Microfinance

 

Welcome to the microfinance action group for Nyaya Health. 

Our project is entitled Nyaya Microfinance: Using the power of the internet to provide just financial services

The initial goal of this wiki is to create a strategy that we will incorporate into a 30 page business proposal plan for a March 22nd deadline to the Yale Y50K entrepreneurship competition. Afterwrads, we will use this wiki to refine our plan and begin implementation on the ground in Achham.

 

 

Here is a Link to a 1 page executive summary of our plan:

http://www.nyayahealth.org/Library/StanfordBases_microfinance.pdf

This was submitted to a Stanford Social entrepreneurship competition.

 

Deadlines

Below are the competitions to which we have already submitted or are planning to submit, with their corresponding deadlines:

feb 15: Utexas exec summary http://www.utexas.edu/lbj/rgk/competition/entryform08.php [submitted] http://bases.stanford.edu/site/socialechall/07-08/competition.jsp

 

feb 18: Stanford exec summary

 

[submitted] http://yesatyale.org/y50k.php

feb 23: 2-3 page exec summary

feb 28: 1000 word exec summary for MIT 100K http://www.mit100k.org/

march 15: initial proposal to Ideas http://web.mit.edu/ideas/www/index.htm

march 22: 30 page business plan for Yale

march 28: business plan for Utexas

april 11: business plan for Stanford

may 1: business plan for MIT 100K

 

 

TASK GROUPS

In order to effectively compile our business plan, we have divided the work into task groups.

 

Each taskgroup should have the following plans:

-a lot of issues will come up that require answers from local people. Please compile questions that are targeted that we can request to the Achham-based staff.

-email any potential collaborators, team members, etc.

-three-year vision for implementation

-timeline

-personnel/volunteers required on the ground in Achham

-budget, including maturity terms and interest rates

-market analysis/competitors

-risks and their management; contingency plans

-collaborators

-funders/grants

 

 

Task Groups:

 

A-SAVINGS Task Group: models for savings in rural, impoverished areas living on less than 50 cents per day

B-COOPERATIVES Task Group: integrating, training, capacity building and managing village cooperatives

C-P2P LENDING Task Group: online P2P lending strategies (and all the money transfers, sales pitches, etc... that are involved)

D-INTEGRATING HEALTH AND ENTERPRISE NEEDS Task Group: integrating microfinance and health needs (includes coming up with interest rates, loan periods, ways to ensure repayment, how to incorporate health/consumption loans, whether to do group lending, etc...) 

 

 

 

BELOW is a general overview of Microfinance and the ways in which it can apply to Nyaya

 

History:

Finance policy has traditionally been designed on the premise of a gap between the demand for credit and savings and access to these services. Bridging the gap between access and demand has been notoriously difficult for financial institutions seeking to serve clients outside the frontier of formal finance (1). Policymakers have attempted a number of interventions to bridge this gap. In the 1960s the state played the primarily role, producing parastatal development banks and agricultural credit. This method of intervention encountered widespread failures and was replaced in the 1980s by a paradigm set by bold microfinance initiatives, in particular the Grameen Bank and the Bank Rakyat Indonesia. These MFIs initially received heavy state and donor support, but successfully became cost-efficient agencies to expand the frontier for financial services. This new paradigm also recognized that the key causes of the gap between access and demand for both financial intermediaries and clients were informational asymmetries and moral risk (2). These institutions performed market research to estimate the demand for financial services by the rural poor, and then developed financial services that specifically met the needs of their target population. They also developed institutional strategies to reduce operating costs. This market-oriented approach has greater potential to sustainably expand the financial frontier to the poor, but is also more challenging to implement.

Objectives of microfinance institutions:

As microfinance institutions developed, the original financial policy objective of reaching more of the poor (breadth of outreach) and more of the poorest of the poor (depth of outreach) was supplemented with the objective of achieving institutional sustainability, meaning that an MFI should be able to cover its cost of operation. Some analysts argue that the objectives of improving outreach and achieving sustainability are not entirely compatible. As an MFI expands its outreach, it will accrue additional costs which may jeopardize its sustainability. MFIs typically provide small-sized loans and receive small-sized deposits in a large number, accruing cost to the client and institution per transaction. This law of increasing transaction costs per decreasing transactions size generates the contention between outreach and sustainability (3).

