1. Microfinance By Amphol Unves, Team Manager, Capacity Building Office,
Bank for Agriculture and Agricultural Cooperatives (BAAC)

2. Scope of the session Microfinance overview
Microfinance main services; Saving and Credit
BAAC Practices on micro credit
Experiences sharing on microfinance from informal financial system

3. The year 2005 has been declared the International Year of Micro credit
The year 2005 has been declared the International Year of Micro credit. “Microfinance has proved its value, in many countries, as a weapon against poverty and hunger. It really can change peoples’ lives for the better – especially the lives of those who need it most.” (Kofi Annan, quoted from The European Union’s Social Support Project in Thailand, Case Studies in Rural Development Banking, Volume 2, January 2005)

4. Microfinance Services
Microfinance is the provision of financial services such as
Deposits
Loans
Other Services
Payment services
Money transfers
Insurance to poor and low-income households and their micro-enterprises

5. Sources of Microfinance
Formal Financial System
Formal institutions – e.g. banks, cooperatives
Informal Financial System
Semiformal institutions/systems – e.g. non-government organizations, groups, special programs, funds
Informal sources – e.g. relatives, money lenders, shopkeepers

6. Importance of Microfinance
As poverty reduction strategy:
Improve access, provide services to enable the poor for consumption needs, risk mgt., assets, income generation, improve quality of life
Improve resource allocation, markets, technology, promote economy and development
Most poor people have to rely on scanty self-finance or informal sources of microfinance. This limits their ability to participate in and benefit from the development opportunities.
It can provide an effective way to help and empower poor women, who are suffered from poverty
It can contribute to the development of the overall financial system through integration of financial markets

7. Microfinance services’ effect on poverty reduction
Savings: more savings, income, technology, cope with risks, productive assets, growth
Effect on Poverty: more income, reduce risks, reduce poverty, empowerment
Credit: chances in investment, technology, business expansion, less rely on informal sources, cope with risks, profitability, growth
Effect on Poverty: more income, education, reduce poverty, empowerment
more capacity for self-investments, ability to invest in better technology, enable consumption smoothening, enhance ability to face external shocks, reduce relying on money lenders, enable purchase of productive assets, improve allocation of resources, increase economic growth
Credit Facilities: get advantage of investment opportunities, lead to use of better technology, enable microenterprises expansion, diversified economic activities, enable consumption smoothening, risk taking, reduce dependent on costly informal sources, enable to face external shocks, improve investments profitability, reduce distress selling of assets, increase economic growth
Effect on Poverty: more income and income sources, less vulnerable income, less volatility in household consumption, increase household consumption, better education for children, reduce severity of poverty, empowerment, reduce social exclusion

8. Microfinance services’ effect on poverty reduction
Insurance services: savings, reduce risks & impact, more investments
Effect on Poverty: more income, security
Payments/Money Transfer Services: trade and investments
Effect on Poverty: more income, consumption
Insurance services: more savings in financial assets, reduce risks and losses, reduce distress selling of assets, reduce impact of risk, increase investments
Effect on Poverty: greater income, less volatility in consumption, more security
Payments/Money Transfer Services: facilitate trade and investments
Effect on Poverty: higher income and consumption
Grameen Bank borrowers (21%), Bangladesh Rural Advancement Committee, a microfinance NGO borrowers (11%) have lifted their families out of poverty and poverty declined (from 33% to 10% and from 34% to 14% respectively). (Source:

9. Microfinance Facts Rural poor have farm or farm-related activities
Many run microenterprises
The poor are not served by financial institutions because of high risks, high costs, low profitability, and not able to provide collateral.
The poor rely on informal sources because of lack of access to credit at reasonable price.
Microfinance services affect poverty, socioeconomic aspects but need to provide services to the not-served poor too
Microfinance services empowers the poor at the household, enterprise, and community level.
Rural poor (mostly) get involved in farm or farm-related activities, e.g. laborers, small-scale farmers.
Many of them get involved in various microenterprises, in which women operate.
(Mostly) the poor are not served by formal financial institutions because of (perceived) high risks, high costs, low profitability, and the poor’s inability to provide required tangible collateral.
Most poor and low-income earners still rely on self-finance or informal sources of microfinance. Even the poor who has investment opportunities are still in poverty because of lack of access to credit at reasonable.
The poor also lack access to other services, e.g. payments, money transfers, and insurance.
Most of the poor find it difficult to accumulate savings without access to safe institutions that provide deposit services.
Informal sources are still the main sources for microfinance. Their services are mainly short-term credit with higher interest rates than semiformal and formal sources.
With lower bargaining power the borrowers are unable to fully use economic opportunities.
Most informal insurance mechanisms are normally weak and provide insufficient protection to the poor.

