microfinance project ew35dited

8/11/2019 Microfinance Project Ew35dited

1/42

pg. 1

CHAPTER 1 :INTRODUCTION OF MICROFINANCE

Microfinanceis a source offinancial services for entrepreneurs and small

businesses lacking access tobanking and related services. The two main mechanisms for

the delivery of financial services to such clients are: (1) relationship-based banking for

individual entrepreneurs and small businesses; and (2) group-based models, where

several entrepreneurs come together to apply for loans and other services as a group.

For some, microfinance is amovement whose object is "a world in which as many

poor and near-poor households as possible have permanent access to an appropriate range

of high quality financial services, including not just credit but also savings,insurance,andfund transfers." Many of those who promote microfinance generally believe that such

access will help poor people out ofpoverty, including participants in theMicrocredit

Summit Campaign.For others, microfinance is a way to promote economic development,

employment and growth through the support of micro-entrepreneurs and small

businesses.

Microfinance is a broad category of services, which includesmicrocredit.

Microcredit is provision of credit services to poor clients.Microcredit is one of theaspects of microfinance and the two are often confused. Critics may attack microcredit

while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the

broad range of microfinance services, it is difficult to assess impact, and very few studies

have tried to assess its full impact.[2]Proponents often claim that microfinance lifts

people out of poverty, but the evidence is mixed. What it does do, however, is to

enhancefinancial inclusion.

1.1 Origin of micro finance

Mainly after 1970s, some personal attempt had been made to build microfinance

institution, like ACCION, Grameen bank etc. Before that, several institutions had been

working in many countries but the effect was too small.
http://en.wikipedia.org/wiki/Financial_serviceshttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Social_movementhttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Povertyhttp://en.wikipedia.org/wiki/Microcredit_Summit_Campaignhttp://en.wikipedia.org/wiki/Microcredit_Summit_Campaignhttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Microfinance#cite_note-2http://en.wikipedia.org/wiki/Microfinance#cite_note-2http://en.wikipedia.org/wiki/Microfinance#cite_note-2http://en.wikipedia.org/wiki/Financial_inclusionhttp://en.wikipedia.org/wiki/Financial_inclusionhttp://en.wikipedia.org/wiki/Microfinance#cite_note-2http://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Microcredithttp://en.wikipedia.org/wiki/Microcredit_Summit_Campaignhttp://en.wikipedia.org/wiki/Microcredit_Summit_Campaignhttp://en.wikipedia.org/wiki/Povertyhttp://en.wikipedia.org/wiki/Remittanceshttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Savingshttp://en.wikipedia.org/wiki/Social_movementhttp://en.wikipedia.org/wiki/Bankinghttp://en.wikipedia.org/wiki/Financial_services


2/42

pg. 2

In the later 1970s the concept of micro finance had evolved. Although, micro finance has

a long history from the beginning of the 20thcentury here, had been established by a law

student of Latin America to help the poor people residing in the rural and urban areas of

the Latin American countries. Today, in 2008, it is one of the most important

microfinance institutions of the world. Its network of lending partner comprises not only

Latin America but also US and Africa.

The inception and growth of micro finance and the micro finance institution in

India, can be traced back to 1972, when in Ahmadabad district of Gujarat, a self

motivated group of women entrepreneurs started a movement for economic independence

by setting up an organisation called SEWA (Self Employed Womens Association).

During the early and mid 1990s various credit institutions had been formed in

Europe by some organised poor people from both the rural and urban areas. These

institutions were named credit Unions, peoples bank etc. The main aims of these

institutions were to provide easy access to credit to the poor people who were neglected

by the big financial institutions and banks.

1.2 History of microfinance

The history of micro financing can be traced back as long to the middle of the

1800s when the theorist Lysander Spooner was writing over the benefits from small

credits to entrepreneurs and farmers as a way getting the people out of poverty. But it was

at the end of World War II with the Marshall plan the concept had an big impact.

The today use of the expression micro financing has it roots in the 1970s when

organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer

Mohammad Yunus, where starting and shaping the modern industry of microfinancing.

Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of

microfinance initiatives introduced many new innovations into the sector. Many

pioneering enterprises began experimenting with loaning to the underserved people. The

main reason why microfinance is dated to the 1970s is that the programs could show that

people can be relied on to repay their loans and that its possible to provide financial


3/42

pg. 3

services to poor people through marketbased enterprises without subsidy. Shorebank was

the first microfinance and community development bank founded 1974 in Chicago .

The year 2005 was proclaimed as the International year of Microcredit by The

Economic and Social Council of the United Nations in a call for the financial and

building sector to fuel the strong entrepreneurial spirit of the poor people around the

world.

The International year of Microcredit consists of five goals:

Assess and promote the contribution of microfinance to the MFIs

Make microfinance more visible for public awareness und understanding as a veryimportant part of the development situation

The promotion should be inclusive the financial sector

Make a supporting system for sustainable access to financial services

Support strategic partnerships by encouraging new partnerships and innovation to build

and expand the outreach and success of microfinance for all

The economics professor Mohammad Yunus and the founder of Grameen Bank were

awarded the Nobel Prize 2006 for his efforts. The press release from nobelprize.org

states:

1.3 Objectives of Microfinance:

Transform the lives of the under-privileged from chronic poverty by creating jobs,

stimulating small business, and strengthening communities.

Use group dynamics to inculcate spirit of self-support for each others efforts for

economics self-advancement.

Provide sustainable access for the poor and deprived to financial services.


4/42

pg. 4

Encourage innovation and new partnership by promoting and supporting strategic

partnerships to build and expand the outreach.

Channelizing the skills of those deprived from opportunities due to lack of

financial access, by encouraging them to build their own small business.

To provide alternative opportunity to under-served masses, ineligible for

traditional loans.

Save people from exploitation of loan sharks providing loans at exorbitant rates of

interest.

1.4 Features of microfinance:

Microfinance involves loans without collateral security; it enables the poor and

small entrepreneur to access to finance and financial services.

Microfinance is useful tool in building the capacity of the poor in management of

sustainable self employment opportunities.

It empowers the vulnerable sections of the society especially the women.

The transaction cost of banks and other financial institutions can be loweredsignificantly.

It is relevant that microcredit helps borrowers to overcome the poverty by

improving their financial and economic position.

Increase in savings reduces the dependence on external sources of funds and helps

in continuity and sustainability.

Create awareness regarding health care, sanitation, family planning, insurance,literacy, energy conservation, management of common resources etc.

Loans for income generation through market-based self employment empowering

poor and women especially.

Enabling the rural poor to participate, in planning and deciding their own destiny.