 

The third objective of finance, welfare impact, is essential for measuring the success of microfinance institutions. Public institutions or donors must also examine the impact of the microfinance institutions they are supporting, as funding spent on subsidizing MFIs could also be used to develop other public investments such as education and healthcare. The very poor benefit from microfinance largely by smoothening their consumption by borrowing or improved savings management, while those near the poverty line use loans to finance improved production ability that in the long term increases their income. Thus, financial services may improve the welfare of the very poor but do not necessarily lift them from poverty because of their lack of access to complementary inputs such as markets, technology, and education that raise incomes and expand their production frontier. Complementary services such as business or marketing services or training of borrowers can enhance the impact of finance. These complementary services are occasionally provided by MFI but increase operational expense and jeopardize sustainability (4).

 

Thus, the three core objectives for microfinance institution are 1) outreach, 2) impact, and 3) sustainability. Successfully meeting one objective may be at the expense of another, but synergies also exist. Sustainability can influence outreach, as MFIs with an established reputation of sustainable operation are more attractive to clients with limited incomes than institutions with less financially-sound operation. Sustainability can also influence impact, as MFIs striving for sustainability would also seek to develop products and operations that meet client demand; improved financial products would in turn generate greater economic benefits for clients and would thereby have a greater impact on poverty.

Demand for financial services by the poor:

The rural poor are exposed to variable seasonal income patterns due to uncertainty of crop yields and market conditions. Households in the lowest income quartile spend as much as 91 percent of their consumption budget on food (5). In times of crisis, when productive capability is particularly low or income is limited, poor households rely on short-term financial support from relatives and moneylenders to increase available funds for consumption. The rural poor therefore benefit from financial services that smoothen consumption and income. Credit can be used for income generation by expanding production ability, while savings and insurance services can smoothen consumption (6). The level of poverty of a client also predicts the desired financial product: the very poor demand more insurance and savings options to smoothen consumption and maintain stable income while those near poverty line also demand credit to expand production. Women, however, use credit to smoothen consumption in the short-term but also to accumulate wealth in the long-term. Potential clients' demand for credit also depends on their perceptions of risks and benefits of getting a loan. The risks include transaction costs of obtaining a loan, and opportunity costs of applying for a loan. Successful rural MFIs conduct market research and develop diversified financial products with low client costs to meet the specific needs of farmers, women, and micro-entrepreneurs (7).

Outreach and sustainability:

Microfinance institutions that seek to improve the welfare of the poor must assess the depth of outreach (how poor are the clients served) as well as breadth of outreach (how many of our clients are poor). Measures of the breadth of outreach include number of total clients, number of female clients, and number of loans disbursed. Size of loans and deposits can be used as estimates of the depth of client poverty (8). Different MFI structures have different degree of outreach: village banks tend to have greater depth while credit unions tend to have greater breadth. Credit unions may, in fact, have deeper outreach compared to village banks if a significant percentage clients they serve are also very poor (9)(10). In terms of sustainability, village banks tend to rely more on subsidies while credit unions tend to be independently sustainable. MFIs seeking sustainability produce credit services that are targeted to the level of poverty of their clients: clients who are somewhat richer and can offer collateral for loans are served individually, while poorer clients without collateral for loans are served within groups to reduce costs of multiple individual transactions (3). Institutions that design diverse financial products to satisfy a broad population while simultaneously possessing efficient operation management have the greatest probability of achieving excellent outreach and financial sustainability.

Impact:

Access to credit influences household outcomes by two mechanisms: 1) enabling acquisition of inputs to improve income production, and 2) improving risk-bearing capacity (11). The option to borrow even if not exercised allows households to use already present liquidity to undertake riskier projects, knowing that they can borrow if the returns on their riskier projects are lower than expected. A limited budget for project monitoring may best utilized in assessing the changing needs and preferences of clients, which can then inform future design of financial services. The very poor may seek credit services once savings and insurance services have stabilized consumption budgets. In the absence of measurable estimates, the best evidence of impact is whether or not clients continue using microfinance services (12).

Summary:

The rural poor typically use financial services to smoothen consumption and to allow investment in income-generating technologies. The very poor mainly utilize savings and insurance services, while the more well off poor are more likely to use credit to expand production ability. Credit unions targeting a diverse rural population have a greater outreach and likelihood of sustainability than village banks. The impact of rural microfinance may be best estimated by assessing the changing preferences of clientele.

 

1) Von Pischke J. (1991) Finance at the frontier: debt capacity and the role of credit in the private economy. EDI Development Studies.

2) Stiglitz J. (1981) Credit rationing in markets with imperfect information. American Economic Review 71, 393-410.