10. Microfinance Facts Formal sources has increased from
Expansion through linkage programs with semiformal sources
New institutions focused on microfinance
Microfinance programs by Gov. through non-financial institutions
Cooperatives, semiformal microfinance, e.g. NGOs provide microfinance services.
Formal sources has increased from
Expansion of the work scope through various linkage programs with semiformal sources.
New formal institutions focused on microfinance, such as the Grameen Bank of Bangladesh
Reforms of state-owned financial institutions
Microfinance programs initiated by governments through nonfinancial institutions
Cooperatives who play important financial intermediaries roles in many countries, e.g Thailand, India, Sri Lanka, and Viet Nam, have provided microfinance services.
Semiformal microfinance especially NGOs in many cases provide microfinance services to clients who are generally poorer than those who access formal institutions. In most countries they aim to serve poor women. They provide services mostly on social collateral basis.

11. Microfinance Facts Microfinance has developed to viable business.
The poor can and do save
The poor are creditworthy
MFIs can make profits at low transaction costs without relying on physical collateral
Microfinance has developed and changed from a subsidy-dependent activity to viable business.
The poor has proved that they can save and do save, and that savings can be mobilized from them.
The poor are creditworthy. They can take financial services.
MFIs can make profits at low transaction costs without relying on physical collateral (if it is done with appropriate and efficient financial technology)
Microfinance services have empowered the social and human capital of the poor at the household, enterprise, and community level.
Sustainable delivery of microfinance services has generated positive developments in microfinance policies and practices among all stakeholders, e.g. governments, microfinance service providers, etc.

12. Experiences from Various Countries
Quoted from APRACA Journal of Rural Finance, April-June 2007 volume.

13. Bank of Ceylon, Sri Lanka
Bank Rakyat Indonesia
“Micro-finance not only provides credit facilities for MSMEs but also facilitates savings and remittance facilities and, therefore, is recognised as a pivotal element in the system of financial intermediation.”
Bank of Ceylon, Sri Lanka
“Micro-finance Institutions Act, which would empower the monetary board of the Central Bank of Sri Lanka to provide license, formulate regulations and supervise micro-finance institutions.”

14. Land Bank of the Philippines
“Rural financial market has gone through stages of development and experience – from a policy environment characterised by credit subsidies and allocations, to a rebound of financial reforms.”
Nepal Rastra Bank
“The development of the formal micro-finance sector in the country dates back to …..which are regulated by the Nepal Rastra Bank and supervised by the Supervision Department. ”

15. Myanmar Agricultural Development Bank
“In spite of the existence of four state-owned banks in the country, the development of private banking appears more impressive if we take into consideration the negative real interest rates, credit restrictions, and lack of banking habits among the people in the country.”

16. Bank for Agriculture and Agricultural Co-operatives
“People in the lower income group have a demand for efficient micro-finance services that do not result in high transaction costs for the borrowers/clients…. .”
National Institute of Bank Management, India
“..Informal financial services has been an important feature of rural economy. A very high cost of financial services… has helped the growth of these informal financial services”

17. Bank Keshavarzi, Iran
“Bank Keshavarzi’s reforms…focusing on resource mobilisation through attraction of public deposits and offering diverse banking services and products rather than emphasising on receiving resources…from the government.”
Agriculture Promotion Bank, Lao PDR
“..each regulation such as interest rate polic attract new entrants into rural finance and micro-finance, and ensures the creation of a sound financial intermediation system.”

18. A majority of smallholders worldwide remain without access to the services they need to complete and improve their livelihoods. Broader access to financial services-savings and credit products, financial transactions, and transfer services for remittances-would expand their opportunities for more efficient technology adoption and resource allocation.”
World Development Report – 2008, Agriculture for Development, The World Bank, page 143

19. Groupworks
What are advantages/disadvantages of each 3 sources of Microfinance?
Group 1: Formal Institutions
Group 2: Semiformal Insti.
Group 3: Informal Insti.
Consider regulations for the Microfinance / Microcredit, e.g. the Reserve Bank of India: RBI issued guidelines to enable banks to appoint banking correspondents and banking agents and introduced law to provide a formal framework for the promotion, development and regulation of the micro finance sector.
Financial Institutions need to ensure satisfactory loan repayment rate

