"Microfinance: international experience and some preliminary findings from field research in Thailand" - updated 17 September 2010

1. Microfinance
Sarinee Achavanuntakul
17 September 2010
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2. Topics
 The concept and models of microfinance
 Does microfinance really help the poor?
 Microfinance in Thailand: some preliminary findings
from field research
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3. The concept and models of microfinance
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4. What is microfinance?
 Microfinance institutions (MFIs) provide financial services for the
poor
 Not ‚informal players‛ e.g. moneylenders, self-help groups
 Definition of ‚the poor‛ varies
 People living below poverty line
 People who have little access to formal banking, especially in rural areas
 Two kinds of incentives
 ‚Social business‛ : social mission at the core, aims to be financially
sustainable -- most MFIs. This will be the subject of these slides
 ‚Commercial microfinance‛ : profit-oriented MFIs
4

5. Types of microfinance products
Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007. 5

6. Types of players
 NGOs
 Cooperatives
 Credit unions
 Nonbank financial institutions (e.g. village banks)
 Microfinance banks
 Commercial & state banks
 Post office 6

7. Two basic types of microfinance institutions
 Lending-based
 Focus on lending to build capacity of micro-entrepreneurs
 Develop saving products afterward (voluntary and mandatory saving)
 Funding: soft loans or grants from governments or development agencies,
consumer deposits, loans from commercial banks
 Saving-based
 Focus on building long-term savings and provide welfare to those outside
formal social safety nets
 Funding: consumer deposits, soft loan / grants from gov. & dev. agencies
 Tend to be more conservative than lending-based MFIs
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8. Some typical features
 Typical microcredit features
 No collateral requirement – typically use ‚social capital‛ (e.g. group of 5,
cross-guaranteeing each other) in lieu of asset-based collateral
 Flexible repayment schedule – typically no bullet repayment; small
installments on a weekly/monthly basis
 25%-40% effective interest rate
 No accrued interest & penalty rates on overdue loans
 Social commitment / mission
 Empowerment of borrowers through joint ownership & group decisions
 Foster community business, social activities, other programs
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9. ‚Grameen microcredit highway‛
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10. The microfinance universe: growing, but no consensus #
 Total MFI assets approx. $30 billion, 73% serve <2,500 clients
 CGAP estimates 750+ million MFI saving & loan accounts
 Microcredit Summit Database includes 3,133 MFIs; MBB 1,400+
Source: The MiX Market, http://www.mixmarket.org/, data on 1,400+ MFIs 10

11. Growth patterns suggest a ‘maturing’ sector
Source: MicroBanking Bulletin No. 18, http://www.themix.org/
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12. Growth patterns suggest a ‘maturing’ sector (cont.)
Growth in borrowers & portfolio Shift to commercial funding
Source: MicroBanking Bulletin No. 18, http://www.themix.org/. The data covers 487 MFIs in 78
countries, representing 82% of outstanding loans and 75% of worldwide MFI
borrowers as at the end of 2007. 12

13. Source: MicroBanking Bulletin No. 18, http://www.themix.org/
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14. Source: MicroBanking Bulletin No. 18, http://www.themix.org/
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15. Source: MicroBanking Bulletin No. 18, http://www.themix.org/
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16. Forbes ranking of ‚Top 50 MFIs‛ in 2007
Source: http://www.forbes.com/2007/12/20/microfinance-philanthropy-credit-biz-cz_ms_1220microfinance_table.html 16

17. Microfinance is still unable to meet potential demand…
17

18. …but there is increasing diversity of funds universe…
27 funds
11 funds
12 funds
17 funds
7 funds
15 funds
Source: The MiX Market, http://www.mixmarket.org/ 18

19. …an increasing variety of vehicles and funders...
Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007.
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20. …and increased interest from big commercial players
Source: forum for the future, “new horizons: creating value, enabling livelihoods.” 2007.
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21. Recent trends
 Increase in local competition amongst MFIs
 Increase in competition from local commercial banks
 Growing interest of international banks and investors
 Greater transparency, allows for measurement and
benchmarking of financial performance
 Increasing role played by microfinance rating agencies

22. Current issues
On the positive side:
 Growing industry – number of institutions & clients.
 Largely survived the food (2007) financial (2008) and economic (2009) crises.
 But challenges remain: economic turmoil, approx. 2.5 billion people still don’t
have access.
Weakness & downsides:
 Development impact – does it really help the poor?
 Excessive (or not?) profit-making behavior
 Exorbitant interest rates
 Over-indebtedness
 Microfinance ‚bubbles‛?

23. ‚Mission Drift‛ in microfinance
Cull, Demirgüc-Kunt, and Morduch (2007) define mission drift as
‚… a shift in the composition of new clients, or a reorientation from
poorer to wealthier clients among existing clients.‛
Armendáriz and Szafarz (2009) define mission drift as
“ … a phenomenon whereby an MFI increases its average loan size
by reaching out wealthier clients neither for progressive lending nor
for cross subsidization reasons.”

