1. 1 Introduction to Financial Intermediation

2. Session Objectives At the end of the session, the trainees are expected to be able to: 1.Describe the financial intermediation process 2.Explain the role of rural banks as financial intermediaries and as microfinance providers 3.Identify the different credit methodologies in microfinance and explain their major differences.

3. Financial Transactions Source of Funds User of Funds Loans/Investment Repayments/Returns

4. Role Play Mini-Cases of Financial Intermediation Compare different scenarios with and without a financial intermediary Learn practical lessons on how a financial intermediary helps savers and borrowers alike, and how the community gains.

5. Case 1 How Financial Intermediation works P10,000

6. Case 2 How Financial Intermediation works P10,000 + P2,000 P8,000 P20,000

7. Case 3 How Financial Intermediation works P10,000 + P1,000 P8,000 P20,000 P1,000

8. What is Financial Intermediation? Financial Intermediation is the transfer of capital or liquidity from those who have excess at a particular time to those who are short at that same time, through a financial intermediary. Deposits Loans/Investments Repayment/Returns Investments Sources of fundsFinancial IntermediariesUsers of funds

9. Financial Intermediaries A financial intermediary may be an institution, firm or individual who performs intermediation between two or more parties in a FINANCIAL context. Examples: Banks, Credit Cooperatives, Lending Investors, Insurance Companies, and mutual funds

10. Why are Financial Intermediaries Necessary? A financial intermediary can pool together the resources of thousands of savers and make these available to borrowers who can make the best use of these funds. Without financial intermediaries, the bulk of surplus funds will be lying idle, while many economic activities wont be able to expand or take off the ground.

11. Services Provided by Financial Intermediaries Savings Loans Investments Insurance/ Pre- need plans

12. Enabling legislation in 1952 (Rep. Act 720) authorized the establishment of rural banks; updated law is contained in Rural Banking Act of 1992 Rural Banks as Financial Intermediaries 805 head offices and 1,075 branches covers 85% of the municipalities and cities nationwide. Size and locations make RBs a strategic player in countryside development. Compared to other types of banks, RBs operations are considered to be more responsive to the needs of communities.

13. RBs are located closest to micro-entrepreneurs Can provide products appropriate to the needs of micro-enterprise operators; Can mobilize deposits for sustaining their microfinance operations; Can offer deposit products with low opening and maintaining balance Comparatively lower administrative cost Supervised by BSP RBs engaged in microfinance have proven that microfinance can be a profitable banking activity. Rural Banks as Microfinance Institutions

14. What is Microfinance? Provision of financial services, both deposits and loans, to low-income clients for their micro-enterprises and small businesses. Loans amounting to P150,000 and below Employs less than 10 people Maximum asset of P1.5 million

15. The Microentrepreneur Low educational level Small volume of operations Few employees (0-9), Usually family members Rudimentary / obsolete equipment Family and business are considered as one Multiple income-generation activities Basic or no business records Limited marketable collaterals to offer Limited access to formal sources of credit / No credit history Active participation in informal sources of credit Basic financial skills Large, extended families

16. Business Environment Local policies are sometimes onerous. Limited market for their goods and services. Execution & registration of guarantees time consuming and expensive for both borrower and lender Stiff competition

17. Microfinance Credit Delivery Methods Individual Lending Loans are given to individual borrower. Group-based Lending Loans given to groups – that is, either to individuals who are members of a group and guarantee each other’s loans or to groups that then sub-loan to members. (Examples are Grameen banking, Solidarity lending and Village Banking)

18. Comparison Between Individual and Group Lending Methodology Individual Lending MethodologyGroup Lending Methodology Loans are given to individuals borrowers.Peer groups of unrelated members are self-formed and organized into “centers” of up to eight groups Most successful for large, urban-based, production-oriented business. Business must be existing for at least 1 year. Appropriate clients are from rural or urban (densely populated) areas and are usually women from low-income groups. Usually ideal for start-up businesses. Requires some form of collateral (substitute) or co-signatories. Group members mutually guarantee each others loans. No further loans are given to member if all loans of the group members are not repaid on time. No collateral is required

19. Comparison Between Individual and Group Lending Methodology Individual Lending MethodologyGroup Lending Methodology Credit products tailored to the specific needs of the business. One single product that is not necessarily tailored to specific needs of the members of the group (One size fits all). Loan amounts and terms are based on careful analysis by the credit officer. Loan amounts are pre-determined (“One size fits all”). Loan appraisal is performed by group members and center leaders. Branch staff verify information and make periodic visits to clients business. Requires frequent and close contact with individual clients Attendance at weekly meetings and weekly savings contributions, group fund contributions, and insurance payments are mandatory

20. Comparison Between Individual and Group Lending Methodology* Individual Lending MethodologyGroup Lending Methodology Credit Officers usually work with a relatively small number of clients (between 60-150) and close relationship with them over the years, often providing minimum technical assistance. Credit officers usually carry between 250-350 clients.

21. The MABS Approach to Microfinance Video Presentation