5/42

pg. 5

1.5 Principles of Micro Finance:

Poor people borrow frominformal moneylenders and save with informal

collectors. They receive loans andgrants fromcharities.They buy insurance from state-

owned companies. They receive funds transfers through formal or

informalremittance networks. It is not easy to distinguish microfinance from similar

activities. It could be claimed that a government that orders state banks to open deposit

accounts for poor consumers, or a moneylender that engages inusury,or a charity that

runs aheifer pool are engaged in microfinance. Ensuring financial services to poor people

is best done by expanding the number of financial institutions available to them, as well

as by strengthening the capacity of those institutions. In recent years there has also been

increasing emphasis on expanding the diversity of institutions, since different institutionsserve different needs.

Some principles that summarize a century and a half of development practice

were encapsulated in 2004 by CGAP and endorsed by theGroup of Eightleaders at the

G8 Summit on June 10, 2004.

Poor people need not just loans but also savings,insurance andmoney

transfer services.

Microfinance must be useful to poor households: helping them raise income, build

up assets and/or cushion themselves against external shocks.

"Microfinance can pay for itself."[18]Subsidies from donors and government are

scarce and uncertain and so, to reach large numbers of poor people, microfinance

must pay for itself.

Microfinance means building permanent local institutions.

Microfinance also means integrating the financial needs of poor people into a

country's mainstream financial system.

"The job of government is to enable financial services, not to provide them."

"Donor funds should complement privatecapital,not compete with it."
http://en.wikipedia.org/wiki/Informal_economyhttp://en.wikipedia.org/wiki/Grantshttp://en.wikipedia.org/wiki/Charitieshttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Heifer_Internationalhttp://en.wikipedia.org/wiki/Group_of_Eighthttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Group_of_Eighthttp://en.wikipedia.org/wiki/Heifer_Internationalhttp://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Remittancehttp://en.wikipedia.org/wiki/Charitieshttp://en.wikipedia.org/wiki/Grantshttp://en.wikipedia.org/wiki/Informal_economy


6/42

pg. 6

"The keybottleneck is the shortage of strong institutions and managers." Donors

should focus on capacity building.

1.6 Effects of microfinance

Comprehensive impact studies have demonstrated that:

Microfinance helps very poor households meet basic needs and protect against

risks;

The use of financial services by low-income households is associated with

improvements in households economic welfare and enterprise stability or growth;

By supporting womens economic participation, microfinance helps to empower

women, thus promoting gender-equity and improving household well-being;

For almost all significant impacts, the magnitude of impact is positively related to

the length of time that clients have been in the programme.

Poor people, with access to savings, credit, insurance, and other financial services

are more resilient and better able to cope with the everyday crises they face. Even

the most rigorous econometric studies have proven that microfinance can smooth

consumption levels and significantly reduce the need to sell assets to meet basic

needs. With access to micro insurance, poor people can cope with sudden

increased expenses associated with death, serious illness, and loss of assets.

1.7 Microfinance products

Offering financial services to poor people in developing countries is expensive

business. The cost is one of the biggest reasons why traditional banks dont make small

loans, the resources requierd for a 50$ loan is the same as for a 1000$ loan.

MFIs also have big personnel and administration costs. Field staff managers must

perform village surveys before entering a village, conduct interviews with potential

borrowers, educate the borrowers in credit discipline, travel to the villages every week to

collect interest and distribute loans and control that the loans are being used for the given

purpose.
http://en.wikipedia.org/wiki/Bottleneckhttp://en.wikipedia.org/wiki/Bottleneck


7/42

pg. 7

In the microfinance sector theres other services expanding as well. The poor need,

like all of us, a secure place to save their money and access to insurance for their homes,

businesses and health. Microfinance institutions are now innovating new products to help

meet these needs, empowering the worlds poor to improve their own lives. Products

common used in the microfinance sector today is:

Micro savings:

A possibility to save money without no minimum balance. Allows people to retain

money for future use or for unexepected costs. In SHGs the members save small amounts

of money, as little as a few rupees a month in a group fund. Members may borrow from

the group fund for a variety of purposes ranging from household emergencies to school

fees. As SHGs prove capable of managing their funds well, they may borrow from a local

bank to invest in small business or farm activities. Banks typically lend up to four rupees

for every rupee in the group fund;

Micro insurance:

Gives the entrepreneurs the chance to focus more on their corebusiness which

drastically reduces the risk affecting their property, health or workingpossibilities. The isdifferent types of insurance services like life insurance, property insurance, healt

insurance and disability insurance. The spectrum of services in this sphere is constantly

expanded, as schemes and terms of providing insurance services are determined by each

company individually;

Micro leasing:

For entrepreneurs or small businesses who cant afford buy at full cost they caninstead lease equipment, agricultural machinery or vehicles. Often no limitations of

minimum cost of the leased object.


8/42

pg. 8

Money transfer:

A service for transferring money, mainly overseas to family or friends. Money

transfers without opening current accounts are performed by a number of commercial

banks through international money transfer systems such as Western Union , Money

Gram, and Anelik. On the surface they may seem like small money transfers, but when

one considers that such transactions take place millions of times around the world each

week, the numbers start to become impressive. According to the World Bank, the annual

global market for remittances money transferred home from migrant workers is

around 167 billion US dollars. The estimated total is closer to 230 billion dollars if one

counts unregulated transactions. Remittances are also an important source of income for

many developing countries including India, China and Mexico, all of which receive over20 billion dollars each year in remittances from abroad.

1.8 Use of Finance in Different Fields:

POVERTY:

Microfinance has emerged as one of the most effective instruments of fighting

poverty. The Kushali Bank, which is now entering third year of its operations, has opened

branches in 35 districts. So far it has disbursed RS.1.3 billion to about 75,000 poor

borrowers. Branches of Khushali Bank will be opened in all the districts of the country.

Pakistan poverty Alleviation Fund (PPAF), which was set-up to provide wholesale credit

to microfinance institutions, including NGOs, has significantly, increased overall lending.

So far it has provided loans of about rs.860 million for on lending to beneficiaries

through various NGOs in all parts of the Pakistan.

FINANCIAL DEVELOPMENT AND POVERTY ALLEVIATION

A central aspect of this programme is the development and transformation of the

financial sector. Financial sector development is critical because access to financial

services is an important factor in the vulnerability to extreme poverty.


9/42

pg. 9

A large amount of research and practice has shown that the permanent deepening of

financial markets to provide access to the poor can achieve the following outcomes:

Economic growth and job creation can be stimulated, as small business

development and access to housing finance generates new cycles of accumulation

and contributes to higher levels of effective demand.

