What is Microfinance ?According to famous economist Robinson, Microfinance refers to small-scale financial services for bothcredits and deposits - that are provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financialservices . Ultimately, the goal of microfinance is to give low income people an opportunity to become self- sufficient by providing a means of saving money, borrowing money and insurance.
What is the need of Microfinance ?Traditionally , Macro-financial institutes like bankshave been reluctant to provide financial services to clients with little or no cash income, because of various reasons – 1. ‘Break Even Point‘ in providing loans. 2. Few assets to be secured as collateral.
What is the need of Microfinance ?Lack of loan and other financial services from banks and other institutes forces them to rely heavily on relatives or local money lenders at the time of need . Usually interest rate of moneylenders arevery high . They are often accused of Usury .
What is the need of Microfinance ? According to a 1995 World Bankestimate, in most developing countries the formal financial system reaches only the top 25% of the economically active population - the bottom 75% have no access to financial services apart from moneylenders .
How Microfinance helps the poor ?1:It provides a long-term increase in incomeand consumption of poor families.2: Access to credit helps the poor to smoothcash flows and avoid periods where access tofood, clothing, shelter, or education is lost.3: Credit make it easier to manage shocks likesickness of a wage earner, theft, or naturaldisasters.
How Microfinance helps the poor ?4: It provides support to Micro Enterprises .Thus booster support to Entrepreneurshipamong the jobless people .5: Plays an important role in WomenEmpowerment , particularly in Developingcountries like India.
Theorist Lysander Spooner wrotemiddle of the 1800s about small credits , as a way of getting the people out of poverty . Marshall Plan was introduced forEnd of World War II revival of post war economy . It gave emphasize on micro finance . Micro-Credit movement started in 1970’s countries like Bangladesh ( Grameen Bank led by Muhammad Yunus) , Pakistan , Vietnam etc. Declared as International year of 2005 Microcredit by The Economic and Social Council of the United Nations
Microfinance Lending Models 1: Associations , Ex : Self Help Groups, SHGs (India)2: Bank Guarantees , Ex : Latin America Bridge Fund 3: Community Banking , Ex: Grameen Bank (Ban.) 4: Cooperatives , Ex: Co-operative Bank (England) 5: Credit Unions 6: Non-Governmental Organizations , Ex: KIVA ,US 7: For-profit Banks , Ex: Khushali Bank (Pakistan)8: Rotating Savings and Credit Associations (ROSCAs)
Major Features of MFI’s Most of the major MFI’s (like SHGs, Community banks ) follows certain methods ( developed over last 30 years ) to deliver very small loans to unsalaried or poor borrowers.
Major Features of MFI’sThese include –1. Negligible Amount of Collateral required.2. Group lending and liability.3. Pre-loan savings requirements.4. Gradually increasing loan sizes &guarantee of ready access to future loans ifpresent loans are repaid fully and promptly.
Major Features of MFI’sUsually High Interest rates are chargedby the MFI’s for the following reasons :1: The administrative cost of making tinyloans is much higher in percentage termsthan the cost of making a large loan.2: More Risk factor is involved in Micro-credit than mainstream banking .
Microfinance in IndiaMajor Microfinance activities followed inIndia are –1. Micro credits2. Micro savings3. Small scale Insurance
Role of NGOS in the microfinance>What are NGOs?>NGOs are voluntary social work organization who rendershelp to government and society for improvement of qualityof life people>Help in the formation of SHGs>To reduce the smaller transaction NGOs help banks>Over the last quarter century, a few organizations, outsidethe purview of the public sector, have succeeded in effectivepoverty alleviation through micro-credit>Main objective is to draw attention about microfinance byconduction meetings in rural areas
Role of NGOS in the microfinance> Providing the minimum knowledgerelated to the finance> Helping people to improve their skills ineducation> Making contact between the SHGs andbanks> How banks are benefited by NGOs???
