Micro Finance (M.COM Bangalore university )

1. Module 3
Micro Credit and Micro Fiancé
Microfinance is the provision of financial services to low-income clients, including
consumers and the self-employed, who traditionally lack access to banking and related
services. More broadly, it is a movement 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, and
fund transfers.” Those who promote microfinance generally believe that such access will
help poor people out of poverty.
Definition:
The means by which poor people convert small sums of money into large lump sums
(Rutherford 1999)
Microfinance refers to small-scale financial services including both credits and deposits
provided to people who farm or fish or herd: operate small or microenterprises where
goods are produced, recycled, repaired or traded: provide services, work for wages or
commission, gain income from renting out small amounts of land, vehicles, draft animals
or machinery and tools, in both rural and urban areas.
Micro finance the provision of banking services to lower-income people, especially poor
and the very poor
Concept and Features of Micro-finance
1. It is a tool for empowerment of the poorest
2. Delivery is normally through Self Help Groups (SHGs).
3. It is essentially for promoting self- employment, generally used for:
a. Direct income generation
b. Rearrangement of assets of assets and liabilities for the household to
participate in future opportunities and
c. Consumption smoothing.
4. It is not just a financing system, but a tool for social change, specially for women.
5. Because of micro credit is aimed at the poorest, micro-finance lending technology
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2. needs to mimic the informal lenders rather than the formal sector lending. It has
a. Provide for seasonality
b. Allow repayment flexibility
c. Fix a ceiling loan sizes
Key features of micro finance
THE GOALS ARE
• Eradicate Extreme Poverty & Hunger.
• Achieve Universal Education.
• Promote Gender Equality & Women’s Empowerment.
• Reduce Child Mortality
• Battle Diseases
• Developing Entrepreneurial Spirit
ELEMENTS OF MICRO FINANCE
Microfinance GlossaryBankable people are those deemed eligible to obtain financial
services that can lead to income generation, repayment of loans, savings, and the building
of assets.
2
Lend to the
poor
Lend to the
poor Do not take
security
Do not take
security
Prefer
saving over
borrowing
Prefer
saving over
borrowing
Small short
term loans
Small short
term loans
Cost
covering
interest
rates
Cost
covering
interest
rates
Group
appraisal
and
guarantee
Group
appraisal
and
guarantee
Prefer
women
customer
s over
men
Prefer
women
customer
s over
men

3. Microcredit is a small amount of money loaned to a client by a bank or other institution.
Microcredit can be offered, often without collateral, to an individual or through group
lending.
Group lending, also known as solidarity lending, is a mechanism that allows a number
of individuals to provide collateral or guarantee a loan through a group repayment pledge.
The incentive to repay is based on peer pressure; if one person in the group defaults, the
other group members make up the payment amount.
Individual lending, in contrast, focuses on one client and does not require other people
to provide collateral or guarantee a loan.
Micro entrepreneurs are people who own small-scale businesses that are known as
microenterprises. These businesses usually employ less than 5 people and can be based
out of the home. They can provide the sole source of family income or supplement other
forms of income. Typical micro entrepreneur activities include retail kiosks, sewing
workshops, carpentry shops and market stalls.
Microfinance refers to loans, savings, insurance, transfer services and other financial
products targeted at low-income clients.
Micro insurance is a system by which people, businesses and other organizations make
payments to share risk. Access to insurance enables entrepreneurs to concentrate more on
growing their businesses while mitigating other risks affecting property, health or the
ability to work.
Micro savings are deposit services that allow people to store small amounts of money for
future use, often without minimum balance requirements. Savings accounts allow
households to save small amounts of money to meet unexpected expenses and plan for
future investments such as education and old age.
Inclusive financial sectors: it allows poor and low-income people to access credit,
insurance, remittances and savings products. In many industries, the financial sectors do
not provide these services to the lower income people. An inclusive financial sector will
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4. support the full participation of the lower income levels of the population.
Remittances are transfers of funds from people in one place to people in another, usually
across borders to family and friends. Compared with other sources of money that can
fluctuate depending on the political or economic climate, remittances are a relatively
steady source of funds.