Poverty can be reduced, as access to finance, in the form of savings and credit in

the hands of the poor, can enable them to build assets; while these and other

services, such as insurance, can play a vital role in smoothing the income of the

poor, and so reducing their vulnerability to financial and economic shocks.

These factors are key in building viable communities and contributing to the

sustainable livelihood strategies of poor households.

1.9 Challenges and Opportunities of Micro Financing:

The government has indicated its willingness to speed up the pace of structural

reforms to meet the major challenges of micro financing-

Reducing Poverty:

The basic motto of the government to eliminate the poverty and bring prosperity

in country. MFI providing small loans and other credit facilities to the poor and

low-income groups; which are beginning positive changing like their standard of

living group and earning have increased.

Improving Social Indicators:

Inadequate access to productive resources and social services has resulted low

social indicators and low employment opportunities. This situation is

compounded in rural areas; where access is more difficult. So, by providing small

loans and credit facilities they can overcome this issue and can improve social

indicators.


10/42

pg. 10

Improving The Fiscal Balance Of Payment Position:

Pakistan is a poor country whose balance of payment always in deficit, because

of low productivity, lack of resources and lack of productive mens power. If MFI

provide loans new business can be established. And exports that can be improved

which create balance of payment.

Restoring Investor Confidence:

Due to economy investors are hesitating to invest their money but MFIs can

boost up. Because provide loans to local people new business will stable.

Economy will go up and this situation may motivate to them for investing their

funds

Achieving higher growth on a sustainable basis:

Another objective of MFI is that to achieve high development and bring

innovation in the economy, which improve GDP of the country and give

sustained to the economy.


11/42

pg. 11

Chapter 2 : Introduction of Micro Finance Institutions

2.1 Micro Financial Institutions

Poverty is the main cause of concern in improving the economic status of

developing countries. A microfinance institution is an organization that offers financial

services to low income populations. Almost all give loans to their members, and many

offer insurance, deposit and other services.

A great scale of organizations is regarded as microfinance institutes. They are

those that offer credits and other financial services to the representatives of poor strata of

population (except for extremely poor strata).

Microfinance is increasingly being considered as one of the most effective tools

of reducing poverty. Microfinance has a significant role in bridging the gap between the

formal financial institutions and the rural poor. The Micro Finance Institutions (MFIs)

accesses financial resources from the Banks and other mainstream Financial Institutions

and provide financial and support services to the poor.

Various types of institutions offer microfinance: credit unions, commercial banks,NGOs (Non-governmental Organizations), cooperatives, and sectors of government

banks. The emergence of for-profit MFIs is growing. In India , these for-profit MFIs

are referred to as Non-Banking Financial Companies (NBFC). NGOs mainly work in

remote rural areas thereby providing financial services to the persons with no access to

banking services.

The term transformation, or commercialization, of a microfinance institution

(MFI) refers to a change in legal status from an unregulated nonprofit or non-

governmental organization (NGO) into a regulated, for-profit institution. Regulated,

transformed organizations differ from nonprofits in that they are held to performance and

capital adequacy standards and are supervised by a financial authority, typically the

central bank of the country where they are registered. A transformed MFI also attracts


12/42

pg. 12

equity investors. The equity investors want to ensure that the values of their investments

are maintained or enhanced and elect Board members who share a common vision for the

new for-profit institution.

Among transformed MFIs, varying classifications of regulated institutions exist,

the strictest being banks rural banks and thrift banks followed by non-bank

financial institutions. Different countries have varied names for these regulated MFIs.

The microfinance sector consistently focuses on understanding the needs of the

poor and on devising better ways of delivering services in line with their requirements,

developing the most efficient and effective mechanisms to deliver finance to the poor.

Continuous efforts towards automation of operations is steady improving in efficiency.

The automated systems have also helped accelerate the growth rate of the microfinance

sector.

The goal for MFIs should be:

To improve the quality of life of the poor by providing access to financial and support

services;

To be a viable financial institution developing sustainable communities;

To mobilize resources in order to provide financial and support services to the poor,

particularly women, for viable productive income generation enterprises enabling them to

reduce their poverty;

Learn and evaluate what helps people to move out of poverty faster;

To create opportunities for selfemployment for the underprivileged;

To train rural poor in simple skills and enable them to utilize the available resources and

contribute to employment and income generation in rural areas.


13/42

pg. 13

A microfinance institution (MFI) is an organisation that provides microfinance

services, ranging from small non-profit organisations to large commercial banks.

FORMAL INSTITUTIONS

1. Khushali Bank

2. The First Micro Finance Bank Ltd

3. Network Micro Finance Bank

1.Khushali bank

Khushali Bank is the countrys first initiative to bridge the demand for

microfinance services. Integral to microfinance services is the intensive and sustained

social support for mobilization, management and development of all clients of the bank

and their access to basic infrastructure services.

As a for-profit, commercial microfinance institution, our purpose is to:

Establish a sustainable, scalable pro-poor financial services platform with retail

delivery capacity to reach 600,000 poor households by the 2006.

Catalyze an enabling environment, with which the microfinance sector can

develop in Pakistan. Assist the central bank in setting up an appropriate and responsive regulatory

framework within which microfinance institutions can operate on sustainable

grounds, thereby expanding outreach to the poor.

Promote tranperancy, financial rigor and good governance as leading indicators of

excellence within the microfinance sector.

2.The First Micro Finance Bank Ltd.

Almost 60-70% of the population in Pakistan is deprived of financial services

with the majority of them being poor. The management of FMFB believes that this large


14/42

pg. 14

segment of the population is very much bankable and access to microfinance services can

bring substantial positive change in their lives.

FMFB is looking ahead to cover as many of this poor segment of the population

through its microfinance services with a major focus on women the service which are

being provided by this bank are:

Microfinance Intermediation - Loan products, Saving products, Micro Insurance

Products and other Financial Services;

Social Intermediation - Group formation for building human and social capital

for sustainable financial intermediation;

Enterprise Development Services - Non-financial services that assist micro

entrepreneurs;

Social Services Non financial services that focus on wellbeing of micro

entrepreneurs. This includes health, nutrition, education and literacy training.

3.Network Micro Finance Bank

The MFN has played an important role in helping the industry develop and

improve upon key issues in microfinance. This special group of institutions is committed

to transparency in their operations, thus advancing the standards of performance inmicrofinance. Through their vision an drive to provide the best services possible to the

working poor, the members of the Microfinance Network are playing a fundamental role

in revolutionizing the process of poverty alleviation. By providing microfinance

practitioners and institutions with a forum for information exchange to take place.

2.2Fundamentals of micro financing

The managers at the MFIs are careful to ensure the borrower success and informs aboutthe risks involved, that makes in general the borrower performing better. This leads often

to earned dignity and lasting self-confidence associated with responsible loan repayment.

