

  • Collateral

  • Repayment Schedule

  • Fees & Interest Rates

  • Lending Method

You were provided with a comparison of individual versus group lending and finally, you were shown some key terms used in the Microfinance sector and their meanings.

You will now be asked to complete two Knowledge Check questions to reinforce your learning, which you can attempt as many times as you need to.

In the next module, we will cover why there is a need for microfinance.

Module One: Knowledge Check

Microfinance is the provision of  to those living in a state of  

Financial inclusion means that a full suite of financial is provided to all who can use them, by a range of providers, to financially clients

Module One: Knowledge Check

Match the category on the left with the characteristics on the right 

  • Type of Client
    Employment in informal sector, low wage bracket
  • Loan Amount
    Determined by current capacity and willingness to pay
  • Collateral
    Land title; Movable assets such as motorcycle
  • Fees & Interest Rates
    Tend to be higher than traditional banks
  • Loan Term
    Usually short, depending on payment history and cycle

Module 2: The Need for Microfinance

Why people need money: Household & Consumption Expenses

Why do people need money: Investment Opportunities

How do people pay for their expenses?


Those people living in poverty may have limited access to reliable sources of finance such as traditional banks

The different sources through which those living in poverty pay for their expenses are generally categorised into "Informal", "Semi-Formal" and "Formal" sources of credit ,which we will discuss next.

Informal, Semi-Formal and Formal Sources of Credit

There are generally three ways in which those living in poverty are able to pay for their expenses

Informal Sources of Credit

People who live in remote areas far from formal financial institutions or who require more flexible and varied products than those offered by financial service providers often rely on informal finance through moneylenders, family members, or friends. Informal sources of credit are not regulated.

Source: Consultative Group to Assist the Poor (CGAP)

Informal sources include:

  • Money they have at home 

  • Money from family and friends 

  • Pawning jewellery or other assets

  • Rotating credit (registered society)

  • Moneylender

Informal, Semi-Formal and Formal Sources of Credit:

Semi-Formal Sources of Credit

Semi-formal sources of credit are those from registered bodies but not regulated by central government. Semi formal institutions have their own rule book and all the members abide by it

Semi-Formal sources include:

  • Non Government Organisations
  • Co-operatives
  • Self-Help Groups
  • Savings Groups
  • Unregulated MFIs

Informal, Semi-Formal and Formal Sources of Credit

Formal Sources of Credit

Formal sources of credit are those that are regulated by central government and are registered under a legal entity.


Formal sources include:

  • Small Microfinance Banks

  • Microfinance Institutions 



What might those living in a state of poverty look for in different microfinance sources of credit?


  • Security of savings
  • Access to appropriate savings and loans products and delivery of services
  • Affordable interest rates, terms and conditions 
  • Fair and transparent practices
  • Confidentiality of information
  • Respectful treatment

Why are savings as important as credit?

Savings safely provides those living in poverty with a cushion against shocks

Having money in a safe place provides people with a cushion against sudden shocks, such as illness or a bad harvest, which could easily push them into destitution. Savings may in fact be more important than credit in helping to raise incomes and reduce risk, although the impact on income may take longer to realise with savings.

Credit is a useful way to save but can be expensive, inflexible and inaccessible

Credit often serves the same purposes as savings for those living in poverty, but it is riskier, usually more expensive, and often as unavailable as appropriate deposit services.People often prefer to save and are even willing to pay to do so.

Saving may be more important than credit in helping raise incomes / reducing risk

Some financial institutions have discovered ways to offer savings products appropriate to the needs of those living in poverty.  These institutions have found that demand for savings deposit services far exceeds demand for credit if offered without restrictions or credit-biased incentives

Features, advantages and disadvantages of Microfinance Service Providers

If you would like to learn more about the features, advantages and disadvantages of the various Microfinance Service Providers you can download the report below.

Source: Adapted from World Bank Organization

Microfinance Service Providers

How does being included in the formal financial system help people?

How do those living in poverty interact with Microfinance Institutions?

Module 2: Summary

In this module we discussed that people need money not only for household and consumption expenses but also for investment opportunities.

The module introduced you to different sources of credit for those living in poverty, these being informal, semi-formal and formal, and that those living in poverty typically have less access to reliable sources of credit such as traditional banks.

The module explained why savings are as important as credit, the various ways in which those living in poverty pay for their expenses, and what the unbanked look for in different sources of savings and credit.