Role of govt in microfinance> Government interested in SHGs> Rashtriya Mahila Kosh , Indira MahilaYojana, Swarnajayanti Gram SwarojgarYojana (SGSY) launched in 1999> Swarnjayanti Gram Swarojgar Yojana(SGSY) has emerged as a main anti-poverty programme
Working of SHGHow it works??> Formation of group with (10-20) members> Monthly savings about 20-50 rs per each member> Money lending from banks> Money lending from SHG> Interest rates> Repayment of money
In Andhra Pradesh> Initiative taken by govt of A.P to enhance theprofit of shg members> Loans are at 2.5 % interest> Achieved great response from poor> Presently there are 1.15 lakh DWCRA groupsand 2.19 lakh SHG groups in Andhra Pradeshwith a membership of 46 lakh women having asavings of Rs.300 crores.
In Orissa> It is the state that have only microfinance as tooleliminate the poor.> In Orissa Mission shakti , a government drivenprogramme, formed in 2001 with a target toorganize 2 lakhs WSHGs(women self help group)covering all revenue villages of the State. The mainaim is to provide supports to different stakeholdersworking in the field of women empowerment suchas Banks, NGOs, MFIs and other institutions.
In Orissa> In 2008 IDBI Fortis Life Insurance has tied upwith Regional Rural Development Centre(RRDC) to offer rural consumers the protectionof Termsurance Grameen Suraksha in Orissa..
In Orissa> There are around 35 MFIs registered in thestate out of which 8-10 are functional, with therecovery rate of these institutions being around95%..>Micro-Finance Institutions (MFIs) operating inOrissa have advanced loans worth Rs 1500 crorein the past three to four years, reaching out tomore than two million customers in the state.
Disadvantages & Criticisms of MicrofinanceDisadvantages to the Micro-lenders:1. To the bank the borrowers are few for theproblem of reaching out to the people.2. A main disadvantage to micro-finance isthat the deal is too small for the lender todevote ample time and money to doingproper due diligence.
Disadvantages & Criticisms of Microfinance3.As the capital is low the profits are also low.4 .Borrowers seldom if ever give lenders the fullstory on their situation and with a small amount atrisk, it does not make sense for lenders to spend alot of money to check out the story. When lendersget burned, they decide to stop lending and thenext round of lending must be done by greenhornswho have no idea what they are getting into.
Disadvantages & Criticisms of Microfinance5.In other words, to some extent microlendingdepends on an ever-increasing number of lenders inorder to be successful
Disadvantages & Criticisms of Microfinance6.The inability to reach the poorest of the poor is aproblem that plagues most poverty alleviationprograms. As Gresham’s law reminds us, if thepoor and non-poor are combined within a singleprogram, the non-poor will always drive out thepoor. To be effective, the delivery system must bedesigned and operated exclusively for the poor.
Disadvantages & Criticisms of Microfinance7.Some criticize that microfinance programsbenefit the moderately poor more than thedestitute, and thus impact can vary by incomegroup.8. Most microfinance programs target women (dueto higher repayment rates), which may result inmen requiring wife to get loans for them.
Disadvantages & Criticisms of Microfinance9.Vicious cycle of debt, microcreditdependency, increased workloads, and domesticviolence associated with participation inmicrofinance programs.10. Low repayment rates in comparison withtraditional financial institutions.11. Use of harsh and coercive methods to push forrepayment and excessive interest rates
Disadvantages & Criticisms of Microfinance12.Concerns have been raised that the reliance onmicrofinance programs to aid the poor may result ina reduction of government and charitable assistance(“privatization of public safety‐net programs”).
Conclusion In Bangladesh microfinance has successfully enabled extremely impoverished people toengage in self-employment projects that allow them to generate an income and, in many cases, begin to build wealth and exit poverty.
Conclusion> In India micro-finance has succeeded with repayment rates upto 98% reported all across the country ( from the states like AP,Tamil Nadu, Karnataka, Kerala ,West Bengal and Orissa etc. ) > This tells us that micro finance hascertainly has the capacity to reduce poverty by a great margin .