To have a sustainable growing economy it takes high entrepreneurship and energy in

order to develop the world and fight poverty. Independet and responsible entrepreneurs


15/42

pg. 15

are valuable resources which can take advantage of the microfinance industry. They will

not take big risks and must be supported by predictable financing.

Normal bankoperations suits better to large transactions which is more profitable, the

traditional operating philosophy is to invest in facilities and they have costly operating

structures. The traditional financing industry must either change themselves or stay out of

the microfinance business. A new generation of banking institutions is growing in a

market of very small transactions and less affluent clients. With lowered transactions

costs through institutional specialization and innovation in delivery systems, they will be

able to operate profitable in this market serving the poor with financial services.

The poor entrepreneurs are the future representing the population who will become

successful in the nearby future. They have the same will and skills as the toughest

business operators. The are economical, dont take big risks and repay debts as scheduled

to maintain possibility borrowing money in the future.

This require a totally new ground breaking banking system with scale economics.

Modifying the standard system will simply not be enough, the poor people will continue

stay outside their countrys economy. Building up microfinance institutions serving poor

people is a relatively costeffective use of subsidies for economic development comparedto other supporting strategies for welfare.

2.3 Stages In Microfinance:

Micro-finance programs and their need for funds can be considered in three stages of

their growth. They are;

Start up stage

Scaling up stage and

Sustainable stage

Start up stage


16/42

pg. 16

This is stage when one faces the real test of starting everything from scratch;

identifying and organizing the poor, learning the techniques, raising fund, recruiting and

training staff, providing credit, mobilizing saving, avoiding default, setting discipline and

creating a foundation for growth. At this stage, the initial funding may come from the

pocket of the one who is initiating the project, or from other as donation or equity. It may

also come from organizational source like donors, social investor, development

foundations etc.

Scaling up the stage

Scaling up stage may be understood in both narrow and broad senses. In narrow sense it

may initially be the scaling up of branch operations, and the going for institutional

scaling up on branch by branch level. In broad sense it may be scaling up of operations

on fast track approach. Operating a number of branches at a time, recruiting all the staff

at the beginning and developing them as professionals to undertake the challenging task

operating on sustainable basis.

Scaling up of funds may be generated from different sources like equity, grants, savings,

social investors, apex institutions, whole sale funds, foundations, banks and other

sources.

Sustainable stage

A sustainable operation is a precondition for maximizing the outreach and optimizing the

impact on poverty reduction. To operate on a basis, a minimum scale of operation in

terms of outreach, amount of loan outstanding; loan loss reserve, accumulated profits and

saving balance is needed.

2.4 Microfinance Industry Structure


17/42

pg. 17

Financial institutions-

Many banks and financial institutions have been pioneering the microfinance program.

They are listed through the MFIs.

Donors-

Donors focused on providing subsidized credit to small and marginal farmers, in hopes of

raising productivity and incomes through the MFIs.

Private Equity-

Highest interest and repayment rates make MFIs profitable. Private equity investments

MFIs are leads to increase in investment flow. Private equity firms have shown particular

interest in investing in MFIs in which they see possibility f good returns.

Microfinance institutions-

Microfinance institutions can broaden their resources base by mobilizing savings,

accessing capital markets, loan funds and effective institutional development support

through SHGs. microfinance institutions could not also serve as intermediaries between


18/42

pg. 18

borrowers and the formal sector and on-lend funds backed by a public sector guarantee

MFI around the world follow a variety of different methodologies for the provision of

financial services to low income families

Self Help Groups (SHGs)-

Self Help Groups (SHGs) form the basic constituent unit of the microfinance movement

in India. An SHG is a group of few individuals- usually poor and often women- who pool

their savings into a fund from which they can borrow as when necessary. Such a group is

linked with bank- a rural, cooperative or commercial bank through MFIs- where they

maintain the group account. They provide their service to group of poor people.

2.5 Microfinance Problems- Challenges for Micro Entrepreneurs

Although the important of microfinance in the process of poverty eradication is realized,

it faces multiple problems. Offering financial services to people individual (the definition

of microfinance) is a complex process and that in itself leads to various challenges.

All these challenges divided into two sets; problem faced by micro entrepreneurs (this

article) and problems/challenges faced microfinance providers (another article).

1)

The poors inability to offer marketable collateral for loansMicrofinance clients are either very small businesses or poor individuals who

usually have a few assets, non-existent credit histories, and low income levels.

This problem because it means these clients have cannot offer any collateral to

microfinance providers against loans. As a result, microfinance institutes (MFIs)

may either raise their interest rates or turn down hundreds of applications (read

10 determinants of interest rates in microfinance).

2)

Lack of knowledge about sources of microfinance servicesMany micro entrepreneurs live in far off rural areas, often remote villages,

which is a problem because it means they have no access to microfinance

services offered by MFIs. This issue was also mentioned in the article about

challenges faced by microfinance providers, because has a natural consequence;

loan providers cannot target these potential clients.


19/42

pg. 19

3) Shortage of Financial Capitalor Misallocation

Under 10 million of the 500 people who run micro and small enterprises have

access to financial support for their business. Data Snapshot, The Virtual Library

on Microcredit.

As a result of the above three problems, a fourth arises for micro entrepreneurs- a

lack of funds, which can be solved if MFIs build up their capital base by

accessing various sources of funds. Without money the micro ventures cannot

grow and take advantage of opportunities. Since, 20% of the worlds population

accounts for 86% of consumption (Global Issues Websites), one can deduce that

the problem isnt related to the shortage, but rather, misallocation of funds.

4) Inability to exploit growth opportunities

The last point is a contributor t this problem, because a lack of access to funds

means micro entrepreneurs cannot inject money into their business (say, to

buymore resources or hire more people) to grow them after observing a surge in

demand. Moreover, the remote location of micro businesses means they have litte

information pertaining to their markets, such as customer needs and competitor

strength and weaknesses and so on. As a result, many critics may find faults with

the idea of microfinance, not realizing that this isnt really a problem, but just a

challenge that can be overcome as the business grows and increase its capital

base.

5) Few organizational resources and poor governance

Micro entrepreneurs have limited skills, qualifications and exposure to

handling businesses, while they need to be trained through capacity building

initiatives by th MFIs, many micro entrepreneurs may not grow as plannedbecause of these problems. For instance, they may borrow more money than

needed, or mis-allocate it in their business and end up bearing the burden of large

interest payments instead of enjoying the fruits of their business. Again, critics

may say microfinance is an ineffective way of alleviating poverty but this isnt


20/42

pg. 20

true. The flip side of this problem is linked to the governance issues faced by

MFIs, which is discussed in the first part of this article.