Unbanked describes people who have no access to financial services (services that
include savings, credit, money transfer, insurance, or pensions) through any type of
financial sector organization such as banks, non-bank financial institutions, financial
cooperatives and credit unions, finance companies, and NGOs. Implicit in this definition
is that financial services are usually available only to those individuals termed
“economically active” or “bankable”.
History of micro finance
 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
micro financing. 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 it´s possible to provide financial services to poor people through market
based enterprises without subsidy. Shore bank was the first microfinance and
community development bank founded 1974 in Chicago.
 An economical historian at Yale named Timothy Guinnane has been doing some
research on Friedrich Wilhelm Raiffeisen´s village bank movement in Germany
which started in 1864 an by the year 1901 the bank had reached 2million rural
farmers. Timothy Guinnane means that already then it was proved that
microcredit could pass the two tests concerning peoples paybackmoral and the
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5. possibility to provide the financial service to poor people.
 Another organization, The caisse populaire movement grounded by Alphone and
Dorimène Desjardins in Quebec , was also concerned about the poverty, and
passed those two tests. Between 1900 to 1906 when they founded the first caisse,
they passed a law governing them in the Quebec assembly , they risked their
private assets and must have been very sure about the idea about microcredit.
 Today the World Bank estimates that more than 16 million people are served by
some 7000 microfinance institutions all over the world. CGAP experts means that
about 500 million families benefits from these small loans making new business
possible. In a gathering at a Microcredit Summit in Washington DC the goal was
reaching 100 million of the world´s poorest people by credits from the world
leaders and major financial institutions.
 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
very important part of the development situation
 • The promotion should be inclusive the financial sector
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6.  • 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:
 “The Norwegian Nobel Committee has decided to award the Nobel Peace Prize
for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank
for their efforts to create economic and social development from below. Lasting
peace can not be achieved unless large population groups find ways in which to
break out of poverty. Micro-credit is one such means. Development from below
also serves to advance democracy and human rights. Muhammad Yunus has
shown himself to be a leader who has managed to translate visions into practical
action for the benefit of millions of people, not only in Bangladesh , but also in
many other countries. Loans to poor people without any financial security had
appeared to be an impossible idea. From modest beginnings three decades ago,
Yunus has, first and foremost through Grameen Bank, developed micro-credit
into an ever more important instrument in the struggle against poverty. Grameen
Bank has been a source of ideas and models for the many institutions in the field
of micro-credit that have sprung up around the world.Every single individual on
earth has both the potential and the right to live a decent life. Across cultures and
civilizations, Yunus and Grameen Bank have shown that even the poorest of the
poor can work to bring about their own development.Micro-credit has proved to
be an important liberating force in societies where women in particular have to
struggle against repressive social and economic conditions. Economic growth and
political democracy can not achieve their full potential unless the female half of
humanity participates on an equal footing with the male.Yunus’s long-term vision
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7. is to eliminate poverty in the world. That vision can not be realised by means of
micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that,
in the continuing efforts to achieve it, micro-credit must play a major part.”
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9. 9

10. 10

11. Sustainable Micro Finance-features and Principles:
Microfinance is considered to be an adequate tool for financing small-scale
activities/techno- logical applications in the rural areas because of the following features.
(a) Provide credit for investment in small-scale activities chosen by the poor people.
(b) Empower the poor to build self-confidence that I can do something.
(c) Can pay for itself with the interest earned.
(d) Allow developing opportunities for self-employment to the underserved people.
(e) Have the broadest utility and the least cost per beneficiary.
The principles of sustainable micro-financing are as follows:
 It offers flexible customer friendly services preferred by low-income group,
 It has opportunities for streamlining operations and reducing costs (standardized
simple lending Process, decentralized loan approval, inexpensive offices, and use
staff from local communities)
 It operates in market basis charging market interest rates and fees, and
 It strives to recover the costs of the loan.
