FAQ
Microfinance - an overview
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Microfinance - an overview
What is microfinance?
Microfinance is the provision of basic, small-scale financial services such as credit, savings, insurance and remittances to the poor. The poor need these services to better meet their daily needs, respond to unforeseen demands, and plan for their future. However, they are often excluded from the mainstream financial system because they have neither a steady income nor collateral.
The main components of microfinance are:
- Microcredit: A small loan that enables the recipient to set up a small business in order to generate income, such as selling vegetables in the market, making clothes, or running a hair salon or an internet café. The loan can then be repaid using the income generated by this enterprise.
- Micro-savings: A savings plan that allows the poor to protect the wealth they accumulate, meet their needs when their income dips, prepare for education and healthcare costs, and invest in the future.
- Micro-insurance: An insurance plan that protects the poor in case natural disaster, war, economic crisis or illness.
- Remittances: Money transfers, usually from workers living overseas back to their families at home.
How does microfinance differ from other forms of development assistance?
Most development assistance is given as charity and can therefore make the recipient dependent. Microfinance, in contrast, aims to empower the poor so they can support themselves by employing themselves, saving for the future, and investing according to their own priorities. It enables beneficiaries to take responsibility for their own lives and lift themselves out of poverty through the dignity of their own efforts.
Moreover, microfinance aims to achieve this goal through market-conforming, not market-distorting mechanisms. Beneficiaries of microfinance sell their goods or services in the open market, integrating themselves into the local economy. And since the beneficiaries of microcredit loans are charged interest, they have a strong incentive to make their business a success.
Who is involved in the provision of microfinance services?
- Microfinance Institutions (MFIs) : MFIs are most often set up at the initiative of local communities with the support of international cooperation agencies and international NGOs.
- Credit Bureaus: Agencies that compile and distribute credit and personal information to MFIs and other lenders. This information may include payment habits, amount of loans outstanding, amount of savings, and length and place of employment. This information helps prevent fraud and helps MFIs manage risks.
- Public banks and national development banks: Government-run banks usually act as "bankers" to microfinance institutions. Sometimes they directly provide microfinance services as well.
- Commercial Banks: In some cases, mainstream banks assist MFIs by refinancing their activities or by providing technical assistance. In other cases, they "downscale" and directly develop their own microfinance activities.
- APEX Institutions: A second-tier or wholesale organization that channels funding (grants, loans, guarantees) to multiple MFIs in a single country or region, often along with technical assistance.
- Donors: The capital for MFIs and the cost of training, technical assistance and other services that support the microfinance sector are provided by bilateral cooperation agencies, (USAID, AFD, KFW, DFID), multilateral institutions (United Nations, the World Bank, the European Commission), NGOs, corporations, foundations and individuals.
What is the amount of a micro loan?
The loan amount varies from a few thousand yen to several hundred-thousand yen, depending on the country and the activity for which it will be used.
Are the loans really repaid?
Repayment rates are often very high. It is not rare for the most well-established MFIs to have repayment rates that exceed 95%. In Morocco in 2004, for example, the 5 biggest MFIs had a repayment rate of 98.5%.
What are the maximum rates of interest used on those who benefit from microcredit?
Just as the ultimate goal of the providers of microfinance services is that their clients become self-sufficient, the providers themselves aim to be self-sustaining. They must be able to cover their costs so that they can continue to provide their services to their clients. The cost of providing microfinance services is very high because of the manpower needed to manage numerous small accounts, the difficulty in managing risk because borrowers typically do not have collateral, and the geographical dispersion of the beneficiaries. Very often, therefore, the interest rate charged by MFIs is higher than that charged by commercial banks - but significantly less than that charged by the moneylenders from whom the poor traditionally borrow money.
