MICROFINANCE A Textbook of Microfinance for Schools, Colleges and Practitioners Siegfried Silverman, MS C MBA FCCA

Microfinance Siegfried Silverman

www.whitefalconpublishing.com All rights reserved First Edition, 2018 Copyright © 2018 Siegfried Silverman Cover design © 2018 by Siegfried Silverman Cover image © to Siegfried Silverman No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by means electronic, mechanical, photocopying, or otherwise, without prior written permission of the Author. Requests for permission should be addressed to [email protected] ISBN - 978-19-79425-91-9

Dedication Dedicated to Alice my wife and Joshua, Elijah, Joycelyn, Serena and Cyrus, my children, who braised the scourge of failure and pains when I ventured into the business of Microfinance.

Acknowledgements I was able to obtain permission from various sources to use their research or published materials as part of my analysis and writing. I am particularly grateful to the following for their permissions:  Professor Hari Srinivas - The Global Development Research Center  Bank for International Settlements (BIS)  Bank of Ghana – Collateral Registry  ACCION Microfinance Other sources, like definitions, quotes and contributions are respectfully acknowledged in the texts.

FORWARD In reviewing this book, I have taken cognizance of the fact that there are a lot yet I have to learn. I am out of the schoolgoing age and now of a retirement age, but I am just a fresh student by reading the writing of the author, who I can describe as my son. The definitions, analyses and conclusions are really coming from an award-winning and astute chartered accountant I mentored as an Accounts Clerk just after his secondary school in the late 1990s. Microfinance is a new concept to many people including the banking and finance professionals. This is due to the fact that, it was just a few years that separate us from its introduction and adoption from the current era. It was highly believed, then, that the poor people could not break away from poverty if they did not turn to education and pursued intellectual courses the well-endowed children are equally pursuing. But over the years, and with the advent of Professor Muhammed Yunus and his likes, we have seen that the poor can break the vicious cycle of poverty with a little help. | v

vi | MICROFINA NCE

This little help is seen in administering group loans and repayments that match their cycle of income – the market days, which mostly occur every week or fortnightly. Over the past decades I have been in the education sector, I am very much aware of lack of materials on the subject of microfinance to the teaming youth around the world. It is therefore timely and welcoming to have such a comprehensive survey in all areas of the subject on microfinance. Nothing could be more sufficient in the current trend than this. It is a gift to the next generation of microfinance, banking and finance students and professionals alike!

John Maxwell Quao, BSC MSC FCCA Financial Consultant DFID Project Ghana Education Service Accra Ghana

FOUNDATION STAGE

THE CONCEPT OF MICROFINANCE “People were poor not because they were stupid or lazy. They worked all day long, doing complex physical tasks. They were poor because the financial institution in the country did not help them widen their economic base.” – Professor Muhammad Yunus (Banker to the Poor)

Introduction Until the past 30 years, the poor and the vulnerable were written off. They could not make it to the top unless the artificial structures set up by the world economic orders were climbed to the fine lines. What are those world orders? Success or failures were set around children education which lead to getting employment after the education. When you missed education, you missed everything. Yes, the majority do miss education and the consequences, as a result of lack of funding from parents and family members, lead them back to the starting point of their parents; poverty.

| 3

4 | MICROFINANCE

Let’s look at the diagram below:

Family in poverty

Fail to escape poverty cycle

Struggle to get a job

Child grows in poverty

unable to go/complete school

Figure 1 VICIOUS CYCLE OF POVERTY

When you are poor, you remain poor. This is because: 1. The child of the poor grows in poverty 2. The child is disadvantaged in education. Cannot attend better and higher schools to the university levels 3. With the 2 above, the growing child, now young adult cannot get a good job that is linked to educational qualifications

MICROFINANCE | 5

4. This leads to low income status that prevents sufficient savings and resources to improve his/her life and therefore pass the same poverty to his/her children. 5. The cycle continues.

Breaking the cycle with Microfinance It has, however, been observed that, it is not everybody that is endowed with the ability to pursue educational goals even if all are endowed with the economic circumstances to do so. Others have entrepreneurial abilities or have their abilities in the arts even though they are from poor homes. What option is therefore left for these people apart from education as the breaker-of-poverty? People just need a little seed capital. This seed capital goes a long way to turn their fortunes around. This concept was conceived by a world renowned professor of economics, Professor Muhammed Yunus from Bangladesh. As a Nobel Peace Prize Winner on the development sector, he started the ‘village banking’ concept. This concept in his own native language is called Grameen. This led to the set-up of the Grameen Bank in Bangladesh with the extensive outreach to the rural poor. Today, microfinance can be found in every corner of the world and it has been adopted by the World Bank as the strongest tool in the fight against poverty around the world.

6 | MICROFINANCE

Income from business breaks cycle

Poor parents

Assisted with Microfince services

Grow into adult poor parent

Child born into poverty

Could not enter into school

Figure 2 BREAKING VICIOUS CYCLE OF POVERTY

In the diagram above, the poverty cycle has been broken with the assistance of microloan. The poor parent can now operate a small business with the seed capital received. It then continues to receive small drops of income from the business or agricultural services being operated. This little drop of income is now able to support the home, cater for the children school fees, provide good nutritious food for the child and enable to the home to become stable. The child is now able to grow well, continue the education which was otherwise lacking and entered a better working environment or take over the management of the business of the parent(s). Poverty cycle is broken with the little help received from the microfinance sector.

MICROFINANCE | 7

Why the textbook in Microfinance? Over the years, extensive research has been conducted into the practice of microfinance. Some research materials and publications are very technical and parochial towards a certain body of knowledge. Others are very limited in scope and too difficult for the business students who increasingly have to rummage through these publications in order to fish out the concept of microfinance as practiced in the field. The textbook concept is to make the study on the subject matter, a very simple one. To help the student have materials that cover all aspects of the microfinance sector at the level of schools and colleges – up to a first degree level. In particular, the various topics cover areas listed below:  Introduction to the microfinance and the microfinance sector  Difference between banking and microfinance  Lending methodologies of microfinance institutions  Sources of funding to the banks and the MFIs  Wholesale banking and development banking  Risk Management  Fraud risks management  Operations Risk Management  Best Practices in Loans Collections

8 | MICROFINANCE

 Collateral Management and Collateral Registry  Financial Technology (Fintech) and Mobile Banking  The role of the Finance, Internal Audit and Human Resource functions  Glossary of thousands microfinance definitions The concepts are self-explanatory and direct teachings gathered from all around the world. Examples are from Africa, Asia, Latin America and Europe. I hope it shall be your companion in the subject of microfinance!

BANKING AND MICROFINANCE “Making loans and fighting poverty are normally two of the least glamorous pursuits around, but put the two together and you have an economic innovation that has become not just popular but downright chic. The innovation - microfinance - involves making small loans to poor entrepreneurs, usually in developing countries” – James Surowiecki

Introduction In the first of the series of topics that introduced microfinance to the students and practitioners alike, we would like to begin with how banking is different from Microfinance. A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Microfinance is a source of

| 9