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12. 12

13. ROLE OF MICROFINANCE IN POVERTY REDUCTION:
Microfinance is about providing financial services to the poor who are not served by the
conventional formal financial institutions - it is about extending the frontiers of financial
service provision. The provision of such financial services requires innovative delivery
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14. channels and methodologies. The needs for financial services that allow people to both
take advantage of opportunities and better management of their resources. Microfinance
can be one effective tool amongst many for poverty alleviation. However, it should be
used with caution -despite recent claims, the equation between microfinance and poverty
alleviation is not straightforward, because poverty is a complex phenomenon and many
constraints that the poor in general have to cope with. We need to understand when and
in what form microfinance is appropriate for the poorest; the delivery channel,
methodology and products offered are all inter-linked and in turn affect the prospect and
promise of poverty alleviation. Access to formal banking services is difficult for the poor.
The main problem the poor have to take when trying to acquire loans from formal
financial institutions is the demand for collateral asked by these institutions. In addition,
the process of acquiring a loan entails many bureaucratic procedures, which lead to extra
transaction costs for the poor. Formal financial institutions are not motivated to lend
money to them. In general, formal financial institutions show a preference for urban over
rural sectors, large-scale over small scale transactions, and non-agricultural over
agricultural loans.Formal financial institutions have little incentives to lend to the rural
poor for the following reasons.
Administrable difficulties: Small rural farmers often live geographically scattered, in
areas with poor communication facilities, making loan administration difficult.
Systematic risks:Agricultural production is associated with some systemic risks, such as
drought and floods, which is reflected in a high covariance of local incomes.
Lack of information: The absence of standardized information, Standard lending tools,
such as financial statements or credit histories, do not exist in these areas.
Repayment problems:The repayment of working capital may be required only once a
year for example during the harvest season. On the other hand, access to informal loans is
relatively easy, convenient, and available locally to low income households for the
following reasons:-
Informal moneylenders use interlinked credit contracts to reduce default risk such as
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15. development of business relationship with the clients.
Informal moneylenders have local information, which helps them to appraise credit
needs and credit worthiness of the client.
Informal moneylenders are considering the needs and requirements of clients even for
small amount of loan.
Informal moneylenders will profit from social sanctions such as those that may exist
among members of a family. These sanctions may serve as a substitute for legal
enforcement.
Informal moneylenders use specific incentives to stimulate repayment, such as repeat
lending to borrowers who repay promptly, with gradually increasing loan size.
Despite the fact that many rural poor acquire their loans from the informal financial
sector in rural areas of developing countries; the sector has some basic limitations. A
common feature of many rural communities is that much of the local information does
not flow freely; it tends to be segmented and circulates only within specific groups.
Usually the informal credit market is based on local economies and is thus limited by
local wealth constraints and the covariant risks of the local environment. Since most of
the world’s poor do not have access to basic financial services that would help them
manage their assets and generate income. To overcome poverty, they need to be able to
borrow, save, and invest, and to protect their families against adversity. Another
shortcoming of the two financial sectors in developing countries is their inability to
satisfy the credit needs of the poor that has led to the new development of microfinance.
Microfinance is believed to be able to reduce the above-mentioned inadequacies of
formal and informal financial institutions and is emerging as an important credit partner
to the poor in the developing world.
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16. Types of micro financed by people
Household financial goals
Micro finance Product
Source :Mathwood consulting company
SALIENT FEATURES OF MICRO-FINANCE PROGRAMME OF
GOVERNMENT OF INDIA :
a) Arranging Fixed Deposits for MFIs/NGOs: Under this scheme government of India
arrange money to MFI/NGO like SIDBI for micro credit to poor.
b) Training and Studies on Micro-Finance Programme : Government of India would
help SIDBI in meeting the training needs of NGOs,SHGs, intermediaries and
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Cost of burials,
Health care
Replacement costs
after hurricanes
&Floods., etc.
Various insurance
Plans
Retirement (for self or
Parents ), migration
farm equipment, wells,
home upgrade self
insurance, etc.
Pension plan or long
term deposit
Irrigation
transportation,
livestock,
microenterprise, home
renovation, schooling
and education etc.
Medium term deposit
Food security, health
treatments, festival&
social obligations,
emergencies etc.,
Demand or short term
deposit
Send money to family
at home and away
microenterprise
working capital etc.
Fund transfer and
cheque
Microenterprise
working capital
livestock, sewing
machines, radios, bikes
etc.,
Short-term loans
Meet urgent family
disaster like sickness
or crop failure pay off
moneylender etc.
Emergency loans
Housing wells,
irrigation system boats,
motor bike etc,.
