Microfinance Day at Ivey

Near the end of second semester for the HBA Program, Ivey Connects hosted a Microfinance Day at Ivey. The “Microfinance 101” crash course was open to all HBA, MBA and PHD students as well as Ivey faculty – in all there were over 80 attendees. 

The speaker at the event was Jannalee Anderson, an Ivey MBA from 1999 who is currently with Opportunity International. Below is a summary of the presentation.

How does Microfinance work?

Banks/lenders/NGO’s who are in the microfinance industry enter small communities in third world countries and establish the culture and tone of the community. What they almost always find is that people are full of hope and are willing and wanting to help themselves, but they generally don’t have the means to do that from a financial standpoint. While most of these communities will have something resembling an economy, small business owners have two real options for acquiring financing – go to a bank (but without collateral, English proficiency and with banks hundreds of miles away this is rarely done), or go to a loan shark (sadly the more common), who charges up to 150% interest and are incredibly dangerous.

A microfinance organization goes into these towns and finds someone who is well connected. They ask this person to get together a group of their friends who are either in small business or who want to be, and the only other criteria is that the well connected person trust the people they invite. Together, they form communities, and support one another. Each entrepreneur applies for their own individual loan, and the average size of a first loan is $181, however it can go as low as $50.

The beauty of microfinance is that it relies on “character collateral”; since these people don’t have any physical assets to lay as collateral, they rely on their friends to vouch for their character. Further, if someone in your “circle” misses a loan payment due date, it is common that other members of the circle step up and make that payment on their behalf to maintain the strong standing of the microfinance circle community. As such, microfinance organizations have a 98% repayment rate.

Why do Microfinance organizations charge interest?

While the main purpose of charging interest is for sustainability practices for micro financers, there are a few other reasons why charging interest is important. In some countries, microfinance organizations serve as NGO’s, and the microfinance loans entrepreneurs receive are interpreted as “training”; a way these entrepreneurs can prove themselves before applying to a real bank for a real loan. In order to fairly emulate what a real loan would be like, interest must be applied.

What are some of the challenges of providing microfinancing to the third world?

First and foremost is poor education, as many of the entrepreneurs are unable to even sign their names on a loan agreement. As such, microfinance organizations are using technology including fingerprint scanning as acceptable proof of identity for people unable to write their own names.

Second, the vast nature of many third world countries could require entrepreneurs to travel for hours before they reach the local chapter of a bank or a teller. Microfinance organizations are combating this challenge through the use of “mobile banks”; a truck with an ATM type function arrives at the village on a regular basis to allow entrepreneurs to bank in their own community.

How big is Microfinance? Is Canada involved?

While there are hundreds of banks, not-for-profits and NGO’s working in microfinance, only 20% of the needs of the third world are filled at this point in time. While there are many Canadian NPO/NGO’s involved and many Canadian donations received, only one Canadian bank currently has a microfinance wing (Scotiabank in Peru).

Why should I donate my money to a microfinance organization?

Unlike most donations, when you give $1.00 to a microfinance organization, because of the number of times it can turn over, giving that $1.00 equals, on average, $2.73 to people in the third world. Where is Microfinance going next? Many microfinance organizations are working on a concept called “micro insurance”, which is affordable insurance for microfinance clients to protect their physical assets in case of theft or environmental concerns such as fire or flooding.

Thanks for a great event Ivey Connects, and thanks to Gillian Heisz for her contributions on this post.

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