Sunday, October 18, 2009

WHY does commercial microfinance work?

Poor people around the world produce very high marginal returns on capital, and need financial services to exploit these opportunities.
The high cost of capital in the developing world (20-100% APR), the high demand for credit, and the low cost of labor, make transaction-intensive microfinance quite profitable if done right. Moreover, due to the low delinquency and default rates on micro-loans, the (elite few) high-performing microlenders’ earnings are stable and strong (ROA of 3-8%). There are numerous other factors that also make the industry attractive, including low systematic risk, low volatility, and strong diversification of micro-loan portfolios (Source: Blue Orchard). Of course, there are many significant risks as demonstrated by the fact that only 3% of microlenders around the world actually turn a profit.

Thursday, October 15, 2009

Grameen Bank- A Role Model in Microfinance

Yet another monsoon season was approaching; but Joshuna Begum (Begum) unlike her neighbours was not worried about her house getting damaged during the monsoon. Her house now had a tin roof, mud walls and wooden windows, a luxury in rural Bangladesh. Earlier, Begum’s house had a straw roof and bamboo walls, which used to get damaged in the monsoon season, forcing the whole family to live in the kitchen. She got her hut repaired with a loan from the Bangladesh Grameen4 Bank (Grameen Bank).

Begum wasn’t the only one; there were thousands of people in rural Bangladesh who had improved their living conditions with the help of the microfinance programs of Grameen Bank, a pioneer in microfinance (Refer Exhibit I for more about microfinance). Grameen Bank helped thousands of poor Bangladeshi women to improve their lives by extending loans to them to start. their own enterprises. By 2003, it was reported that between 33-48% of Grameen Bank borrowers had moved above the poverty line5. By 2003, with 1,170 branches across Bangladesh, Grameen Bank was seen as a role model for microfinance all over the world.


The Grameen Bank model was replicated across the world -- not only in developing countries like India, Pakistan, and Vietnam, but even in developed countries such as Australia and the USA, where similar schemes were set up to improve the lives of the urban poor (Refer Exhibit II).

An effective poverty reduction strategy

Microfinance is often considered one of the most effective and flexible strategies in the fight against global poverty. It is sustainable and can be implemented on the massive scale necessary to respond to the urgent needs of those living on less than $1 a day, the World’s poorest.

Microfinance consists of making small loans, usually less than $200, to individuals, usually women, to establish or expand a small, self-sustaining business. For example, a woman may borrow $50 to buy chickens so she can sell eggs. As the chickens multiply, she will have more eggs to sell. Soon she can sell the chicks. Each expansion pulls her further from the devastation of poverty.

Microfinance, the Grameen way, includes several support systems that contribute greatly to its success. Microfinance institutions offer business advice and counseling, while clients provide peer support for each other through solidarity circles. For example, if a client falls ill, her circle helps with her business until she is well. If a client gets discouraged, the support group pulls her through. This contributes substantially to the extremely high repayment rate of loans made to microfinance entrepreneurs.

An equally important part of microfinance is the recycling of funds. As loans are repaid, usually in six months to a year, they are re-loaned. This continual reinvestment multiplies the impact of each dollar loaned.

Microfinance has a positive impact far beyond the individual client. The vast majority of the loans go to women because studies have shown that women are more likely to reinvest their earnings in the business and in their families. As families cross the poverty line and micro-businesses expand, their communities benefit. Jobs are created, knowledge is shared, civic participation increases, and women are recognized as valuable members of their families and communities.

Thursday, October 8, 2009

A Sustainable Microfinance Model

ASA –SUSTAINABILITY

ASA has been widely recognized one of the world's largest sustainable, cost-effective and fully grants free Micro Finance Institutions (MFI).

Over the last 16 years, ASA has achieved highest Operational Self Sufficiency (OSS) and Financial Self Sufficiency (FSS) within a short period of time.

ASA cost effective model also proven itself in different countries in Asia and Africa. ASA branches have proved its capacity to reach a break even point within a year.

ASA has maintained high self sufficiency from the beginning of operations and it continue to date.



ASA has been rated to have the highest OSS and FSS compare with Global MFIs and Asian Largest FIs.

How does ASA achieve these numbers?

By having:

* Lean structure
* Faster recruitment and costless informal training
* Simplification and Standardization
* Less over head cost and standard costs structure
* Maximum utilizations of fund
* Guided operation based on Manual
* Cost control steps
* Innovative management

Highest productivity and portfolio quality (data as of June 2008)


Highest productivity and portfolio quality (data as of June 2008)
# Indicators Results
1 Staffs ratio: head office versus / field
(total staffs 27142 and head office 257 only ) 1:106
2 Rate of recovery 99.48%
3 Portfolio at risk > 30 days 5.17%
4 Portfolio in arrears 2.90%
5 Cost per money lent 0.046
6 Cost per loan made $5.80
7 Loan loss ratio 0.20%
8 Reserve ratio 2.97%
9 Average clients per loan officer 461
10 Average borrower per staff 206
11 Average member per branch 2,146
12 Average outstanding loan per Loan Officer $31,382
13 Operational Self-Sustainability 179.14%
14 Financial Self-Sustainability 122.41%


How does an ASA Branch break-even so quickly?
ASA’s microfinance model, known as the 'ASA Sustainable and Cost-effective Microfinance Model' is different from other models and has already been proven as one of the best in the world.

This model is simple as well as cost-effective. This cost effective method, from Branch Office to the Central Office ensures ASA’s dedication towards its mission for reducing poverty.

Each Branch is managed by a Branch Manager (BM), One Assistant Branch Manager (ABM), 4 Loan Officers (LO) and a Peon who are responsible to conduct all activities of the branch smoothly.

On an average a mature ASA branch caters to around 2,000 group members and every new branch demands Bangladeshi Taka 6 (six) million (USD 88,000) to start its activities.

Once a branch starts operations, it takes (9-12) months for it to break even and become self-sustainable:

The key assumptions in this model are:

* there are 4 Loan Officers per branch, each with a 500 client target achieving a total of 2,000 clients within a year for the branch
* each client receives BDT 10,000 (USD 147) as their initial loan
* Loan loss Provisioning is at 0.5%
* Service Charge (interest rate) is 12.5% flat, calculated for a 45 installment loan spread over 12 months
* each member deposits BDT 20 per week as savings and pays BDT 20 as membership fees when joining ASA

Friday, October 2, 2009

Microinsurance Overview

Few poor households have access to formal insurance that protects against risks such as the death of a family breadwinner, severe or chronic illness, or loss of an asset including livestock and housing. These shocks are particularly damaging for poor households that are more vulnerable and less able to absorb the financial consequences of such an event.

Definitions of microinsurance vary in their emphasis on process, product characteristics, price and the target population. The Churchill definition (2006) states microinsurance is “the protection of low-income people against specific perils in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved.” As with all insurance, risk pooling under microinsurance attempts to allow many individuals or groups to pool risks and redistribute the costs of the risky events within the pool.

Although life microinsurance products are becoming increasingly available, microinsurance is a new field and still in the experimental stage. As MFIs expand beyond credit to a broader array of financial products, there is increasing interest to offer their clients access to microinsurance products in partnership with insurance companies. While commercial insurers provide the majority of the world’s products, mutual, cooperative and other community-based or community-led insurance organizations are emerging as providers of microinsurance. The greatest challenge for microinsurance schemes is providing real-value for poor households: finding the right balance between adequate protection and affordability.