24. Does microfinance really help the poor?
24

25. CGAP: Principles of microfinance
 The poor need a variety of financial services, not just loans.
Just like everyone else, poor people need a wide range of
financial services that are convenient, flexible, and reasonably
priced. Depending on their circumstances, poor people need not
only credit, but also savings, cash transfers, and insurance.
 Microfinance is a powerful instrument against poverty. Access
to sustainable financial services enables the poor to increase
incomes, build assets, and reduce their vulnerability to external
shocks. Microfinance allows poor households to move from
everyday survival to planning for the future.
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26. CGAP: Principles of microfinance (cont.)
 Microfinance means building financial systems that serve the
poor. Poor people constitute the vast majority of the population in
most developing countries. Yet, an overwhelming number of the
poor continue to lack access to basic financial services.
 Financial sustainability is necessary to reach significant
numbers of poor people. Most poor people are not able to
access financial services because of the lack of strong retail
financial intermediaries. Building financially sustainable institutions
is not an end in itself. It is the only way to reach significant scale
and impact far beyond what donor agencies can fund.
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27. CGAP: Principles of microfinance (cont.)
 Microfinance is about building permanent local financial
institutions. Building financial systems for the poor means
building sound domestic financial intermediaries that can provide
financial services to poor people on a permanent basis. Such
institutions should be able to mobilize and recycle domestic
savings, extend credit, and provide a range of services.
 Microcredit is not always the answer. Microcredit is not
appropriate for everyone or every situation. The destitute and
hungry who have no income or means of repayment need other
forms of support before they can make use of loans.
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28. CGAP: Principles of microfinance (cont.)
 Interest rate ceilings can damage poor people’s access to
financial services. It costs much more to make many small loans
than a few large loans. Unless microlenders can charge interest
rates that are well above average bank loan rates, they cannot
cover their costs, and their growth and sustainability will be limited
by the scarce and uncertain supply of subsidized funding.
 The government’s role is as an enabler, not as a direct
provider of financial services. National governments play an
important role in setting a supportive policy environment that
stimulates the development of financial services while protecting
poor people’s savings. 28

29. CGAP: Principles of microfinance (cont.)
 Donor subsidies should complement, not compete with
private sector capital. Donors should use appropriate grant, loan,
and equity instruments on a temporary basis to build the
institutional capacity of financial providers, develop supporting
infrastructure (like rating agencies, credit bureaus, audit capacity,
etc.), and support experimental services and products.
 The lack of institutional and human capacity is the key
constraint. Microfinance is a specialized field that combines
banking with social goals, and capacity needs to be built at all
levels. Most investments in the sector, both public and private,
should focus on this capacity building. 29

30. CGAP: Principles of microfinance (cont.)
 The importance of financial and outreach transparency.
Accurate, standardized, and comparable information on the
financial and social performance of financial institutions providing
services to the poor is imperative. Bank supervisors and
regulators, donors, investors, and more importantly, the poor who
are clients of microfinance need this information to adequately
assess risk and returns.
30

31. Some latest findings: the story vs. the reality
 The story: ‚Microfinance funds creation and expansion of
microenterprises, producing additional income that lifts the
borrowers’ households out of poverty.‛
 The truth, naturally, is more complicated. One problem is the
complex issue of causality – Randomized Controlled Trials (RCTs)
is still new to this field.
 The verdict is still out on whether microfinance reduces poverty on
average (i.e. not making some poor worse off the way credit cards
made some middle income consumers worse off).
 Income may not increase, but ‚consumption smoothing‛ is a benefit.
31

32. The real benefit of microfinance
 The problem with being poor is not just that income is low, but
also that it tends to be uneven and vulnerable to disruption.
Given the variability and vulnerability of their income, poor
households have to save and borrow constantly in order to put
food on the table and meet other consumption needs.
 Since informal credit and savings mechanisms tend to be
unreliable, microfinance customers value formal microfinance
highly because it is more reliable, even if it is often less flexible
than their other tools to manage their cash flow.
 Millions of microfinance customers are ‚voting with their feet.‛
32

33. Looking at microfinance from ‚capabilities approach‛
 Applying Amartya Sen’s capabilities approach as described in
‚Development as Freedom‛ to microfinance leads to some
interesting issues:
 Good research question: when does microfinance gives people
more control over their lives and when less?
 Also, from the perspective that development is a tool for institution-
building, one important contribution of microfinance is the
enrichment of important institutions: enhancing social cohesion,
encouraging civic participation, etc.
33

34. Microfinance in Thailand: some preliminary
findings from field research
34

35. ‚Grassroots finance‛ in Thailand
There are 3 kinds of players in Thailand’s ‚grassroots finance‛ space
1. State-owned banks: Bank for Agriculture and Agricultural Cooperatives
(BAAC), Krung Thai Bank, Government Savings Bank, Government
Housing Bank
2. Semi-formal groups (set up as government’s initiatives): 78,013 Baht 1
million village funds (some upgraded to ‚community banks‛), 1,227 saving
cooperatives, credit unions, and saving-for-production groups. The assets
of these groups total approx. Baht 900 billion.
3. Informal groups (set up as villagers’ own initiatives): one-Baht savings
groups, one-Baht expense reduction groups, etc. Total assets approx.
Baht 30 billion.
Semi-formal groups and informal groups serve approx. 12 million people.

