Microfinance basics, discussion of social business modelling

1. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Fundamental concepts in
microfinance
Theory and Practice

2. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Review Session 4
• Fair Trade
– Theory of Change
– Grounded to bring about social and environmental
impact
– Labeling, branding : Creating a sense of exclusivity
– Business Model
– Consumers and market

3. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Review Session 5 : Performance of
Social Enterprise

4. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Review Session 5
• SROI
– Measuring the Theory of Change (social, public
and financial returns)
– Best when few KPIs
– Lack of structure/template/ high subjectivity (--)
– Managing stakeholders (++)
– Gaining legitimacy

5. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
SKS Microfinance Case
• Discuss the role and compatibility of founders
and professional CEO in this case?
• Discuss the organizational stigma associated
with SKS Microfinance?
• Is for profit social business an Oxymoron?
• Discuss the role of regulators when suicides
were reported, what happened?
• Should social business go for IPO?

6. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013

7. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013

8. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Financial Services Pyramid

9. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Poverty Pyramid

10. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
What Is Microfinance?
• Microfinance is the offer of financial & non-financial services to
people excluded from the traditional banking system. The services
are adapted to the needs of the target populations.
FINANCEMICRO
• Micro-entrepreneurs
• Self-employed
• Low income populations
• Excluded populations
• Business & educational loans
• Savings
• Micro-insurances
• Remittances
• Micro-entrepreneur training
• Coaching & workshops on
health, hygiene, etc.

11. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Microfinance Theory of Change
• Financial Inclusion
– Provide Financial services to the marginalised
– Protect the marginalised from loan sharks
• Ethical Financial Practices
– Low or zero collateral
– Low interest rates
• Additional services
– Entrepreneurship training and consulting
– Housing loan
– Insurance services at low cost

12. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Types of Financing
• Debt Financing
• Equity Financing

13. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Why high interest rate?
• Moral Hazard
• Information Asymmetry

14. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Different Microfinance Products
• Cost of burial replacement costs, natural calamity …. (MF :
Insurance)
• Retirement plans, Health care plan..(MF…Pension plan,
health insurance)
• Equipment for agriculture activities, livestock, home
upgrade.. (MF: Medium term)
• Social obligations like Marriage, Festivals.. (MF: Short term)
• Housings, Wells, Capital intensive enterprise (MF: Long
term Loans)
• Emergency loans like family disaster, natural calamity
• Short term loans to meet daily/weekly needs
Source: Insead case study 2009 (Santos and Anne Claire)

15. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Activity 1
• In groups of 3-4, discuss the target segment
for microfinance in Scandinavia?
– Think about the background and the strata of
people that are financially excluded in Scandinavia
– Who do you think can be benefited from
microfinance in Scandinavia?
– What are their needs and how much microfinance
loans can they have?
Hint (Immigrants with no financial history)

16. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Business Basics at the Base of the
Pyramid… Akula (2008)
• Scaling
• Standardization of products and services
• Adopt a profit oriented approach to signal
commercial capital
• Use of technology
• Focus on volume

17. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Building Social Business Models:
Lessons from the Grameen Experience
• Social Business Model
– How products can be ‘servitised’ to serve the
poor
– Grameen Phone, Grameen Veolia, Grameen
Danone (each using their own innovative ways to
reach out to the poor)

18. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Building Sustainable Hybrid Organizations : The
Case Of Commercial Microfinance Organizations
• How organizations can navigate competing
logics?

19. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Design a Microfinance Business Model
• In a group of 3-4, discuss to design a
microfinance business model?
– Define the target customer/region
– Target loan / person
– Profit/Social business
– Interest rate

20. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Difference Traditional banking industry
and Microfinance
• Location
• Salary
• Stress
• Interest Rate
• Certainty about the future
• Purpose, goals and values
• Working hours, motivation
• Outdoor time, real world impact
• Working environment
• Friends and Family
Source: Kiva

21. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Principles of Microfinance
• Poor people need a variety of financial services, not just loans.
• Microfinance is a powerful tool to fight poverty.
• Microfinance means building financial systems that serve the poor.
• Microfinance must pay for itself to reach large numbers of poor people.
• Microfinance is about building permanent local financial institutions.
• Microcredit is not the best tool for everyone or every situation.
• Interest rate ceilings making it harder for poor people to get credit.
• The role of government is to enable financial services, not to provide
them.
• Donor funds should complement private capital, not compete with it.
• The key bottleneck is the shortage of strong institutions and managers.
• Microfinance works best when it measures and discloses its
performance.

22. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Points Against Microfinance
• High interest rates
– How to decide the optimum interest rate?
• Lack of legal protection for the borrowers and
for the lenders
• High operating costs and low margins
• Lack of institutional structures, business
framework, data, operating procedures

23. 7th October 2013
S-ENT, Session 6, Anirudh Agrawal CBS
7th October 2013
Way Forward in Microfinance Study
Fundamentals
• Describe fundamental concepts in microfinance
• Design client-focused services
• Apply effective microcredit methodologies
• Describe the effects of the local environment on microfinance
Financial analysis and Risk Analysis
• Read financial statements
• Measure delinquency
• Identify key financial factors
• Identify effective interest rate practices
• Measure financial viability
Institutional Analysis
• Gauge institutional viability
• Strengthen relations between donors and microfinance institutions