1. Microfinance 101: Week Two Introduction to Microfinance Institutions Robert Gailey, Point Loma Nazarene University WELCOME!
2. Outline for Tonight Introduction of Mr. Rivera – learning about his business Introduction of new participants Review from last week How are MFIs different from other traditional financial services available to poor people? How are MFIs different from traditional relief? How are MFIs different from traditional banking? Inspiration from Sam Daley-Harris Exploring interest rates and key financial metrics for MFIs Scope of impact - Microcredit Summit Report and Mix Market A few important debates in the industry Important books and websites Outline of remaining weeks of class Question Time 2
3. Introductions – Any New People? State your name Your institutional affiliation if you have one Your first exposure to microfinance What you hope to get out of the course 3
4. Review from last week 4 Why do people need financing? What things/events do people finance? What mechanisms exist for people to access financing?
27. Key terms and definitions Financial Income: What comes in for products or services. Profit: Generating something above what it costs you. Revenue exceeds expenses. Subsidy: Anything which doesn’t cover its costs and must be covered by other sources (grants, donations, free labor, etc.)
28. Key terms and definitions Institutional Health Repayment Rate (on-time and overall): How much is paid on-time and eventually. Arrears: How much is due but has not yet been paid. Portfolio at Risk: Value of portfolio outstanding that is in arrears. Loan Loss (Default rate)/[Loan loss reserve]: How much of the loan portfolio is written off or how much is set aside to write off
29. Key terms and definitions Institutional Health Operational Self-Sufficiency: Income/Operating expenses (+ costs of capital) Financial Self-Sufficiency: Income/Operating expenses + costs of capital (+ implicit subsidies). Efficiency: Income up and/or expenses down
30. Setting the Interest Rate Here is a formula that can be used by an MFI in order to determine the appropriate interest rate: R = AE + LL + CF + K –II 1-LL Where R is the interest rate, AE is administrative expenses, LL is loan losses, CF is the cost of funds, K is the desired capitalization rate, and II is investment income. 12 Or, use my friend’s back-of-the-napkin excel program:
31. Setting the Interest Rate However, in practice, MFIs usually do not set their rates based on this formula, but rather based on what the interest rates of other MFIs and lenders in an area are charging and what the operational expenses of the MFI are. MFIs charge interest for at least five reasons: To cover operating costs of administering loans (salaries, rent, etc.). To cover financial costs of the cash used for lending if borrowed by the MFI from an interest-charging resource or from another currency. To cover the risk of loans not being repaid. To cover the time-value of the money lent (inflation). To grow their program/portfolio. 13
33. Important debates Savings-led versus credit-led Financial services only or combining with health/education services? Who owns the bank – organizations or clients? Whether to become a formalized, regulated institution or stay informal To stay non-profit or turn into a for-profit How transparent to make one’s interest rates 15
38. Outline for Rest of Course Week 3: Focus on local microfinance institutions – International Rescue Committee, Accion, CDC Finance – introduction and information Week 4: Hearing from the clients, clubs, and investors – meet staff and clients from La Maestra, college clubs, and San Diego Microfinance Alliance, and local individuals who are invested in microfinance 20
39. Concluding Remarks Questions/Remarks Please turn in your tags Come hungry next week – Two clients of CDC – El Pollo Grill for dinner and Sweet Dreams for interview 21