In India, for example, MFIs use a monthly rate of 1.5% while banks charge 1% and some money lenders 15% per month. In Morocco, MFIs charge 2 to 3% per month versus 1% a month at commercial banks but 10-20% per month by money lenders. In West Africa, MFIs charge nearly 2% to 3% per month, not much higher than the bank rate of 1.5%, but significantly less than the money lenders' rate of nearly 20% per month. Thus, although the interest rate of MFIs may seem high, it is much lower than the rate they traditionally pay and well within their means. Several impact studies undertaken by PlaNet Finance have shown that clients are much more interested in the amount of credit available and the efficiency of the MFI providing the loan rather than the interest rate it charges.
Does the life of the beneficiaries really improve?
Although microfinance directly fights poverty by increasing the economic opportunities available to the poor, it indirectly helps tackle the two other leading causes of endemic poverty: poor health and lack of education.
Because they provide access to much-needed capital and a mechanism to save, microfinance institutions often become a locus in the community. That enables MFIs to team up with other NGOs offering other services, such as education and hygiene or environmental awareness programs.
For example, microfinance is playing an important role in fighting HIV/AIDS in sub-Saharan Africa. Many MFIs there offer HIV/AIDS information and education programs, which are either run by their own personnel or in conjunction with specialized organizations. Generally speaking, regular group meetings (one of the techniques of microfinance) play a beneficial role in this type of training. By holding regular meetings and running information exchanges and prevention sessions, the programs run by microfinance institutions enable issues related to HIV/AIDS to be discussed within the community and break common taboos, a vital prerequisite for any effort aimed at preventing the disease. A World Bank study showed that 53% of the female beneficiaries of microfinance were using contraceptives compared with just 36% of females who were not involved in microfinance programs.
In fact, microfinance programs are particularly geared toward women. In most developing countries, women are politically, economically and socially excluded. However, they also play an indispensable role, particularly in areas like nutrition and education. When they are gainfully employed, their whole family lives and eats better and have a higher rate of staying in school. Microfinance helps them reach this goal by:
- improving their access to credit, thereby giving them the chance to increase their incomes and promote their economic independence;
- improving their access to education;
- helping them to take part in family decisions, especially spending decisions;
- contributing towards changing attitudes towards women in terms of their role within the family and the community;
- enabling them to defend their rights by increasing their power within society and boosting their self-confidence;
- reducing inequalities in areas like control over land, work, raw materials and incomes;
- making it easier for them to have access to markets and information networks by giving them greater experience of life beyond their families and offering them the possibility of taking on other roles, be they political, economic or social.
Today there are over 80 million clients of microfinance institutions around the world. There is no question that many of these people lead less precarious, more economically stable lives than before. But microfinance is just a tool that helps increase opportunities for the poor, not a panacea. Its success depends entirely on the initiative of the person using the services.
About PlaNet Finance Japan
When was PlaNet Finance Japan established?
PlaNet Finance Japan was first set up in 2005 after nearly a year of exploratory discussions. It received NPO status from the Tokyo Metropolitan Government in July 2006.
Who are the staff for PlaNet Finance Japan?
- Robert Verdier, Chairman
- Kazuo Tanaka, Executive Director
- Kazuo Tanaka, Executive Director
- There are nine staff currently working in program implementation, accounting and others.
What is PlaNet Finance Japan's source of funding?
PlaNet Finance Japan's goals obtain financial support from companies based in Japan as well as government and quasi-government institutions.
What kind of services does PlaNet Finance Japan provide?
Although Japan is one of the leading providers of overseas development assistance, its involvement in microfinance has been limited. PlaNet Finance Japan hopes to change that through the following activities:
Education and awareness-raising
- Training Japanese microfinance professionals
- Hosting seminars and conferences in Japan to highlight developments in microfinance
- Building a network of finance and technology experts, socially responsible companies, academics and development organizations with the aim of giving the microfinance movement additional momentum in Japan
- Conducting a public relations campaign to bring microfinance to a wider audience in Japan
- Identifying and developing microfinance projects in developing countries that match the needs and interests of Japanese donors
- Implementing and managing microfinance projects with requisite accountability and transparency
What is so unique about PlaNet Finance Japan compared to other NGOs in Japan?
