www.microfinancethailand.

com
1. What is Micro-Credit?

Micro-credit is the extension of very small loans (microloans) to the unemployed, to poor
entrepreneurs, marginalized people and to others living in poverty who are not considered
bankable. These individuals lack collateral, steady employment and a verifiable credit history and
therefore cannot meet even the most minimal qualifications to gain access to traditional credit.
Micro-credit is a part of microfinance, which is the provision of a wider range of financial services
to the very poor such as insurance and savings.

Micro-credit started in Bangladesh where it has successfully enabled extremely impoverished

people to engage in self-employment projects that allow them to generate an income and, in
many cases, begins to build wealth and exit poverty.

The concept of micro-credit has become so popular that the United Nations declared 2005 the
International Year of Micro-credit. In 2006, the Nobel Peace Prize also went to Dr. Yunus and his
organization for their work with the poor.
2. What is a Microfinance Institution (MFI)?
A microfinance institution is an organization that offers financial services to low income
populations. This includes NGOs, credit unions, cooperatives, private commercial banks and non-
bank financial institutions (some that have transformed from NGOs into regulated institutions) and
parts of state-owned banks such as the Government Savings Bank and BAAC.

A lot of NGOs and foundations also offer micro-credit in Thailand. However; most also offer other
non-financial development activities and prefer not to be called a "financial institutions". Yet, from
an industry perspective, since they are engaged in supplying financial services to the poor, we call
them MFIs.

3. Who are the clients of microfinance?

The typical microfinance clients are low-income persons that have little or no access to formal
financial institutions. Microfinance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban areas,
microfinance activities are more diverse and include shopkeepers, service providers, artisans,
street vendors, etc. nv Microfinance clients are poor and vulnerable non-poor who have a
relatively stable source of income.

4. How does microfinance help the poor?

Experience shows that microfinance can help the poor to increase income, build viable
businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument
for self-empowerment by enabling the poor, especially women, to become economic agents of
change.
Poverty is multi-dimensional. By providing access to financial services, microfinance plays an
important role in the fight against the many aspects of poverty. For instance, income generation
from a business helps not only the business activity expand but also contributes to household
income and its attendant benefits on food security, children's education, etc. Moreover, for
women, who, in many contexts, are secluded from public space, transacting with formal
institutions can also build confidence and empowerment.

5. Aren't the poor too poor to save?

The poor already save in ways that we may not consider as "normal" savings--- investing in
assets, for example, that can be easily exchanged to cash in the future (gold jewellery, domestic
animals, building materials, etc.). After all, they face the same series of sudden demands for cash
we all face: illness, school fees, need to expand the dwelling, burial, weddings.

These informal ways that people save are not without their problems. It is hard to cut off one leg
of a cow that represents a family's savings mechanism when the sudden need for a small amount
of cash arises. Or, if a poor woman has loaned her "saved" funds to a family member in order to
keep them safe from theft (since the alternative would be to keep the funds stored under her
mattress), these may not be readily available when the woman needs them. The poor need
savings that are both safe and liquid. They care less about the interest rates that they can earn
on the savings, since they are not used to saving in financial instruments and they place such a
high premium on having savings readily available to meet emergency needs and accumulate
assets.
6. Why do MFIs charge such high interest rates to poor people?
Providing financial services to poor people is quite expensive, especially in relation to the size of
the transactions involved. This is one of the most important reasons why banks don't make small
loans. A 5000 baht loan, for example, requires the same personnel and resources as a 200,000
one thus increasing per unit transaction costs. Since most poor people are also in rural areas,
micro-credit programs must also spend additional money to travel to clients.

The microfinance institution could subsidize the loans to make the credit more "affordable" to the
poor. Many do. However, the institution then depends on permanent subsidy. Subsidy-dependent
programs are always fighting to maintain their levels of activity against budget cuts, and seldom
grow significantly. They simply aren't sustainable, especially if other micro-credit operations have
shown that they can provide credit and grow on the basis of “high” rates of interest—and along
the way serve far greater numbers of clients.

Evidence shows that clients willingly pay the higher interest rates necessary to assure long term
access to credit. They recognize that their alternatives—even higher interest rates in the informal
finance sector (moneylenders, etc.) or simply no access to credit—are much less attractive for
them. Interest rates in the informal sector can be as high as 20 percent per day among some
urban market vendors.

In Thailand, MFIs charge interest rates that are considerably lower than what neighbouring
countries charge. The average interest rates in Thailand are surprisingly low compared to
neighbouring countries. Rates in Thailand usually range from 10-20% per year while Cambodia
and Vietnam have interest rates around 30-50% per year. This is due primarily to the fact that the
government heavily subsidizes the rates. Most experts in the micro-credit industry think that
government involvement in micro-credit can have two negative effects:

• Government subsidies can distort markets and usually limits growth.

 • The programs could potentially be used for political purposes.

Organizations

The micro-credit / microfinance sector in Thailand is very small due mainly to the fact that
the Thai government is also heavily involved. A few small non-governmental organizations
also offer various types of services and programs.
Non-Government Organizations

Common Interest International

Common Interest is a foundation working in Northern Thailand. It works primarily with rural
and hill-tribe villages using the Village Banking methodology.

Compassion Thailand
Compassion has micro-credit programs throughout Thailand.

Mirror Art Group

The Mirror Art Group has a new and small loan program for rural farmers in Chiang Rai.
Population and Community Development Association
PDA is a large NGO with many different programs. It has a savings and loan program for rural
villages.
SED
SED is a business working in Surin province. It has ties to Catholic Relief Services and Food
for the Hungry. SED uses the Village Banking methodology in its programs.
Step Ahead MED
Step Ahead MED serves the working poor of Bangkok through sustainable microfinance
services, mentoring and training in their communities.
UHDP
The Upland Holistic Development Project has a small Community-based Micro-finance
program in the Mae Ai region of Chiang Mai. Most of their work is with hill-tribe communities.

World Vision
World Vision has programs throughout Thailand.
Government Organizations
Government Savings Bank
The Government Savings Bank has several programs for the poor including group savings
and loans. Most activities occur in urban areas.
BAAC
The Bank for Agriculture and Agricultural Co-operatives is a very large institution working
mainly with rural farmers.
1 Million Baht Program
This program was introduced by a previous government. Villages were given money to start
their own micro-credit schemes. However; in many villages, this system is no longer in
existence.