20. Savings The poors can save Existing concept : S = I – E
New concept : I – S = E
Ways to achieve: increase income / reduce expenses
These services have positive impacted on the severity of poverty, socioeconomic aspects, e.g. children’s schooling, nutrition, women’s empowerment.
The poor have accessed formal financial system and used Microfinance institutions (MFIs) services, i.e. credit and savings in financial assets, and reduced their poverty
This needs policy to allow for sustainable growth in microfinance operations in many countries, and interest rates limit MFIs’ ability to provide access to the excluded households.
Many governments intervene in microfinance through channeling microcredit to the underserved or not served poor with subsidized interest rates and poor loan collection rates. This undermines sustainable development of microfinance. Therefore, there are many poorly performing government microfinance programs that distort the market and discourage private sector institutions from entering the industry.
Inadequate financial infrastructure including legal, information, and regulatory and supervisory systems for financial institutions and markets.
Most governments aim at building institutions or special programs to disburse funds to the poor but not build financial infrastructure that supports, strengthens, and ensures the sustainability of these institutions or programs.
Lack of conducive legal framework for emergence and sustainable growth of small-scale financial institutions
Lack of regulatory and supervisory systems for microfinance which is being matured
Lack of emphasis on development of accounting and auditing practices and professions.
Lack of a system for supervision and regulation and of adequate measures to protect public deposits impede development and integration of formal microfinance with the broader financial system

21. Saving methods Individual/personal savings Group Savings
Proportional deduction of loan amount
Shareholding
Savings in kinds
These services have positive impacted on the severity of poverty, socioeconomic aspects, e.g. children’s schooling, nutrition, women’s empowerment.
The poor have accessed formal financial system and used Microfinance institutions (MFIs) services, i.e. credit and savings in financial assets, and reduced their poverty
This needs policy to allow for sustainable growth in microfinance operations in many countries, and interest rates limit MFIs’ ability to provide access to the excluded households.
Many governments intervene in microfinance through channeling microcredit to the underserved or not served poor with subsidized interest rates and poor loan collection rates. This undermines sustainable development of microfinance. Therefore, there are many poorly performing government microfinance programs that distort the market and discourage private sector institutions from entering the industry.
Inadequate financial infrastructure including legal, information, and regulatory and supervisory systems for financial institutions and markets.
Most governments aim at building institutions or special programs to disburse funds to the poor but not build financial infrastructure that supports, strengthens, and ensures the sustainability of these institutions or programs.
Lack of conducive legal framework for emergence and sustainable growth of small-scale financial institutions
Lack of regulatory and supervisory systems for microfinance which is being matured
Lack of emphasis on development of accounting and auditing practices and professions.
Lack of a system for supervision and regulation and of adequate measures to protect public deposits impede development and integration of formal microfinance with the broader financial system

22. Savings mobilization Competitive interest rate Develop saving products
Provide incentives
Marketing campaigns
These services have positive impacted on the severity of poverty, socioeconomic aspects, e.g. children’s schooling, nutrition, women’s empowerment.
The poor have accessed formal financial system and used Microfinance institutions (MFIs) services, i.e. credit and savings in financial assets, and reduced their poverty
This needs policy to allow for sustainable growth in microfinance operations in many countries, and interest rates limit MFIs’ ability to provide access to the excluded households.
Many governments intervene in microfinance through channeling microcredit to the underserved or not served poor with subsidized interest rates and poor loan collection rates. This undermines sustainable development of microfinance. Therefore, there are many poorly performing government microfinance programs that distort the market and discourage private sector institutions from entering the industry.
Inadequate financial infrastructure including legal, information, and regulatory and supervisory systems for financial institutions and markets.
Most governments aim at building institutions or special programs to disburse funds to the poor but not build financial infrastructure that supports, strengthens, and ensures the sustainability of these institutions or programs.
Lack of conducive legal framework for emergence and sustainable growth of small-scale financial institutions
Lack of regulatory and supervisory systems for microfinance which is being matured
Lack of emphasis on development of accounting and auditing practices and professions.
Lack of a system for supervision and regulation and of adequate measures to protect public deposits impede development and integration of formal microfinance with the broader financial system