PlaNet Finance Japan is the only organization in Japan that is dedicated solely to growing the microfinance sector. Although a relatively new entity in Japan, it is part of a global network that has nearly a decade's experience in microfinance that has touched the lives of more than 3 million people in nearly 60 countries.
PlaNet Finance Japan brings to Japan all the resources of this global network, including:
- Influential leadership: The involvement of global leaders in business, politics and development gives our organization a strong voice and unparalleled access to new projects, new ideas and new resources.
- Application of information technology solutions to microfinance problems: We specialize in developing and applying information technology (IT) to assist MFIs increase their efficiency and capacity. These benefits can then be passed on to their clients in the form of better service and lower interest rates.Our IT solutions also provide micro-entrepreneurs with information about markets, production and techniques which are as crucial to them as working capital. Through improving IT skills amongst micro-entrepreneurs, our projects help bridge the digital divide.
- Interdisciplinary approach to projects: We have led the field in developing an cross-disciplinary approach to alleviating poverty that goes beyond mainstream microfinance. For example, our Microfinance and Health Unit brings together experts in health, insurance and training to design and implement programs aimed at improving the health of the clients of microfinance institutions. Similarly, the Microfinance and Natural Disasters and Microfinance and Post-Conflict Units bring together various expertise in order to use microfinance as a tool to speed recovery from crisis situations.
- Horizontal integration of services: We have developed in-house expertise across the spectrum of issues important to the microfinance sector, and are able to deliver our services to all levels of the microfinance sector from national policymakers down to the smaller MFIs that may be the only economic support mechanism in a region or village.
- Global network: Our federated structure allows us to carry out its activities across a number of regions without an increase in transaction costs, but still allows for the cross-pollenation of ideas from one country to another.
About the PlaNet Finance global network
When was the PlaNet Finance global network established?
It was while taking part in a seminar at the Aspen Institute in November 1997 that Jacques Attali outlined his plan for creating a virtual bank for refinancing microfinance institutions. He proposed calling it PlaNet Bank.
Jacques Attali then got in touch with Arnaud Ventura, who was then in Argentina as Head of New Technologies with the Banque Nationale de Paris in Buenos Aires. Arnaud had become interested in how new technologies could help NGOs develop and grow. In October 1997 he set up NGO-NET, an NGO dedicated to using the internet and new information and communication technologies to strengthen the capacity of NGOs in sectors such as health, education and microfinance.
In December 1997, Arnaud drew up PlaNet Finance's first business plan outlining the services the organization would offer. In February 1998 Jacques Attali discussed the proposed project with Michel Rocard (former French Prime Minister and member of the European Parliament), Muhammad Yunus (founder and President of the Grameen Bank) and Massimo Ponzellini (who was then Vice-President of the European Investment Bank). They gave their support and were invited to join the organisation's governing body.
In May 1998, a pilot program was established in East Africa under Arnaud Ventura's leadership. Its aim was to get a better understanding of the needs of those involved in microfinance. The program and the work of the many experts who contributed to it led to the creation of PlaNet Finance on 13 October 1998 as a non-profit organization.
Since then, PlaNet Finance has grown to have an annual budget of ¥600 million and a staff of nearly 200 employees and experts.
Who are the key staff members of PlaNet Finance?
- Jacques Attali, President
- Founded PlaNet Finance in 1998. Prior to that was special counselor for foreign affairs to President Francois Mitterrand of France. Also founded the European Bank for Reconstruction & Development and Action Internationale Contre la Faim. Author, playwright, and professor.
- Arnaud Ventura, Executive Vice-Presidentt
- Co-founded PlaNet Finance in 1998 and served as its managing director until December 2005. Under his leadership, the organization grew to more than 200 staff operating in 60 countries with offices in 30 countries. In 2005, he founded MicroCred, a subsidiary of PlaNet Finance which plans to set up and run 15 microfinance banks in underserved areas in its first 5 years. Arnaud is a specialist in technical assistance, bank downscaling, and government regulation and microfinance development strategies.