6) Low bargaining power

In case micro entrepreneurs operate in competitive markets, their individual

bargaining power is diminished when dealing with customers because of their small size.

However, at the other end of spectrum, there still isnt respite because micro

entrepreneurs deal with MFIs on an individual basis, which also erodes their bargaining

power. This isnt really a problem for microfinance, but rather micro entrepreneurs.

2.6 Working Method For Microfinance Institutions:

The Grameen Bank of Bangladesh has developed a joint liability model that its MFIs are

using suited for local conditions.

When choosing a village the MFI conduct a comprehensive survey to brief the potential

for operations and the local conditions in a village. The MFI are evaluating some key

factors like village population, degree of poverty, road accessibility, political stability and

safety. When a village has been selected, the MFI introduces its mission, methodology

and the services they are offering.

After the informational presentation interested women are gathered in group formations.

They have to be in the age between 18 and 59. The women put them self together in

groups of five to serve as guarantors for each other. Earlier experience has shown that a

group of five persons is small enough to create group pressure between the members,

enforcing them to be loyal to each other. In case someone of the group members are not

able to repay the loan the group is big enough to help with the payments. The company

does not influence the selection of group members nor the decision regarding the income

generation activity nor the loan amount they intend to take. Group members must live

close to each other and cannot be related to each other.


21/42

pg. 21

If a borrower defaults on her loan, the entire group

typically is penalized and sometimes barred

altogether from taking further loans. This peer

pressure encourages borrowers to be very selective

about their peer group members and to repay loans in

full and on time.

Then the group training begins, usually as a five day program. The purpose is to educate

the members in the procedures of the financial products, delivery methods, calculation of

interest rates, business development skills and how to sign their names. The members are

also taught in quality management, to identify an income generation activity, how to set

prices and how to market. They field staff also build a culture of credit discipline and

collective responsibility. The field staff makes sure the members qualifies for the

program and collect data for future analysis. Within the village, a center is created

collecting the groups. The center is responsible for the payments of all groups, enabling a

dual liability system. When the villagecenter is created the financial transactions can

begin.

The groups meet weekly in the villagecenter where they can discuss new loan

applications, loan utilization, and community issues. The field staff of the MFIs conduct

the meetings with rigid discipline in order to sustain the credit discipline of the group. All

financial transactions are conducted during the meetings.

Microfinance is a relatively new segment of the market economy that is why institutions

created in this segment have short experience in their activities, and their personnel is not

sufficiently experienced and qualified. Taking this into consideration, staff of these

institutes is recommended to follow the internationally recognized principles of

microfinance:

thorough examination of potential clients of the microfinance institution;

thorough estimation of business viability and also factors which can positively or

negatively affect the results of work in specific conditions;


22/42

pg. 22

thorough registration of documents and contracts related to loan issuance and

microfinance services providing;

keep in touch with client in combination with monitoring of the terms of paying a

credit, interests payments and with the aim to find out potential and real problems;

setting of interest rates for microfinance services compatible with market ones;

quick reaction to any problems which can complicate the perspectives of getting

of issued credit payed back.

2.7 Using IT and technology to reach scale in Microfinance

A key factor to be more successful in scaling the microfinance industry efficient is to usethe power of IT technologies which already thousands of MFIs recognized. Technology

is essential to reach new people, controlling risks make the business sustainable and more

effective due to the costs. With mobile phones, ATM machines and other new

innovations the possibilities are unlimited to provide financial services more efficient to

poor people. Once improved the technology more unbankable are reached. Despite the

big potential, there are still not enough MFIs reaching scale.

Access to affordable telecommunications simply does not exist for millions in the

developing world. For some, placing a phone call can require traveling over six


23/42

pg. 23

miles from their homes. This can mean leaving work and losing out on

desperately needed income. Cut off from easy access to communications, these

communities are at both an enormous economic and social disadvantage

Tool using in MFIs.

Point Of Sale (POS) terminals can be computers, bank card readers or even mobile

phones. Already many MFIS are using those tools to conduct business with their clients.

POS terminals enables money transfers, bank transactions from balance inquiries, bill and

loan payment, cash withdrawal and deposits.

Using POS terminals Is much more cheaper than building brick and mortar

branches everywhere in order to reach the huge demand. Although they need staff

to operate the terminal, its cheaper than staff a bank office. The technology is

already something we can use today, it does not have to be innovated. The mobile

phone is the most used tool today, villages that dont even have a telephone line

now can be reached. Thats why the most applications for microfinance also are

innovated to work together with mobile phones. Solar energy systems aredeveloped to charge the mobile phones in the villages where they even lack

traditional power grid


24/42

pg. 24

ACCION International are using a system called PortaCredit and the Mifa

system innovated by Grameen aiming to make heavybusiness transactions to

clients cost less and be more efficient.

While the client always in the end have to pay for all costs, microfinance need to

bring costs down even though its enabling and empowering with personal contact

with the clients. Their time has to be used effective to improve the process. MFIs

want to provide their financial services to clients with the same quality of

products and services that clients receive from other service providers.

2.8 Micro Financial Institution Grading Scheme:

NABARD in partnership with CRISIL (credit rating information services of India Ltd.)-

lending credit rating institution in India) has developed a methodology for grading the

MFI and NGOs which have microfinance programmers among their key activities. The

main objective of this initiative of NABARD is to facilitate increased flow of bank credit

to MFI in India. Under the scheme NABARD would reimburse 75% of the professional

fees paid by scheduled commercial bank to CRISIL for obtaining grading of an MFI.

Benefits of Grading

Grading helps MFI in accessing cost effective funds from banks/FIs and also get

donations from donors.

It helps MFIs in identifying their weakness and take suitable measures to improve

upon.

Banks can increase their wholesale on- lending to MFIs which is not similar to

other lending scheme of the banks.

Grading scale

CRISILs grading is a current opinion on the ability of an MFI to conduct its operations

in a scalable and sustainable manner. It is a measure of the overall performance of an

MFI based on broad range of parameters under CRISILs MICROs framework.


25/42

pg. 25

This grading does not signify about the timely repayment of loans by MFI. It is also not a

recommendation to purchase, sell or hold any debt instrument issued by MFI. The

grading does not involve audit by CRISIL. The grading should not be used by MFIs in

their external communication.

2.9 MFIs Focus on Women:

Microfinance programs have generally targeted poor women.

By providing access to financial services only through women-making women

responsible for loans, ensuring repayment through women, maintaining savings accounts

for women, providing insurance coverage through women-microfinance programs send a

strong message to households as well as to communities. It also has been observed that

giving women the control and the responsibility of small loans raises their socio-

economic status, which is seen as a positive change to many of the current relationships

of gender and class.

