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Does competition result in lower interest rates to microcredit customers? To address this question, this Focus Note analyses the experiences of Uganda, Bangladesh, and Bolivia, home to some of the early regional and even global pioneers of microcredit.
Many microfinance institutions in developing and transition economies receive foreign funding. This Focus Note looks at these "foreign investors" and the demand for their services. It presents a view of the market and addresses key questions, including How much foreign investment in MFIs is really private? How much of this investment is really commercial? Where is the investment being placed, in terms of region, number, and type of MFIs? Are investors competing to invest in MFIs? As MFIs grow and absorb more funding, what is the likely role of foreign investment compared with domestic sources? Does foreign debt create inappropriate currency risks for MFIs? and What practical lessons emerge from this analysis?
Retail financial institutions remain the backbone of financial systems that
serve low-income clients. They need complex skills to offer poor people quality
financial services on a permanent basis. In most countries, inadequate retail
capacity is the main bottleneck to scaling up microfinance. This brief addresses
how funding agencies - public donors, international NGOs, private foundations, and
investors - can help meet the challenge of developing retail capacity.
As the communities affected by the recent devastating tsunami begin to rebuild
their lives, microfinance institutions (MFIs) can play a powerful part in the
path to recovery. The following guidelines are intended to help MFIs provide the
appropriate range of emergency and longer-term assistance to their clients,
while helping both MFIs and donors ensure that the ultimate mission of the
MFI--to be a sustainable provider of financial services--is not compromised.
(adapted from Elizabeth Littlefield and Richard Rosenberg, "Microfinance and the
Poor: Breaking Down the Walls between Microfinance and Formal Finance," Finance & Development 41, no. 2 (June 2004): 38-40)
There is a dawning understanding that developing countries' financial systems
need to be more accessible to poor people and that there are practical ways to
make this happen. All kinds of financial institutions--regulators, mainstream
rating agencies, commercial and state banks, insurance companies, and credit
bureaus--are starting to play a part in developing sound, inclusive financial
systems that serve the majority of poor countries citizens.
This paper outlines the rationale for higher microcredit interest rates, the
historical performance of subsidized lending, and the impact of interest rate
ceilings on microfinance clients. It includes recommendations for fostering
lower microcredit interest rates through competition and consumer protection
without imposing interest rate ceilings.
Here are the results of CGAP's survey of the global outreach of a broad set of institutions that extend financial services downward---institutions with a "double bottom line" of financial and social/development objectives. The survey found that over 750 million acccounts exist below the traditional level of commercial banks, and that a substantial fraction of these predominantly savings accounts probably belong to the poor or near poor--and represent an important opportunity for outreach.
Because sustainable microfinance is a key element in creating solid financial
markets in developing countries, CGAP's donor members developed and endorsed
these Key Principles of Microfinance. The G8 also endorsed these principles at
their June 2004 Summit in Sea Island, Georgia, USA, as part of their commitment
to expanding the access of microfinance.
These cases (prepared for the international conference in Shanghai, May 2004)
represent powerful examples of scaling up microfinance. These diverse
institutions made conscious decisions to pursue scale while serving poor
clienteles, demonstrating creativity and a willingness to take risk, while
operating under commercial business principles.
Scoring is a new way to judge the risk of whether the self-employed poor will repay their microcredit debts as promised This paper discusses how scoring works, what microlenders can expect from it, how to use it, and what its implications are for microcredit.
Using Microfin 3.0 replaces the 1998 handbook, Business Planning and Financial Modeling for Microfinance Institutions. This new handbook provides detailed guidance on using version 3 of Microfin, the latest version of the Excel-based financial modeling tool specifically designed for microfinance institutions.
Not only can poor ratios mislead donors, they can also obscure urgent problems
from MFI managers until it is too late to reverse them. Many an MFI has died of
a repayment cancer that could have been cured if it had been detected and dealt
with earlier. Meaningful delinquency monitoring is thus a crucial diagnostic
tool for MFI management.
Using examples from the field and an actual MFI (BRAC), the paper explores
alternative answers to a series of questions that MFI managers should ask
themselves regarding the allocation of costs and assets among cost centers and
the impact of cost allocation on the financial statements of multi-service MFIs.
This paper explains how an MFI should estimate the interest rate on its loans if
the institution wants to become sustainable; how to calculate the effective
interest yield on loans; and what different loan and repayment methods are used
to determine the true rate of interest income received by an MFI. The paper also
discusses evidence that MFI clients are capable of paying high interest rates,
concluding that MFIs should charge clients a rate high enough to ensure their
own sustainability.
Spreadsheet Model:
A state-owned village banking system in Indonesia (Bank Rakyat's desa unit) is transformed into a successful microfinance institution. Success of the transition is traced to several key factors, the absence of which would seriously constrain the reform of a similar, state-owned development finance institution.
BancoSol, a Bolivian MFI, faced significant financial and management challenges as it underwent a transition from NGO to licensed commercial bank. The publication summarizes an Ohio State University paper by Claudio Gonzalez-Vega, Mark Schreiner, Richard L. Meyer, Jorge Rodriguez, and Sergio Navajas.
Thirteen MFIs in seven countries examine the trade-offs they made between sustainability and poverty outreach. It is a summary of David Hulme and Paul Mosley, Finance against Poverty (London: Routledge, 1996).
Eleven microenterprise finance programs are examined from two perspectives, outreach and financial sustainability. Based on James Fox's summary an in-depth study of the same name authored by Robert Peck Christen, Elisabeth Rhyne, Robert C. Vogel, and Cressida McKean.
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