Module Two explained how being included in the formal financial system helps people living in poverty, including making day-to-day transactions, safeguarding savings, finance a small business, plan and pay for expenses, mitigate shock and improve their overall welfare.

The module covered the features, advantages and disadvantages of informal, semi-formal and formal sources of credit, and how those living in poverty interact with Financial Service Providers.

You will now be asked to complete three Knowledge Check questions to reinforce your learning, which you can attempt as many times as you need to.

In the next module, we will cover the risks facing those living in poverty, and discuss a number of protection strategies.

Module 2: Knowledge Check

How does being included in the formal financial system assist those living in poverty?

Select all that apply

  • Make day-to-day transactions
  • Finance a small business
  • Plan and pay for expenses
  • Mitigate shocks
  • Improve overall welfare
  • Helps ensure their children don't drop out of school
  • Safeguard savings

Module 2: Knowledge Check

True or False: Moneylenders are formal sources of credit for those living in poverty


  • True
  • False

Module 2: Knowledge Check

Select all semi-formal sources of credit


  • Non-Government Organisation
  • Unregulated MFI
  • Co-operative
  • Bank
  • Relatives
  • Self-Help Groups
  • Savings Groups

Module 3: Risks and Protection Strategies for Those Living in Poverty

Risks faced by those living in a state of poverty

Risks faced by those living in poverty

  • Lack of education and awareness to make informed decision on different financial services

  • Mixing of household and business finance

  • Lack of insurance to safeguard their enterprise and livestock against any natural calamities

  • Having insufficient cash at hand to pay for regular expenses 

Protection Strategies for those living in a state of poverty

Click on each protection strategy to learn more

Financial Capability & Livelihood Skills

Building consumer capability and empowerment is a dynamic and interactive process.

With greater financial capability, clients are better empowered to choose and use financial products and services in ways that makes the most of their scarce resources to advance their greater life goals. 

The provision of livelihood skills training helps smallholder farmers to improve their agronomy skills and attain sound business acumen to improve yields and incomes alongside implementing environmentally sustainable practices.

Both financial capability and livelihood skills are key protection strategies for those living in poverty

A Change in Behavior: Innovations in Financial Capability

"A Change In Behavior: Innovation in Financial Capability" is the seminal report tying financial capability interventions more closely to customer behavior, especially at critical decision-making moments, such as when signing up for and using financial products.

This report--funded by JPMorgan Chase & Co and produced by the Center for Financial Inclusion, assesses the global landscape of financial capability innovations, with special focus on India and Mexico..

To read the report go to Center for Financial Inclusion

Module 3: Summary

Module Three showed you the different risks faced by those living in a state of poverty, including: 

  • Lack of education and awareness to make informed decision on different financial services

  • Mixing of household and business finances

  • Lack of Insurance to safeguard their enterprise and livestock against any natural calamities

  • Having insufficient cash at hand to pay for regular expenses 

The module covered the various protection strategies those living in poverty can use, such as Savings, Small Loans, Micro-Insurance, Remittance.

You also saw how Financial Capability and Livelihood Skills programs can benefit those living in poverty.

You will now be asked to complete three Knowledge Check questions to reinforce your learning, which you can attempt as many times as you need to.

In the next module, we will introduce you to some of the current trends in the microfinance sector.

Module 3: Knowledge Check

What risks are faced by those living in poverty? Select all that apply

  • Lack of education and awareness
  • Mixing of household and business finance
  • Lack of insurance
  • Having too much cash at hand

Module 3: Knowledge Check

Match the protection strategy to the correct description

  • Savings
    Enables “consumption smoothing” (access to safe, secured and stable path for consumption)
  • Small Loans
    Also used to smooth consumption patterns, in particular during the lean periods
  • Micro-insurance
    Either for health, life or assets, this can also protect those living in poverty against sudden loss or misfortune
  • Remittance
    A fast, safe and flexible way to transfer money to friends and family
  • Financial Literacy & Capability programs
    Empowering those living in poverty to choose and use financial products and services

Module 3: Knowledge Check

The provision of  skills training helps smallholder farmers to improve their skills and attain sound business acumen to improve yields and incomes alongside implementing environmentally practices.

