Micro Finance And Livelihoods

Microfinance and Livelihoods N.Srinivasan At CAB, Pune – 17 March 2009

Microfinance • Small savings, credit and financial service needs of small clients • Delivered by Banks, Microfinance institutions and special purpose projects

Livelihoods • Access to adequate incomes over a long period of time – through an enterprise or service activity – regular, sustainable and gainful Includes employment

Financing of livelihoods Not the first preference of banks Perceived high risks Small volumes and high geographical spread Lack of collateral High costs of delivery Unfamiliarity with the variety of activities

MF and livelihoods • Microfinance as a client friendly model • High expectations of livelihood finance • MFIs also have same reservations as that of banks • Quest for sustainability leads to loan products not suited to livelihoods ?

Typical loan products in MF • Lump sum loans repayable in weekly or monthly installments – regardless of cash flow of client • Small, uniform loan size – not matching funds needs of activity • Short duration (typically one year) not sufficient to make investments in livelihood assets • High rate of interest • Loan as the focus – not the livelihood

Examples Financing of a cow One year loan Repayable in 52 weekly installments Garments vendor One year loan Repayable in 12 monthly installments

The variety • • • • • • • • • •

Vegetable and fruit vending River sand mining Crop cultivation Goat rearing Crab fattening Road side / village cafes Leasing of trees for annual crops Itinerant garment and utensils vending Cycle, motor servicing Migration ??

Elements of livelihood finance for MFIs • Contextual • Analysis of market demand with availability of linkages as a key criterion • Adequacy of amounts • Period of loan to match the need • Repayment installments and intervals to match cashflows • Client sustainability as the focus

Institutional concerns and responses • High Risks – if it is too risky do not finance • Large amounts – reducing the loan size is not a good idea • Short maturity – Client would suffer and eventually the MFI • High interest rates – kill the golden goose? Do not offer an incomplete and inadequate product – risks of such a product are much higher

Institutional readiness • • • •

Understand the local livelihoods framework Familiarise staff Train staff in financing of livelihoods Develop products for the local context and livelihoods therein • Develop a long term vision for the client as well the institution • Invest in capacity building of clients – or find external resources for it.

Are you really financing livelihoods? Think again and act differently Thank you