23. Savings’ Outcomes Financial discipline Build social trust
Savings as loan collateral
Loan insurance savings
These services have positive impacted on the severity of poverty, socioeconomic aspects, e.g. children’s schooling, nutrition, women’s empowerment.
The poor have accessed formal financial system and used Microfinance institutions (MFIs) services, i.e. credit and savings in financial assets, and reduced their poverty
This needs policy to allow for sustainable growth in microfinance operations in many countries, and interest rates limit MFIs’ ability to provide access to the excluded households.
Many governments intervene in microfinance through channeling microcredit to the underserved or not served poor with subsidized interest rates and poor loan collection rates. This undermines sustainable development of microfinance. Therefore, there are many poorly performing government microfinance programs that distort the market and discourage private sector institutions from entering the industry.
Inadequate financial infrastructure including legal, information, and regulatory and supervisory systems for financial institutions and markets.
Most governments aim at building institutions or special programs to disburse funds to the poor but not build financial infrastructure that supports, strengthens, and ensures the sustainability of these institutions or programs.
Lack of conducive legal framework for emergence and sustainable growth of small-scale financial institutions
Lack of regulatory and supervisory systems for microfinance which is being matured
Lack of emphasis on development of accounting and auditing practices and professions.
Lack of a system for supervision and regulation and of adequate measures to protect public deposits impede development and integration of formal microfinance with the broader financial system

24. Credit Credit consideration by 4 Cs - Characteristic - Collateral
- Capacity
- Condition

25. Micro credit Micro credit : Part of microfinance
Extension of small loans to the poor who lack collateral, steady employment and credit history
It allows the poor self-employment projects that generate income, be better-off, and exit poverty
It gains credibility in banks, its success makes banks to recognize these micro credit borrowers
Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Extension of small loans (microloans) to the unemployed, to poor entrepreneurs and to others who live in poverty and are not (considered) bankable.
They lack collateral, steady employment and a credit history
They do not meet qualifications to gain access to financial institution credit.
Microcredit is a financial innovation originated in Bangladesh
It engages poorest of the poor people in self-employment projects that allow them to generate income and, in many cases, begin to be better-off and exit poverty.
Due to the success of microcredit, many conventional banks now recognize and categorize these microcredit borrowers as pre-bankable. Therefore, microcredit is gaining credibility in banking industry
Women Issues
Their control and the responsibility of small loans raises their socio-economic status, a positive change to many of the current relationships of gender and class.

26. Micro credit (Con’d) Classification of micro credit
Traditional informal micro credit, e.g. moneylender’s credit, pawn shops, etc.
Micro credit based on traditional informal groups
Activity-based micro credit through conventional or specialized banks, e.g. agricultural credit, etc.
Rural credit through specialized banks
Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Extension of small loans (microloans) to the unemployed, to poor entrepreneurs and to others who live in poverty and are not (considered) bankable.
They lack collateral, steady employment and a credit history
They do not meet qualifications to gain access to financial institution credit.
Microcredit is a financial innovation originated in Bangladesh
It engages poorest of the poor people in self-employment projects that allow them to generate income and, in many cases, begin to be better-off and exit poverty.
Due to the success of microcredit, many conventional banks now recognize and categorize these microcredit borrowers as pre-bankable. Therefore, microcredit is gaining credibility in banking industry
Women Issues
Their control and the responsibility of small loans raises their socio-economic status, a positive change to many of the current relationships of gender and class.

27. Microcredit (Con’d)
E) Cooperative microcredit e.g. cooperative credit, etc.
Consumer microcredit
Bank-NGO partnership based microcredit.
Grameen type microcredit or Brameencredit
Other types of NGO microcredit
Other types of non-NGO non-collateralized microcredit
Grameen Bank at a Glance, Muhammad Yunus, February, 2008
Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Extension of small loans (microloans) to the unemployed, to poor entrepreneurs and to others who live in poverty and are not (considered) bankable.
They lack collateral, steady employment and a credit history
They do not meet qualifications to gain access to financial institution credit.
Microcredit is a financial innovation originated in Bangladesh
It engages poorest of the poor people in self-employment projects that allow them to generate income and, in many cases, begin to be better-off and exit poverty.
Due to the success of microcredit, many conventional banks now recognize and categorize these microcredit borrowers as pre-bankable. Therefore, microcredit is gaining credibility in banking industry
Women Issues
Their control and the responsibility of small loans raises their socio-economic status, a positive change to many of the current relationships of gender and class.