The most important means of achieving improvement in the status of women would be to

secure for them a fare share of employment opportunities. A major step to be taken to

promote female employment would be to expand and diversify the education and training

opportunities available to women.

The women in rural areas can undertake

Handicrafts, horticulture, floriculture, poultry, bee-keeping, Seri-culture, seed bank,

cultivation of medicine plants, sheep keeping, etc. Such societies are of immense benefits

to women as they get employment and render services to needy women.

Many microfinance institutions are focus completely on women borrowers. Like pro.

Mujer, SKS microfinance etc.

2.10 Role of Apex Financial Institutions in Microfinance

Since the emergence of microfinance sector in India, role of AFIs has become significant.


26/42

pg. 26

NABARD initiated the process of microfinance in India through linkage programme of

SHGs under Automatic Refinance Scheme.

SIDBI is second important player in microfinance, providing bulk lending to MFIs.

RMK is the third player providing loans to NGOs for on lending to the women SHGs.

These are the major AFIs in India. Each has different approach in Microfinance sector.

While NABARDs emphasis is entirely on SHGs linkage programme by mobilizing their

own savings also, SIDBI is focusing on building and creating larger MFIs and RMK is

money to smaller NGOs as well. Taking into consideration the growth and potential of

microfinance sector in India, other organization and international agencies have also

made their entry in microfinance sector by providing loans and grants to NGOs for

different income in the service delivery projects of social development.

The important names among them are:-

HUDCO,

NBCFDC (National Backward Classes Finance Development Corporation),

National Handicrafts Development Corporation (NHDC),

OXFAM (Oxford Committee for Famine & Relief),

IDA ( Canadian International Development Agency),

Action aid,

CARE India

International Fund for Agriculture Development (IFAD),

UNDFEM ( United Nations Development Fund for Women),

British Department of Foreign and International Development (DFID)


27/42

pg. 27

CHAPTER 3: MICRO FINANCE SYSTEM

3.1 Microcredit

The word "microcredit" did not exist before the seventies. Now it has become a buzz-

word among the development practitioners. In the process, the word has been imputed to

mean everything to everybody. No one now gets shocked if somebody uses the term

"microcredit" to mean agricultural credit, or rural credit, or cooperative credit, or

consumer credit, credit from the savings and loan associations, or from credit unions, or

from money lenders. When someone claims microcredit has a thousand year history, or a

hundred year history, nobody finds it as an exciting piece of historical information.

I think this is creating a lot of misunderstanding and confusion in the discussion aboutmicrocredit. We really don't know who is talking about what. I am proposing that we put

labels to various types of microcredit so that we can clarify at the beginning of our

discussion which microcredit we are talking about. This is very important for arriving at

clear conclusions, formulating right policies, designing appropriate institutions and


28/42

pg. 28

methodologies. Instead of just saying "microcredit" we should specify which category of

microcredit.

Let me suggest a broad classification of microcredit :

Classification can also be made in the context of the issue under discussion. I am arguing

that we must discontinue using the term "microcredit" or "microfinance" without

identifying its category.

A) Traditional informal microcredit (such as, moneylender's credit, pawn shops, loans

from friends and relatives, consumer credit in informal market, etc.)

B) Microcredit based on traditional informal groups (such as, tontin, su su, ROSCA,

etc.)

C) Activity-based microcredit through conventional or specialised banks (such as,

agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)

D) Rural credit through specialized banks.

E) Cooperative microcredit (cooperative credit, credit union, savings and loan

associations, savings banks, etc.)

F) Consumer microcredit.

G) Bank-NGO partnership based microcredit.

H) Grameen type microcredit or Grameen credit.

I) Other types of NGO microcredit.

J) Other types of non-NGO non-collateralized microcredit.

3.2 Impact of Micro credit

The impact of microcredit is a subject of much controversy. Proponents state that it

reduces poverty through higher employment and higher incomes. This is expected to lead

to improved nutrition and improved education of the borrowers' children. Some argue


29/42

pg. 29

that microcredit empowers women. In the US and Canada, it is argued that microcredit

helps recipients to graduate from welfare programs.

Critics say that microcredit has not increased incomes, but has driven poor households

into adebt trap, in some cases even leading to suicide. They add that the money fromloans is often used for durable consumer goods or consumption instead of being used for

productive investments, that it fails to empower women, and that it has not improved

health or education.

The available evidence indicates that in many cases microcredit has facilitated the

creation and the growth of businesses. It has often generated self-employment, but it has

not necessarily increased incomes after interest payments. In some cases it has driven

borrowers into debt traps. There is no evidence that microcredit has empowered women.

In short, microcredit has achieved much less than what its proponents said it would

achieve, but its negative impacts have not been as drastic as some critics have argued.

Microcredit is just one factor influencing the success of small businesses, whose success

is influenced to a much larger extent by how much an economy or a particular market

grows.

3.3Grameen credit:

Whenever I use the word "microcredit" I actually have in mind Grameen type microcredit

or Grameencredit. But if the person I am talking to understands it as some other category

of microcredit my arguments will not make any sense to him. Let me list below the

distinguishing features of Grameencredit. This is an exhaustive list of such features. Not

every Grameen type programme has all these features present in the programme. Some

programmes are strong in some of the features, while others are strong in some other

features. But on the whole they display a general convergence to some basic features on
http://en.wikipedia.org/w/index.php?title=Debt_trap&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Debt_trap&action=edit&redlink=1


30/42

pg. 30

the basis of which they introduce themselves as Grameen replication programmers or

Grameen type programmes.

Grameen brought credit to the poor, women, the illiterate, the people who pleaded that

they did not know how to invest money and earn an income. Grameen created a

methodology and an institution around the financial needs of the poor, and created access

to credit on reasonable term enabling the poor to build on their existing skill to earn a

better income in each cycle of loans.

If donors can frame category wise micro credit policies they may overcome some of their

discomforts. General policy for microcredit in its wider sense, is bound to be devoid of

focus and sharpness.

General features of Grameencredit are:

It promotes credit as a human right.

Its mission is to help the poor families to help themselves to overcome poverty. It

is targeted to the poor, particularly poor women.

Most distinctive feature of Grameencredit is that it is not based on any collateral

or legally enforceable contracts. It is based on "trust", not on legal procedures and

system.

It is offered for creating self-employment for income-generating activities and

housing for the poor, as opposed to consumption.

It was initiated as a challenge to the conventional banking which rejected the poor

by classifying them to be "not creditworthy". As a result it rejected the basic

methodology of the conventional banking and created its own methodology.

It provides service at the door-step of the poor based on the principle that the

people should not go to the bank, bank should go to the people. In order to obtain loans a borrower must join a group of borrowers.

