Microfinance

An emerging asset class?

By Erol Alaluf, Carol Rodrigues, Cagri Ilhan
University of Toronto
Nov. 24, 2009
A solution to end poverty?
Or
An emerging asset class?
Overview
Philosophy of micro finance

History of micro finance

Major centres of micro finance

Looking forward

Conclusion
What is Microfinance?
Finance that is provided to unemployed or low-
income people or groups.

The provision of small loans (microcredit) to poor
people to help them engage in productive activities
or grow very small businesses. The term may also
include a broader range of services, including
credit, savings, and insurance.

Microcredit is the extension of very small loans to
those in poverty designed to spur
entrepreneurship.

Who are microfinance clients?
Microfinance is provided for the people who
do not qualify for the banking system.

NO collateral (even if people own land they usually dont
have the title to it)
NO credit history

Majority of the microfinance clients are women
(more than 90% of microcredit is borrowed by
women)
How poor are these people?
Why do poor people need financial
services?
Lifecycle Needs: such as weddings, funerals,
childbirth, education, homebuilding, widowhood,
old age.
Personal Emergencies: such as sickness, injury,
unemployment, theft, harassment or death.
Disasters: such as fires, floods, cyclones and man-
made events like war.
Investment Opportunities: expanding a business,
buying land or equipment, improving housing, etc.

Brief History of Microfinance
In 1976, Muhammad Yunus (Nobel
Peace Prize Winner 2006) noticed
that small amounts of loans could
make a big impact on the poor
peoples lives.

Grameen Bank, ("Bank of the
Villages", in Bangla) was founded
in 1983, was supported by the
central bank of Bangladesh.
How does Microfinance work?
System of microloans (typically less than $100)
Instead of using collateral to gain credit, loans are
secured against the honour of a peer group: if one
person fails to make their payments, others in the
lending circle will be denied future credit.
It has outperformed almost all other forms of
development lending.
It is said that microfinance have lifted 100 million
people out of poverty over the last three decades.
Major centers of Microfinance
Regional distribution of MFIs
Region Number of MFIs % of total
Countries with the
most in the region
Africa 69 14%
Ghana (13);
Ethiopia (12)
Asia 117 24%
Philippines (37);
India (32)

ECA 98
20%
Bosnia (13);
Russia (11)
LAC 179 37%
Peru (37); Ecuador
(20); Bolivia (17)
MENA 24 5%
Morocco (7); Egypt
(6)
Source: Microbanking Bulletin #18
Regional distribution of MFIs
What kind of projects is microcredit used
for?
Microloans are used to help people, living in
extreme poverty, start or expand a range of
tiny businesses such as husking rice, selling
tortillas, and delivering cell phone services to
remote villages.

Diverse microenterprises include small
retail shops, street vending, artisanal
manufacture, and service provision, etc.
Looking forward
Industry is expanding significantly

MFIs popular among European pension and other
institutional funds

One of the few financial sectors not significantly affected
by the current recession

Excellent diversification possibilities

Way for the financial sector to 'redeem' itself

Conclusion
Emerging markets are doing very well right now

Good from an investor's point of view (high returns,
diversification)

Feel-good investment

Untapped potential