28. Microfinance: Lending Models
Individuals
Cooperatives
Association
Community/Village Banking
Intermediary/NGOs
Grameen model
Joint Liability Group
Peer Pressure
Bank Guarantees
Etc.
Association: Formed by a community, it is where microfinance activities are carried out. It can be consisted of women, youth. It can create support structures for microenterprises and other work-based issues.
Bank Guarantees: It is used to obtain a commercial bank loan, which may be given directly to an individual, or they may be given to a self-formed group.
Community Banking: Community is as one unit where semi-formal or formal institution is established to provide microfinance.
Cooperatives: It is an association of persons who join to meet their common economic, social, and cultural needs.
Grameen model: Five borrowers form group, in which initially two of them are eligible for, and receive, a loan. If these 2 borrowers repay their loan on time over a period of 50 weeks, then other members are eligible for a loan. The collective responsibility serves as loan collateral.
Individual: a straight forward credit lending model where micro loans are given directly to the borrower.
Intermediary: “the intermediary” is a middle organization between the lenders and borrowers. Its activities include creating credit awareness and education among the borrowers, savings program, raising the 'credit worthiness' of the borrowers to a level sufficient enough to make them attractive to the lenders. It can be individual lenders, NGOs, microenterprise/microcredit programmes, and commercial banks (for government financed programmes). Lenders could be government agencies, commercial banks, international donors, etc.
NGOs: They are involved in microcredit program including creating awareness of microcredit within the community. They also create opportunities to learn about the principles and practice of microcredit. This includes publications, workshops and seminars, and training program.
Peer Pressure: Pressure is put on the initial members to repay. The 'pressure' can be in the form of frequent visits to the defaulter, community meetings where they are identified and requested to comply etc.
Village Banking: They are community-based credit and savings associations. Their loan capital may be from an external source. Their members run the bank, i.e. choose their members, elect their own officers, set up their own by-laws, distribute loans to individuals, collect payments and savings. Their loans are secured by moral collateral: the promise that the group stands behind each individual loan.

29. Mobile banking Another method of service
Move to locate in the field for service accessible
Can be part or full operated

30. Grameencredit’s features
- Promotes credit as a human right
Targets the poor, particularly poor women
Based on trust, not on legal procedures and system
Provides service at the door-step
Borrowers must join group
Loans to be paid back in installments, e.g. weekly, bi-weekly
Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Extension of small loans (microloans) to the unemployed, to poor entrepreneurs and to others who live in poverty and are not (considered) bankable.
They lack collateral, steady employment and a credit history
They do not meet qualifications to gain access to financial institution credit.
Microcredit is a financial innovation originated in Bangladesh
It engages poorest of the poor people in self-employment projects that allow them to generate income and, in many cases, begin to be better-off and exit poverty.
Due to the success of microcredit, many conventional banks now recognize and categorize these microcredit borrowers as pre-bankable. Therefore, microcredit is gaining credibility in banking industry
Women Issues
Their control and the responsibility of small loans raises their socio-economic status, a positive change to many of the current relationships of gender and class.

31. Grameencredit’s features (Con’d)
Put high priority on building social capital
Charity not an answer to poverty
Enable the poor to build on their skill to earn better income
Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor.
Extension of small loans (microloans) to the unemployed, to poor entrepreneurs and to others who live in poverty and are not (considered) bankable.
They lack collateral, steady employment and a credit history
They do not meet qualifications to gain access to financial institution credit.
Microcredit is a financial innovation originated in Bangladesh
It engages poorest of the poor people in self-employment projects that allow them to generate income and, in many cases, begin to be better-off and exit poverty.
Due to the success of microcredit, many conventional banks now recognize and categorize these microcredit borrowers as pre-bankable. Therefore, microcredit is gaining credibility in banking industry
Women Issues
Their control and the responsibility of small loans raises their socio-economic status, a positive change to many of the current relationships of gender and class.

32. Delivery-Models for Micro-finance
Microfinancing
Organizational Approach
Formal Microfinance Institution Approach
Individualistic
Cooperation
Direct
People Participation
Indirect
Institutions
Solidarity Group
Self Help Groups
Cooperatives
Money-
lenders
Point
of Sale
Grameen
Group
Joint Liability
Group
Cluster
Federation
Own
staff
Agent
Refinance
Model
Securitization
Model
Equity
Model

33. “This is not charity. This is business: business with a social objective, which is to keep people get out of poverty.”
Muhammad Yunus, quoted from APRACA, Journal of Rural Finance, July-Sept. 2007