Module 4: Current Trends in the Microfinance Sector & Course Wrap Up

Module 4 Introduction

Module 4 introduces you to three current trends in the Microfinance Sector:

  • Increased focus on client protection
  • Increasing commercialisation
  • Digital Financial Services

Current Trends in the Microfinance Sector: Increasing Focus on Client Protection

There is an ever-increasing focus on client protection within the microfinance sector

In response to a strongly recognised need to assure safe and responsible treatment of their clients, microfinance industry leaders from around the world came together in 2008 to agree on a set of Client Protection Principles to guide the microfinance industry and form the minimum standards that clients should expect to receive when doing business with a microfinance institution.. 

These Principles are:

Current Trends in the Microfinance Sector: Increasing Focus on Client Protection

To put the principles into action, the Smart Campaign was launched in October 2009. Smart Campaign provides Microfinance Institutions with the tools and resources to enable them to comply with the Client Protection Principles. Today it is a global effort with 80 Institutions Smart Certified in client protection that together serve over 40 million clients.

The sector recognises that when financial services are delivered in accordance with these principles, clients are enabled to use financial services well and providers build a foundation for healthy operation for years to come. 

Current Trends in the Microfinance Sector: Increasing Commercialisation

As microfinance services have grown, the sector has become increasingly commercial. The topic of commercialisation has been hotly debated, largely because it raises fundamental questions about whether the dual social and financial missions of microfinance can coexist.

With increased profit orientation, however, it has  become clear that not only can these social and financial missions of microfinance coexist, but when done right, they are mutually reinforcing, creating a healthier long-term business model for both clients and investors.

If you would like to learn more about the commercialisation of microfinance, please go to Challenges in Microfinance:: An EY Perspective  and Commercialization of Microfinance on the CGAP website

Current Trends in the Microfinance Sector: Digital Financial Services

Those living in a state of poverty are increasingly gaining access to financial services through digital channels.

Banks, microfinance institutions, mobile operators, and third party providers are leveraging mobile phones, point-of-sale devices, along with networks of small-scale agents, to offer basic financial services at greater convenience, scale and lower cost than traditional banking allows.

There are an emerging set of institutions such as agent network managers, payment aggregators and others who are helping build out a more far reaching and efficient digital finance ecosystem.

According to estimates, more than 400 million people are linked globally through basic mobile payments services, allowing them to send money, pay bills, or purchase prepaid electricity with greater ease, affordability and access (GSMA Global Adoption Survey, 2015).

Source: Consultative Group to Assist the Poor (CGAP)

Current Trends in the Microfinance Sector: Digital Financial Services

Mobile Money for the Poor (MM4P)

In least developing countries, less than 20 percent of the adult population have formal financial accounts. Fewer use them.This video explains why increasing access and usage through digital financial services contributes to build a more stable, sustainable and inclusive future. 

Source: UNCDF

Module 4: Summary

In this module we covered three current trends in the microfinance sector:

  1. Increased focus on client protection - the Smart Campaign 7 Client Protection Principles and how they are used to to help microfinance institutions practice good ethics and smart business.
  2. Increasing commercialisation in the sector - that despite increased profit orientation, it has  become clear that not only can the social and financial missions of microfinance coexist, but when done right, they are mutually reinforcing, creating a healthier long-term business model for both clients and investors.
  3. Digital Financial Services - how those living in a state of poverty are increasingly gaining access to financial services through digital channels.

You will now be asked to complete three Knowledge Check questions to reinforce your learning, which you can attempt as many times as you need to.

Module 4: Knowledge Check

Select all 7 Client Protection Principles

  • Appropriate Product Design & Delivery
  • Transparency
  • Increasing Loan Repayment Times
  • Fair & Respectful Treatment of Clients
  • Privacy of Client Data
  • Mechanisms for Complaint Resolution
  • How To Market Your MFI to Clients
  • Responsible Pricing
  • Prevention of Over-Indebtedness
  • Providing Multiple Finance Options to Clients

Module 4: Knowledge Check

Complete the following sentence describing commercialisation in the sector:

"With increased orientation it has  become clear that not only can these and missions of microfinance coexist, but when done right, they are mutually , creating a healthier business model for both

Module 4: Knowledge Check

True or False:

Mobile phones, point-of-sale devices, along with networks of small-scale agents, offer basic financial services at greater convenience, scale and lower cost than traditional banking allows.

  • True
  • False

Course Wrap Up

Thank you for taking Microfinance 101

We trust that you enjoyed the course and that it met the Learning Objectives set out in the Introduction, these were:

  1. Identify the key principles of microfinance
  2. Explain why microfinance is needed 
  3. Describe the use of microfinance as a strategy to overcome poverty and enable financial inclusion
  4. Define current trends in the sector