36. Some preliminary findings from field research
 Very few grassroots finance groups in Thailand aim to make financial
profits. Most only want to ‚safeguard‛ their capital and fulfill social mission.
Therefore, financial stability remains more important than profitability.
 Many of the groups’ concerns are governance issues, e.g. the difficulty of
finding ‚new blood‛ to succeed directors, lack of accounting training.
 Benefits to clients from savings-based groups seem to be more tangible in
the form of welfare (e.g. childbirth stipend, sickness allowance, funeral
rites allowance) paid from clients’ collective savings. Operational
sufficiency is major risk.
 Benefits to clients from loan-based groups are less clear. Major risk lies in
the inability of clients to use loans to raise living standards. Delinquency is
not so much a problem since most clients ‘refinance’ from other groups.

37. Characteristics of Thai grassroots finance groups
Key characteristic, by grade Major results
Greatly increases financial Creates solid linkages of finance-employment-welfare
and/or quality of life of clients
Efficient and transparent financial management
A Strongly sustainable financially
Has member information, guarantor system, audit system
Reasonably increases financial Enables members to have working capital
B and/or quality of life of clients Has member information, guarantor system, audit system
Reasonably sustainable No non-performing loans
financially
Increases financial and/or Enables members to have working capital
C quality of life of clients Unsound/unclear accounting
Expands too aggressively
Financial sustainability
Has non-performing loans
doubtful
Cannot gain trust from members Excludes villagers, not transparent
D High risk of financial Borrowers and guarantors do not repay
unsustainability
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38. Local ‚wall street‛ in Nakon Si Thammarat
District financial institution
GSB branch BAAC branch
Village A village fund
Money lender
Shops Village B village fund
crops Women lending group
Savings group
Village bank
Islamic savings group
Rubber Fruit plantation
Village C village fund
plantation 38

39. Community financial group A
Village A
Savings Group
 
200 clients from
Village A outside Village A
Village
Bank Village A
 Village 
300 members Fund  vouch
money
voucher,
guarantor
39

40. Community financial group B
Group 2
Group 1 


 Village B Financial
Village Fund groups in
network
 

Group 3 money
Group 4
40

41. Saving group network in Nakon Si Thammarat
member member
Village A Village B
Saving group Saving group
   
group group
member member member member
directors directors
 
member Saving Group D member
Village C
Saving group
money

group 
member member knowledge,
directors
audit
 community
member
business 41

42. Farmer’s cash flow example: Chainat province
Baht
20,000
Month
1 3 6 9 12 1 3
Cash inflow Cash outflow
Loans from Expenses: household
village fund expenditures & agri investment
Loans from Savings
another
source Assuming normal crop year without
natural disaster, monocrop plantation
Crop income
5 rounds of rice farming in 2 years, 30
rais of land 42

43. Case study: comparison of financial performance
Savings Lending Lending
Financial Performance Indicators 2007 Group Group 1 Group 2
Net profits / Assets 4.0% 0.9% 3.3%
Dividends / (Equity + Deposits) 7.0% 0.0% 3.3%
Outstanding Loans / (Equity + Deposits) 107.1% 75.1% 70.9%
Interest Revenues / Total Loans 4.9% 11.9% 6.3%
Operating Expense / Revenues 32.5% 53.1% 20.0%
Total Loans per Borrower (Baht) 24,586 7,845 5,392
Welfare Expense per Borrower (Baht) 308 23 18
Net Profits before Welfare / Welfare Expense 0.87 14.60 13.00
Welfare Expense / (Welfare Funds & Deposits) 8.4% 0.6% 0.7%

44. Preliminary field research findings
 Few village banks are focused on generating profits. Most aim to
financially break even (‚safeguard funds‛) and focus more on social
performance. Financial stability is more important than profitability.
 Many concerns/risks are management issues: difficulty to find new
directors, some groups don’t have enough knowledge of accounting,
resulting in accounting numbers not reflecting real performance.
 Key risk of savings-focused groups: insufficiency of funds to provide
welfare esp. funeral payouts in light of annual dividends & aging pop.
 Key risk of lending-focused groups: inability to use microcredit as leverage
out of poverty, resulting in no reduction in debt burden (low NPL figure
due to constant refinance e.g. from informal loans).

45. Financial sustainability vs. members’ quality of life
Financial sustainability
high Low loan/deposits ratio - Group is highly financially sustainable,
but members’ quality of life hasn’t much improved
High refinance rate & low NPL ratio - Group is financially
sustainable, but members’ quality of life hasn’t much improved
High interest rate - Group is financially sustainable w/
enough profits for dividend/welfare payout, but very hard
to access for poor people
Highly accessible for poor people - welfare expense
rises faster than deposits, low financial sustainability
Highly accessible for poor people – High risk
of NPLs & low financial sustainability
low Members’
low high quality of life 45