34. BAAC’s Micro credit Practices and Experiences
Non-farm Microcredit
SMEs are backbone of Thai economy and important factors for jobs/income creation in rural areas.
Only lately that credit services for SMEs covered only non-farm activities.
90% of rural households earn farm and non-farm income.
Small/micro-enterprises are backbone of Thai economy and are important factors for jobs and income creation especially in rural areas.
Recently credit services for small and micro-entrepreneurs covered only non-farm activities.
Now 90% of rural households earn farm and non-farm income.
Micro-entrepreneurs lack access to credits since they lack collateral and are high-risk (?)
Micro-entrepreneurs, therefore, often rely on high interest rate moneylenders’ loan and incur rising debt.
BAAC was not allowed to provide non-farm credit at the moment. This led to lack of suitable products and staff knowledge, skills and experience.
BAAC has struggled for its Act amendment.
Key success factors/are includes:
Credit delivery system for individual lending to farmers through JLG (Joint Liability Groups)
Shift from wholesale lending to better-performed individual lending
Viable and self-reliance under controlled interest rates condition: through savings mobilization from public, improved loan recovery, the implementation of prudential regulations and provisioning rules.
Increased staff and branch productivity and efficiency with B-MIS and decentralization of operations
Diversification of credit services to farm and non-farmers
Expansion of branch network
In terms of microfinance BAAC is seriously venture into rural microfinance market segment
Major components:
Savings mobilization, development of savings product tailored to meet poor households’ needs
Campaigning and testing of non-farm micro-credit services to micro-entrepreneurs
Enhance BAAC’s staff competency and service culture to improve financial services quality to rural people
Support branches efficient operation using B-MIS on the profit center basis
Creation awareness about sustainable financial institution development pertaining to BAAC and Thailand’s micro-financing

35. BAAC’s Microfinance Practice (Con’d)
Micro-entrepreneurs lack access to credits since they lack collateral and are high-risk (?)
Micro-entrepreneurs often rely on high interest rate moneylenders’ loan and incur rising debt.
BAAC was not allowed to provide non-farm credit. This led to lack of suitable products and staff knowledge, skills and experience.
BAAC has struggled for its Act amendment.
Small/micro-enterprises are backbone of Thai economy and are important factors for jobs and income creation especially in rural areas.
Recently credit services for small and micro-entrepreneurs covered only non-farm activities.
Now 90% of rural households earn farm and non-farm income.
Micro-entrepreneurs lack access to credits since they lack collateral and are high-risk (?)
Micro-entrepreneurs, therefore, often rely on high interest rate moneylenders’ loan and incur rising debt.
BAAC was not allowed to provide non-farm credit at the moment. This led to lack of suitable products and staff knowledge, skills and experience.
BAAC has struggled for its Act amendment.
Key success factors/are includes:
Credit delivery system for individual lending to farmers through JLG (Joint Liability Groups)
Shift from wholesale lending to better-performed individual lending
Viable and self-reliance under controlled interest rates condition: through savings mobilization from public, improved loan recovery, the implementation of prudential regulations and provisioning rules.
Increased staff and branch productivity and efficiency with B-MIS and decentralization of operations
Diversification of credit services to farm and non-farmers
Expansion of branch network
In terms of microfinance BAAC is seriously venture into rural microfinance market segment
Major components:
Savings mobilization, development of savings product tailored to meet poor households’ needs
Campaigning and testing of non-farm micro-credit services to micro-entrepreneurs
Enhance BAAC’s staff competency and service culture to improve financial services quality to rural people
Support branches efficient operation using B-MIS on the profit center basis
Creation awareness about sustainable financial institution development pertaining to BAAC and Thailand’s micro-financing

36. Micro-Finance Linkage Project
Major components:
Savings mobilization, development of savings product tailored to meet poor households’ needs
Campaign and test non-farm micro-credit services to micro-entrepreneurs

37. Micro-Finance Linkage Project
Enhance BAAC’s staff competency and service culture to improve financial services quality to rural people
Support branches efficient operation using B-MIS on the profit center basis
Create awareness about sustainable financial institution development pertaining to BAAC and Thailand’s micro-financing

38. Project Implementation
Credit services:
Maximum short-term microcredit size: 100,000 Baht
Loan repayment: Set on regular, monthly installments basis, tailored to match small non-farm entrepreneurs’ cashflow.
JLG was the prevailing form of security.

39. Project Implementation
Interest rate: 1% per month flat (on the initial loan principal), the borrower got a remittance of one/fourth of his interest paid if he repaid all installments on time.
BAAC dedicated specialized microfinance staff for this non-farm segment.
First loan disbursed on February 1998.