Loans can be received in a continuous sequence. New loan becomes available to a

borrower if her previous loan is repaid.

All loans are to be paid back in installments (weekly, or bi-weekly).


31/42

pg. 31

Simultaneously more than one loan can be received by a borrower.

It comes with both obligatory and voluntary savings programmes for the

borrowers.

Grameencredit gives high priority on building social capital. It is promoted

through formation of groups and centers, developing leadership quality through

annual election of group and centre leaders, electing board members when the

institution is owned by the borrowers. To develop a social agenda owned by the

borrowers, something similar to the "sixteen decisions", it undertakes a process of

intensive discussion among the borrowers, and encourages them to take these

decisions seriously and implement them. It gives special emphasis on the

formation of human capital and concern for protecting environment. It monitorschildren's education, provides scholarships and student loans for higher education.

CHAPTER 4: MICRO FINANCE AND BANK

4.1Micro Finance on the Indian Subcontinent:

Loans to poor people by banks have many limitations including lack of security and high

operating costs. As a result, microfinance was developed as an alternative to provide

loans to poor people with the goal of creating financial inclusion and equality.


32/42

pg. 32

Muhammad Yunus, a Nobel Prize winner, introduced the concept of Microfinance in

Bangladesh in the form of the "Grameen Bank". TheNational Bank for Agriculture and

Rural Development (NABARD) took this idea and started the concept of microfinance in

India. Under this mechanism, there exists a link betweenSHGs (Self-help

groups),NGOs and banks. SHGs are formed and nurtured by NGOs and only after

accomplishing a certain level of maturity in terms of their internal thrift and credit

operations are they entitled to seek credit from the banks. There is an involvement from

the concerned NGO before and even after the SHG-Bank linkage. The SHG-Bank

linkage programme, which has been in place since 1992 in India, has provided about 22.4

lakh for SHG finance by 2006. It involves commercial banks, regional rural banks

(RRBs) and cooperative banks in its operations.

Microfinance is defined as, financial services such as savings accounts, insurance funds

and credit provided to poor and low income clients so as to help them increase their

income, thereby improving their standard of living.

In this context the main features of microfinance are:

Loan given without security

Loans to those people who live below the poverty line

Members of SHGs may benefit from micro finance

Maximum limit of loan under micro finance 25,000/-

Terms and conditions offered to poor people are decided by NGOs

Microfinance is different from Microcredit- under the later, small loans are given to

the borrower but under microfinance alongside many other financial services

including savings accounts and insurance. Therefore microfinance has a wider

concept than microcredit.

In June 2014, CRISIL released it's latest report on the Indian Microfinance Sector titled

"India's 25 Leading MFI's".[38]This list is the most comprehensive and up to date

overview of the microfinance sector in India and the different microfinance institutions

operating in the sub-continent.
http://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/Self-help_group_(finance)http://en.wikipedia.org/wiki/Non-governmental_organizationhttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Microfinancehttp://en.wikipedia.org/wiki/Non-governmental_organizationhttp://en.wikipedia.org/wiki/Self-help_group_(finance)http://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/National_Bank_for_Agriculture_and_Rural_Developmenthttp://en.wikipedia.org/wiki/Muhammad_Yunus


33/42

pg. 33

4.2 The Role of NGOs in Micro Finance

Self Help groups are almost always formed with outside assistance.

Development NGOs, often with considerable history of working in a particular area for

projects like literacy, sanitation etc., take to organizing SHGs, bringing together people,

explaining the concept to them, attending and helping coordinate a few of the initial

group meetings, helping them maintain accounts and linking them with the banks. Of

late, some of the rural banks themselves are being designated and nursing of SHGs.

Country-level breakdown of SHGs are formed by government agencies about 60% of

government-formed SHGs come from a single state, Andhra Pradesh, where the state

government has played a very pro-active role in SHG planning.

Over the last quarter century, a few organizations, outside the preview of the public

sector alleviation through micro-credit.

Self Employed Womens Association (SEWA) in the Western Indian state of Gujarat and

working Womens Forum in the southern state of Tamil Nadu were among th e pioneers

in the effort. The sector received a major boost in the 1990s with the entry of several non-

government organizations (NGOs). Many of these NGOs have been previously

functioning in different developmental roles among the poor, and now added microcreditto the list of services they provide .A few others, impressed by the success of

microfinance elsewhere, started off as MFIs. Self-Help Groups (SHGS) among the poor,

mostly women, have rapidly become a common rural phenomenon in many Indian states.

4.3 Role of NABARD In Microfinance:

SHG-banks linkage programmes have been put in place.

Refinancing banks/FIs who have lent microfinance.

Arranging Training Programmes to spread the concept and utility of

Microfinance


34/42

pg. 34

Provide technical support to banks to evolve suitable intermediate structures like

Farmers clubs.

Supports and helps banking institutions to take on the role of SHPIs.

Co-ordinates the microfinance efforts in India by organizing

international/national workshops, seminars and NGOs. Etc.

Identification of matured SHGs for promotion of enterprises.

4.4 Micro Finance And Social Intervention

There are currently a few social interventions that have been combined with micro

financing to increase awareness of HIV/AIDS. Such interventions like:

"Intervention with Microfinance for AIDS and Gender Equity" (IMAGE) which

incorporates micro financing with "The Sisters-for-Life" program a participatory program

that educates on different gender roles, gender-based violence, and HIV/AIDS infections

to strengthen the communication skills and leadership of women

"The Sisters-for-Life" program has two phases where phase one consists of ten one-hour

training programs with a facilitator with phase two consisting of identifying a leader

amongst the group, train them further, and allow them to implement an Action Plan to

their respective centres.

Microfinance has also been combined with business education and with other packages

of health interventions. A project undertaken in Peru byInnovations for Poverty

Action found that those borrowers randomly selected to receive financial training as part

of their borrowing group meetings had higher profits, although there was not a reduction

in "the proportion who reported having problems in their business".
http://en.wikipedia.org/wiki/Innovations_for_Poverty_Actionhttp://en.wikipedia.org/wiki/Innovations_for_Poverty_Actionhttp://en.wikipedia.org/wiki/Innovations_for_Poverty_Actionhttp://en.wikipedia.org/wiki/Innovations_for_Poverty_Action


35/42

pg. 35

CHAPTER 5: MICRO FINANCE SERVICES

5.1Services Provide By Micro Finance Banks

So many services provide by MFI. Providing loans; car financing; home financing,

persoonel loans, Taleemi loans.

Providing loans:

The important service is provided by MF is given loan. These loans are provided

from some productive activities like; starting new business, expansion of

business; improving life etc.

