Lecture 4: Microfinance institutions

Question 1

The term “microfinance institution” refers to a various types of financial institutions.

Answer 1

They include NGOs, state banks, postal banks, private commercial banks, non‐bank financial institutions (NBFIs), credit cooperatives, savings cooperatives, as well as several associations and organizations

Question 2

Lending Methodology

Answer 2

• Qualitative assessment of character, and
• Rough estimate of cash flow from a reconstructed income statement. * While items such as movable assets or group guarantees are accepted as collateral.

Question 3

Transaction Costs

Answer 3

transaction costs for microfinance are extremely high due to the * Small value of each transaction, and * Necessity of reducing client transaction costs by bringing microfinance services as close to clients as possible.

• This means that interest rates on loans must be at the high end of market rates to cover all lending costs.

Question 4

Regulation seeks to

Answer 4

Avoid a financial crisis in the microfinance sector, * Maintain payment transactions, * Protect clients and their savings deposits, and * Promote competition and efficiency

Regulators distinguish between two types of MFIs:

• The non‐deposit-taking MFIs, which only issue loans, and * The deposit‐taking MFIs, which both issue loans and take deposits.
• The deposit‐taking MFIs pose a higher risk as savings deposits can be withdrawn at relatively short notice. *