- Selected members of PlaNet Finance's international supervisory board
- Boutros Boutros-Ghali - Former Secretary General, United Nations
Shimon Peres - Nobel Peace Prize Laureate
Muhammad Yunus - Founder and Managing Director, Grameen Bank
Abdou Diouf - Former President of the Republic of Senegal
Bill Joy - Founder and Chief Scientist, Sun Microsystems
Jacques Delors - Former President European Commission
Michel Rocard - Former French Prime Minister
George Yong Boon Yeo - Minister of Commerce and Industry, Republic of Singapore
What is PlaNet Finance's source of funding?
From the start, PlaNet Finance received extensive support from the private sector, supplementing financing that it received from international sponsors. More recently, the sale of services has become a larger source of income for the organization. In 2005, 41% of PlaNet Finance's funding came from donations from the corporate sector (such as Microsoft, Oracle, Motorola, McKinsey & Company, JP Morgan Chase, and ABN-AMRO), 21% from the sales of services, 18% from international institutions such as the World Bank and the European Commission, and 20% from other resources.
What is the role of PlaNet Finance in the field of microfinance and what services does it provide?
PlaNet Finance's role is to assist all parties involved in devising effective programs to facilitate the access of the poor to microfinance services. Its goals are to strengthen the capacity of the microfinance sector, increase the transparency and efficiency of microfinance institutions, and increase the funding available to MFIs.
In order to achieve these goals, PlaNet Finance provides the following services:
- Training and technical assistance to MFIs, credit bureaus, commercial banks and government policymakers
- Assessment and rating of MFIs to support their own fundraising efforts
- Management of debt and equity funds that finance MFIs
- Establishing and running MFIs in underserved areas
What are some of PlaNet Finance's achievements?
In its first 8 years of operations, PlaNet Finance has
- Provided assistance to 700 microfinance institutions in 60 countries with a client base of 3 million
- Established 6 country programs supporting 175 microfinance institutions with 1.2 million clients
- Provided best practices training to 1,700 microfinance professionals
- Provided 209 MFIs with IT equipment to improve their operating efficiency
- Assessed and Rated 145 MFIs were in order to enhance their own fundraising capabilities
- Directly financed a small loan for 15,000 people to start or expand a business
- Raised more than ¥7 billion in debt and equity funds to help MFIs grow and help more people
- Built 191 websites for MFIs to raise awareness and share information
How does the PlaNet Finance network operate?
PlaNet Finance is made up of a network of non-profit organizations. Its work around the world is only done in partnership with local associations.
There are three types of partnerships :
- Partnerships with national microfinance networks. In Benin, PlaNet Finance works with the ALAFIA network which is a collection of more than 30 MFIs. In Togo, PlaNet Finance works in partnership with two local networks (APMFIST, and ALAFIA); in Morocco, PlaNet Finance works in partnership with FNAM ; in China, PlaNet Finance helped to establish the CAM, a Chinese microfinance network.
- Partnerships with individual MFIs. For example, in Morocco, PlaNet Finance directly provides training and technical support to 11 MFIs and in Mexico, PlaNet Finance works with more than 50 MFIs. Partnerships such as these are formed not only in all the countries in which PlaNet Finance has a presence, but also in countries where there is no permanent office, such as partnerships with MFIs in Ivory Coast and Cameroon.
- Partnerships with local government authorities. This is the case especially in West Africa where PlaNet Finance formed partnerships with government health and education authorities as part of its Microfinance and Health Program and portal development program.
How can I help?
How can I help?
You can make a difference. PlaNet Finance Japan needs:
- Interns interested in pursuing a career in microfinance
- Volunteers to help us develop our operations in Japan
- Sponsors to provide resources and know-how to support our projects
With your help, PlaNet Finance Japan can
- Help a micro-entrepreneur set up their own small business
- Strengthen the capacity of an MFI or regional microfinance network to help the poor in their area
- Set up an MFI or help an existing financial institution provide microfinance services