40. Project Implementation
Scenarios
Performance: High portfolio at risk at first - unwillingness to repay, laxity of supervision, follow-up and enforcement
What were done:
Appointed Non-farm microcredit officers
PR activities to make the service known to customers.
Monitoring system: Follow-up on regularly monthly basis when installments got closer
Law enforcement: For willful defaulters to prevent mounting moral hazard problem.
Loan Objectives: Primarily for working capital to maintain or expand businesses and/or to increase/diversify products
Performance: High level of portfolio at risk at first - unwillingness to repay, laxity of supervision, follow-up and enforcement
What were done:
Appointed Non-farm microcredit officers
PR activities to make the service known to customers.
Monitoring system: Follow-up on regularly monthly basis when installments got closer
Law enforcement for willful defaulters to prevent mounting moral hazard problem.
Satisfactory profitability is a necessary pre-condition for viable and sustainable credit services for non-farm micro and small enterprises in rural areas.
Funds were primarily used for working capital to maintain or expand businesses and/or to increase/diversify products and as a result, sales potential.
Non-farm credit enabled small and micro-entrepreneurs to access formal banking sector.
These financial services contributed to income generation and low-cost employment with relevance to poorer segments of the society
Development
Economic activities supported by microcredit are small-scale trading followed by food stalls, repair shops, and food production.
About 65% of borrowers were women
Professional portfolio management is essential for profitable microcredit operation
Diversified collateral requirements was initiated and researched witnessed in the “Review of BAAC’s Credit Technology for Small and Micro-Loans in Agriculture and Non-Agriculture” workshop.
Staff trained in relevance training courses.
Improved customer information/database
Branch management information system on a profit center basis (B-MIS)

41. Project Implementation
Development
Microcredit supports economic activities, e.g. small-scale trading, food stalls, repair shops, food production, etc.
About 65% of borrowers were women
Portfolio management: to ensure profitable microcredit operation
Initiated/researched to diversify collateral requirements: Workshop on “Review of BAAC’s Credit Technology for Small and Micro-Loans in Agriculture and Non-Agriculture” conducted.
Staff trained in relevance training courses.
Improved customer information/database
Branch management information system (B-MIS) on a profit center basis

42. Project Implementation
Conclusions
Project supported BAAC for development/testing of innovative financial system features, products and approaches.
Innovations replicated by BAAC branches
Impact on BAAC outreach, service quality, financial viability
Savings mobilization extended BAAC depositor base
Non-farm loans gave lessons, experience resulted in risk minimizing design of loan procedures and support measures for the new market segment
B-MIS as a new tool for uplift financial performance
Savings are equally important than credit
Innovations must be sustainable and benefit the target groups & increase BAAC financial viability
Conclusions
The project has successfully supported BAAC in the development and testing of innovative financial system features, products and approaches.
The tested innovations are being replicated by BAAC branches
The impact on BAAC outreach, service quality and financial viability were substantial.
Savings mobilization extended BAAC depositor base
Non-farm loans provided lessons and experience and resulted in risk minimizing design of loan procedures and support measures for the new market segment
B-MIS has been a new tool for uplift financial performance
Savings are equally or even more important than credit
Every innovation must at the same time be sustainable and benefit the target group and increase BAAC financial viability

43. Project Implementation
Key success factors:
Credit for individuals through Joint Liability Groups (JLG)
Shift from wholesale to individual lending
Self-reliance under controlled interest rates condition: through savings mobilization from public, improved loan recovery, implementation of prudential regulations and provisioning rules.
Increase staff and branch productivity and efficiency with B-MIS and decentralization
Diversify credit services to farmers/non-farmers
Expand branch network
Venture into rural microfinance market segment
Small and micro-enterprises form the backbone of Thai economy and are important factor the jobs and income creation especially in rural areas.
Most recently credit services for small and micro-entrepreneurs covered only non-farm activities.
At present around 90% of rural households earn farm and non-farm income.
Micro-entrepreneurs lack access to credits since they lack collateral and are high-risk?
Micro-entrepreneurs, therefore, often rely on high interest rate moneylenders’ loan and incur rising debt.
BAAC was not allowed to provide non-farm credit at the moment. This led to lack of suitable products and staff knowledge, skills and experience.
BAAC has struggled for its Act amendment.