3) Navajas S (2002). Microcredit and the poorest of the poor: theory and evidence from Bolivia. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

4) Sharma M and Buchenrieder G (2002). Impact of microfinance on food security and poverty alleviation: a review and synthesis of empirical evidence. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

5) Zeller M and Sharma M (2002). Access to and demand for financial services by the rural poor: a multicountry synthesis. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

6) Nguyen G (2002). Characteristics of household demand for financial services in highly uncertain economies: a review of evidence from Burkina Faso. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

7) Stanton J (2002). Wealth and rural credit among farmers in mexico: is market participation consistent with targeting? In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

8) Yaron J (1992). Successful rural finance institutions. World Bank Discussion Paper No. 150, World Bank.

9) Paxton J (2002). Outreach and sustainability of member-based rural financial intermediaries. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

10) Zeller M, et al (2002). An operational tool for evaluating the poverty outreach of development policies and projects. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

11) Diagne A (2002). Impact of access to credit on maize and tobacco productivity in Malawi. In The Triangle Of Microfinance, ed. Manfred Zeller & Richard Meyer (The International Food Policy Research Institute).

12) Zeller M and Meyer R (2002). The Triangle of Microfinance. The International Food Policy Research Institute.

Options for integrating microfinance into clinic funding:

Option 1) Partner with existing local MFI. Nyaya Health could collect basic demographic data of patients to assess level of poverty. This data could be given to partnered MFI in exchange for funding. Referring patients to the MFI could also serve as a source of income for Nyaya Health. Several supportive institutions may be worth contacting to discuss a strategic partnership:

 

-The Center for Microfinance

-Nepal Federation of Savings and Credit Cooperative Union Limited (NEFSCUN)

-The Institute for Integrated Development Studies (IIDS)

-Plan Nepal

-Canadian Centre for International Studies and Cooperation (CECI)-Nepal

-Microfinance Association of Nepal (MIFAN)

 

Several microfinance initiatives exist in Accham:

 

Seed Quality Control Centre (http://www.aicc.gov.np/organization/projects/summery/cldp.php)

Description: An initiative begun in 2004 by the Department of Livestock Services in partnership with local NGOs, CBOs, and District Development Committees. The objective is give livestock keepers the resources and training necessary to increase production and income. Accham is one of the areas involved.

Contact info: none listed online

 

Decentralized Local Governance Support Program (http://www.dlgsp.org.np)

Description: An initiative dedicated to infrastructure development, skill building, and community planning.

Contact info: Accham DPA Mr. Purushowttam Adhikari 097-629112 097-629112

 

Western Uplands Poverty Alleviation Project (http://www.ifad.org/english/operations/pi/npl/i576np/index.htm)

Description: An initiative begun in 2003 by the International Fund for Agricultural Development that includes support for local microfinance initiatives as part of an integrated development project.

Contact info: Mr Dhan Bahadur Shrestha, Project Coordinator

Western Uplands Poverty Alleviation Project

Ministry of Local Development

G.P.O. Box 20383

Kathmandu, Nepal

Tel: +977 81520088,

+977 15552247

+977 14479396

Fax: +977 81525814

dhanbahadur_shrestha@yahoo.com

Option 2). Invest a portion of clinic operating budget in existing online microfinance initiatives. The return on these investments would be modest but could be used for clinic operation.

Globefunder (http://www.globefunder.com)
At this time it is still in Beta mode.

Description: An online microfinance lending engine to match lenders and borrowers.

Our main role would be to help borrowers post their plans and see what happens. Right now it's only working the US though.

 

Kiva (http://www.kiva.org)
Description: Kiva Microlending is a fast-growing non-profit that provides a peer-to-peer lending infrastructure for third world entrepreneurs. Kiva allows a lender give money to entrepreneurs in the developing world, empowering them to lift themselves from poverty.
If we wanted to use Kiva we would have to still find a microfinance institution on the ground that Kiva trusts. The only group that Kiva is partnered with in Nepal (which they don't actually trust much, a 3 out of 5 trust rating) is Patan Business and Professional Women (but it only works in Patan).

Option 3) Build parallel MFI. Nyaya Health could conduct its own demographic analysis of clients, assess need for financial services, and then develop a microfinance institution to serve those needs. If MFI sustainability is achieved, revenue could be diverted to funding clinic operations. This option requires extensive field research and a dedicated team of Nyaya Health members to lead and manage the enterprise. 

Recent discussions about applications of microfinance to health.