Car Financing:

MFI also assist those people who cannot pay total amount at once. So, these MFI

gave them car on instalments like UBL car financing scheme is too popular and

too many people taking advantage from this scheme.

Home Financing:

Pakistan is a poor country. Purchasing power of Pakistan is very low. So many

people are living on rent. They cannot have too many amounts to purchase homes.

MFIs provide loans be considering their job stability and take security for it.

Personnel Loans:

MFI also obtain personnel loans. Those people who have permanent employment

and stable jobs. This credit facility depends on the income of an individual.


36/42

pg. 36

CHAPTER 6: WEAKNESSES AND STRENGTHS

6.1Weakness:Theres not much research done on the actual effectiveness of microfinance as a tool for

economic growth. Some argue that theres too much focus on microfinance which will

motivating less spending in other helping assistances as public health, welfare, and

education.

Some are doubting microfinance really have those impacts on poverty as the practioners

would submit. Other describes micro crediting as a privatization of public safety net

programs. Theres also some microfinance institutions charging excessive interest rates.

Questions against the Grameen Bank were raised in a Wall Street Journal article. It was

regarding the repayment rate, collection methods and questionable accounting practices.

Studies of microcredit programs have found that women often act as collection agents for

their husbands and sons, such that the men spend the money themselves while women are

saddled with the credit risk. Some borrowers have become dependent on loans for

household expenditures rather than capital investments.

The key debate about microfinance is whether it should focus on improved welfare or

financial sustainability. The two different approaches are usually named as poverty

lending or the welfarist approach and the institutionist approach or financial

system approach. The welfarist approach could be for example supplying the customer

with education and health wilst the institutionists focus only on the financial service. The

reason for that is only with total focus on financial sustainability the huge demand can be

met. MFIs with the welfarist approach are for example the Grameen Bank and Womens

World Banking. Examples of institutionists are ACCION International and BRI UnitDesa.

6.2 Strength


37/42

pg. 37

The biggest strength is bringing financial services to poor people and making it financial

sustainable by the economies of scale effect. In India the National Bank for Agriculture

and Rural Development (NABARD) finances more than 500 banks that on lend funds to

self help groups (SHG). SHGs comprise twenty or fewer members, of whom the majority

is women from the poorest castes and tribes. Nearly 1.4 million SHGs comprising

approximately 20 million women now borrow from banks, which make the Indian SHG-

Bank Linkage model the largest microfinance program in the world. Similar programs are

evolving in Africa and Southeast Asia with the assistance of organizations like

Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also

helps in the development of an economy by giving everyday people the ance to establish

a sustainable means of income. Eventual increases in disposable income will lead to

economic development and growth.

6.3 Benefits and Limitations

The benefits of microfinance are that it helps to manage the assets of the poor and

generates income. Through microfinance institutions such as credit unions, financial non-

governmental organizations and even commercial banks poor people can obtain small

loans and safeguard their savings. The limitations of microfinance are that through this

savings plan participants are losing money by having to pay a fee. The user can also pay

back their loans whenever they chose therefore encouraging a borrower to have various

outstanding loans. The lender is also vulnerable in that there is no guarantee of the loan

being repaid in the given arranged timeframe, and the consequences to defaulting are not

defined.

The benefits of microfinance are that it helps to manage the assets of the poor and

generates income. Through microfinance institutions such as credit unions, financial non-

governmental organizations and even commercial banks poor people can obtain small

loans and safeguard their savings. The limitations of microfinance are that through this

savings plan participants are losing money by having to pay a fee. The user can also pay

back their loans whenever they chose therefore encouraging a borrower to have various

outstanding loans. The lender is also vulnerable in that there is no guarantee of the loan


38/42

pg. 38

being repaid in the given arranged timeframe, and the consequences to defaulting are not

defined.

However, these initiatives are not without limitations. These limitations focus on the

same issues as stated before, but the negative consequences that may occur. For example,while there may be mistrust in the national banking system, there can be microfinance

initiatives where the outside creator takes advantage of those participating. The money

may not end up in the right places, resulting in distrust to all who have interest in

monetary programs, and could potentially ruin the chance of any further microfinance

projects becoming successful. Secondly, when creating a microfinance project, time may

be an issue. What happens when the program is finished and the people who were

participating are still in poverty? In this case, it may be more beneficial for there to be an

on-going program. To see what would be an appropriate choice in regards of time, the

community must be assessed before the project is put in place.


39/42

pg. 39

Suggestions of Microfinance

Keeping in view the conclusions derived from the Overall Microfinance project,following suggestions are offered to the microfinance:

As is well known, microfinance is providing service to the poor people; therefore

MFIs should have to extent their network to meet the needs of large number of

poor people.

The MFIs should try to attain more consistency and stability in its business i.e.

there should be consistent growth in savings of the MFIs.

The MFIs have to draw finance scheme by considering to the poor people needs.

MFIs main aim is to provide finance to needy and poor people, in todays keen

competition they dont want to ignore their aim.

The MFIs should install Customers Advisory Receptacle, to give due

consideration to the complaints and suggestions of the customers.

Finally, Microfinance institutions should provide microfinance effectively and

efficiently by;

Fighting competition effectively.

Adapting innovatively to survive and succeed.

Establishing a framework for continuous quality improvements.

Ensuring consistency and optimality in work allocation.


40/42

pg. 40

CONCLUSION

After completion of this particular project work, I can proudly conclude that this

particular project has and will prove beneficial to me on both, practical and theoretical

grounds, throughout my life.

The project has helped me evolve following conclusions:

As of now the microfinance is perhaps the only way to help in make happier to the

poor living below poverty line. MFIs have become financially viable.

In micro financing, the banker has truly adorned the role of a friend, philosopher andguide for the members of SHG.

Microfinance in India is still presently too small to create a massive impact in poverty

alleviation, but if pursued with skill and opportunity development of the poor, it holds the

promise to alter the socio-economic face to the Indias poor.

In this conclusion I can also say that microfinance alone cannot substantially reduce

poverty without additional measures in the areas of education, health and infrastructure.

At the same time microfinance plays an important role to provide finance to the poor

people, which help them to meet their basic needs.

The use of financial services by low-income households leads to improvements in

household economic welfare band enterprise stability and growth.


41/42

pg. 41

BIBLIOGRAPHY

Books and other sources of information :

-D.Joel Edwinraj

-V.Frank Ratankumar

Co-operative &Microfinance

Serials publications, New Delhi

Website :

www.google.com

www.wikipedia .com

www.microfinancehub .com

www.microfinanceinfo.com
http://www.google.com/http://www.microfinance/http://www.microfinance/http://www.google.com/


42/42

microfinance project ew35dited

Documents