44. Social Support Project: SSP
The project arose in response to sufferings of rural people after 1997 financial crisis
Aims: Help BAAC to improve microfinance services quality, strengthen rural microfinance & enterprise groups.
Core concept: Provide knowledge/skills on production to target groups first, followed by loan extension to operate group business
The project arose in response to the sufferings of rural people in the aftermath of 1997 financial crisis
Aim to help BAAC to implement models for improved quality of microfinance services, strengthened rural microfinance and enterprise groups.
Two products introduced: Micro-finance Development Programme (MFDP), and the Community Enterprise Development Programme (CEDP)
Lessons learned:
Initial fund of 5,000 Baht from 5 members
BAAC and SSP came forth in providing training programs in accounting and Family Financial Management (FFM) in 2002
Members increased to 20, working capital increased to 20,000 baht (half of it was from the local Tambon Administration Organization (TAO)
All members received annual dividend on their shares.
MFI set up consisting of 185 members, 15 committee members, 4 of which were women), the total fund was 200,000 Baht, which was lent to 60 members in loans of not more than 10,000 Baht
Loan for: to individuals (farm or income-generating projects, household expenditures); to groups (non-farm production)
The case demonstrates: sustainable community enterprise, income generation, strengthening of bank clients, how six month planning focuses the group, and even small village enterprises need to upgrade their skills to solve new arising problems

45. Social Support Project: SSP
It created BAAC staff and branches awareness
SSP integrated into BAAC’s work, e.g. in provincial poverty alleviation campaign, i.e. strengthening community organizations and capacity-building for farmers and rural communities
For Village Funds (born in 2002: government granted 1 mill.baht to each 77,000 villages, BAAC coached fund management). SSP campaigned strongly to use group development/microfinance methods (compulsory savings, etc.) to advance sustainability and utility of funds to villagers

46. Entrepreneur and General People Loan
Customers: Individuals (generally group-based) and Legal person
Loan Types: Working capital, investment loan
Loan Objectives: Promote and support
Customers’ products development in investment, production, processing, marketing
Strengthening of community economy aim at creation of industrial, commercial and service enterprises to increase income, reduce costs
Community savings and self-reliance

47. Entrepreneur and General People Loan
Credit Worthiness Analysis:
Customer: Fame, honesty, loan use record, knowledge & experience, financial status
Loan needs: Needs from business, work, project plan with fact & information from customers, comparison, general standard information
Income: Ability/opportunity to generate income, sources of income to set appropriate installments repayment in line with cashflow
Repay ability: Income after costs (operation cost, household spending) (generally repayment amount not set more than 40% of income)
Repayment history
Collateral: stability, sufficiently covering requested loan

48. Entrepreneur and General People Loan
Loan term: not more than 18 month (on monthly repayment basis) for working capital loans, 15 years for investment loans
Interest rate: MRR (7.5%/year) for individuals (7 interest classes, differentiation made on a scoring basis)., MLR (5.5%/year) for legal persons (11 interest classes, differentiation made on a scoring basis)

49. Microfinance Challenges
Banks incur high overhead, they incline to deal with better-off borrowers. Should they not be expected to provide microcredit?
How to lower transaction costs to operate profitably?
The poor are skillful in survival. They save money, repay debts. Will they be successful in their business?
Microfinance needs more than lending and savings? Are new services, e.g. insurance, housing microfinance, and other financial services for the poor needed?
Typical private banks have invested a lot in facilities and operating structures. Due to their overhead, these banks incline to make large and profitable transactions with better-off borrowers. Therefore, they should not be expected to provide microcredit?
How to lower the transaction costs to be able to operate profitably in markets prevailed by small transaction sizes and less better-off clients?
Poor entrepreneurs are as skillful in survival as the weathy businessmen. They save money, and repay debts on time to maintain access to future loans. In the future they will be individuals who are successful in their business?
Microfinance needs to go beyond lending and savings? Are new forms of services, e.g. insurance and housing microfinance, and other financial services for the poor needed?

50. What to be careful?
1. Financial Viability: If government-directed microcredit programs, NGOs, state-owned banks, cooperatives that provide microfinance services not financially self-sufficient, poor households cannot borrow/deposit, institutions cannot mobilize funds to serve clients and contribute to development. This is fundamental to reach the poor which in turn have a huge impact on poverty reduction.
2. Microcredit given to the poor who do not have a capacity to repay can increase their poverty

51. “The key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The ladder of development hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung.”
Jeffrey Sachs, quoted from APRACA, Journal of Rural Finance, July-Sept. 2007

52. Thank you
address: