Creating a World Without Poverty, Muhammad Yunus, Book, 2007


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Creating a World Without Poverty, Muhammad Yunus, Book, 2007

  • Creating a World Without Poverty, Muhammad Yunus, Book, 2007

  • MICROFINANCE IN INDIA : SECTORAL ISSUES AND CHALLENGES (By Thorat, 2005)

  • The Indian Microfinance Experience – Accomplishments and Challenges (Paper, GATECH, 2004)

  • **This presentation is a compilation of information from these sources, and not the presenter’s personal views on the topic.



Government alone is not the answer

  • Government – alone is not the answer

    • Inefficiencies, slow, bureaucratic, prone to corruption….
  • Nonprofit Orgs. – inadequate

    • dependent on donations (uncertain, demand far exceeds supply)
    • “compassion fatigue”
    • Raising money takes time and energy, which can be spent planning growth/expansion
  • Multilateral Institutions (World Bank…) - ineffective

    • Conservative, slow, under-funded, unreliable
    • Success is measured by
      • a) GDP (might not be helping poor)
      • b) Volume of loans negotiated (not measuring impact)
    • Exclusively work with the government
  • Corporate Social Responsibility - fundamentally flawed

    • “as long as it can be done without sacrificing PROFITS”


Creating business models revolving around low-cost products and services to resolve social problems

    • Creating business models revolving around low-cost products and services to resolve social problems
    • Social business is for ‘more-than-profit’
    • combine revenue-generating business with a social-value-generating structure
    • Can be two kinds


How can you do business and serve social goals?

  • How can you do business and serve social goals?

  • Why is profit-making not conflicting with social objectives?

  • Profits -

    • Promotes R&D, innovation, new technologies
    • Increases efficiency
    • Enables penetration to new geographical areas and serve deeper layers of low-income people
    • Helps recover costs and pay back investors, thus encourages investments
  • PMBs (profit max. businesses) vs. SBs (social businesses)

  • How they are same yet different

    • Employ workers, create goods & services for consumers
    • Must recover full costs
    • Profits are important
    • YET objective is to create social benefit and not limited to personal gains


Banking and finance is the biggest

    • Banking and finance is the biggest
    • beneficiary of technology-enabled social
    • startups
      • Muhammad Yunus, Grameen Bank
      • (Nobel Peace Prize 2006) ** not founded in India
      • Vikram Akula, SKS Microfinance (Social Entrepreneur of the Year Award 2006)
      • Kiva (peer-to-peer micro-lending website) ** not founded in India
    • Energy
      • Solar Electrification - Harish Hande, SELCO (Social Entrepreneur of the Year Award 2007)
    • Other examples
      • Education (Same Language Subtitling, Janarth - education solutions for children of migrant laborers)
      • Many more…


Why do poor need financial services?

  • Why do poor need financial services?

    • A study in Andhra Pradesh revealed that for the poor, about 50% of all risky events were characterized as “health-related” and another 28% were “nature-related”.
    • Responses to these risks -
      • 1st preference of the rural poor is borrowing (money lenders have very high interest rates, subject to exploitation),
      • followed by mortgaging/selling assets (often under difficult conditions that limits the value received for such assets).
  • Why don't they just go to a bank?

  • The poor rarely have access to the formal financial sector

    • No money to open a savings account
    • No collateral or credit record to secure a loan
    • Illiterate – so can’t do paperwork


Microfinance is providing financial services to

  • Microfinance is providing financial services to

  • the poor such as loans, savings, money transfer

  • services and microinsurance.

  • In India, Self Help Groups (SHGs) form the basic

  • constituent unit of the microfinance

    • SHG is a group of a few individuals – usually poor women (group of 5 to 20)
    • They pool their savings (as low as Rs. 10 or 20 cents monthly per member) into a fund from which they can borrow as and when necessary
    • Such a group is linked with a bank – where they maintain a group account.
    • Over time the bank begins to lend to the group as a unit, without collateral, relying on self-monitoring and peer pressure within the group for repayment of these loans.
      • The group is eligible for ‘bank-loan’ after atleast 6 months of ‘inter-loan’ repayments
      • Maximum loan amount is a multiple (usually 4:1) of the total funds in group account – starts with lower multiples (1:1 to 2:1)


High ‘Cost-to-Serve’

  • High ‘Cost-to-Serve’

    • Accounts are low in value but large in volume
    • High transactions costs (as frequent transactions)
    • Low levels of automation
    • Intense supervision requirements to maintain high recovery rates (trade-off between supervision cost min. and recovery max)
  • Very small scale – figure shows SHGs linked to banks are in handful of States (mostly in South India – AP) [Chakrabarti, Georgia Tech, 2004]



Deficiency of Capital – Constrain on Outreach

  • Deficiency of Capital – Constrain on Outreach

    • Until recently, MFIs were dependent on donor grants, but grants are limited in size and availability and are becoming harder to access as the pool of global MFIs grows.
    • Many of the MFIs are registered as not-for-profit entities that make it an unattractive choice for investors
    • Low profitability of MFIs because of reasons mentioned above is also a barrier to raise equity capital
  • Regulatory/policy Issues

    • If the NGO earns a substantial part of its income from lending activity, it violates the Income Tax Act and could lose its charitable status.
    • If an MFI opts to become an NBFC, it should be able to satisfy the entry-level capital requirements of Rs. 20 million. (In India, there has been strong advocacy for bringing down the capital entry norms for NBFCs in the business of microfinance)
    • In the case of NBFCs, deposit mobilisation is not possible at least for the first 3 years, till a satisfactory credit rating is obtained.
    • Borrowing from foreign institutions is hard due to the credit rating requirements imposed by RBI.


SKS, specializing in microfinance

  • SKS, specializing in microfinance

  • is one of the largest and fastest-growing microfinance

  • organizations in the world (disbursements exceeding

  • $500 million to about 2.2 million women)

  • Inter-linked three principles:

  • 1. for-profit methodology 2. best business

  • practices 3. latest technology

  • N-logue Communications, a company incubated by

  • IIT Madras, has built an entrepreneur-led

  • business model for deploying rural internet kiosks

  • across the country.

  • These networks are capable of providing multiple services such as agricultural information, education and health applications and communication.

  • For microfinance, this enables updation of databases real-time and remote monitoring (reduces the ‘cost-to-serve’)



What are the important questions

  • What are the important questions

  • Agenda for next meeting – volunteers for leader?

  • Logistics – date, time, venue




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