Long-term loans

17. entrepreneurs and also in enhancing awareness about the programme.Institution building
for ‘intermediaries’ for identification of viable projects: The Government of India would
help in institution building through identification and development of ‘intermediary
organization’, which would help the NGOs/SHGs in identification of product, preparation
of project report, working out forward and back ward linkages and in fixing marketing/
technology tie-ups. The SISIs would help in the identification of such intermediaries in
different areas.
c) Budgetary Provision for the Scheme During 10th plan : There was a budgetary
provision in 10th five year plan and hoping more funds in next plan. d) Administrative
arrangement: A committee has been formed to control and monitor the administrative
arrangement of MFI/NGOs.
MICRO CREDIT
Microcredit emphasizes the provision of credit services to low-income clients, usually in
the form of small loans for micro enterprise and income generating activities. Use of the
term ‘microcredit’ is often associated with an inadequate amount of the value of savings
for the poor. In most cases, the provision of savings services in ‘microcredit’ schemes
simply involves the collection of compulsory deposit amounts that are designed only to
collateralize those loans. Additional voluntary savings may collect but the clients have
restricted access to their enforced savings. These savings become the main source of
capital in the financial institutions.
Major features of MFI’s
Most of the major MFIs (like SHGs, community banks) follow certain methods
(developed over last 30 years) to deliver very small loans to unsalaried or poor
borrowers.
1. Negligible Amount of collateral required
2. Group lending and liability
3. Pre-loan savings requirements
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18. 4. Gradually increasing loan sizes & guarantee of ready access to future loans if
present loans are repaid fully and promptly.
Usually high interest rates are charged By the MFIS for the following reasons
1. The administrative cost of making tiny loans is much higher in percentage terms
than the cost of making a large loan.
2. More risk factor is involved in Micro credit than mainstream banking.
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19. Major Micro finance activities are followed in India are:
1. Micro credit
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20. 2. Micro savings
3. Small scale insurance
MICROFINANCE - CREDIT LENDING MODELS MICROFINANCE – CREDIT
(http://www.gdrc.org/icm/model/model-fulldoc.html)
Introduction
"Micro-finance: Credit Lending Models" is an attempt to document the various models
currently being used by microfinance institutions throughout the world.
A total of 14 models are described below. They include, associations, bank guarantees,
community banking, cooperatives, credit unions, grameen, group, individual,
intermediaries, NGOs, peer pressure, ROSCAs, small business, and village banking
models.
In reality, the models are loosely related with each other, and most good and sustainable
microfinance institutions have features of two or more models in their activities.
The models were developed through extensive field work/observations and interviews
carried out in India, Thailand, Philippines, Indonesia and Sri Lanka, and includes
information from literature as well.
Associations Model
This is where the target community forms an 'association' through which various
microfinance (and other) activities are intiated. Such activities may include savings.
Associations or groups can be composed of youth, women; can form around
political/religious/cultural issues; can create support structures for microenterprises and
other work-based issues.
In some countries, an 'association' can be a legal body that has certain advantages such as
collection of fees, insurance, tax breaks and other protective measures. Distinction is
made between associations, community groups, peoples organizations, etc. on one hand
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21. (which are mass, community based) and NGOs, etc. which are essentially external
organizations.
Closely related to the group model and similar models.
Bank Guarantees Model
As the name suggests, a bank guarantee is used to obtain a loan from a commercial bank.
This guarantee may be arranged externally (through a donor/donation, government
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22. agency etc.) or internally (using member savings). Loans obtained may be given directly
to an individual, or they may be given to a self-formed group.
Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds may be used for
various purposes, including loan recovery and insurance claims. Several international and
UN organizations have been creating international guarantee funds that banks and NGOs
can subscribe to, to online or start microcredit programmes.
Community Banking Model
Community Banking model essentially treats the whole community as one unit, and
establish semi-formal or formal institutions through which microfinance is dispensed.
Such institutions are usually formed by extensive help from NGOs and other
organizations, who also train the community members in various financial activities of
the community bank.
These institutions may have savings components and other income-generating projects
included in their structure. In many cases, community banks are also part of larger
community development programmes, which use finance as an inducement for action.
Closely related to the village-banking model.
Cooperatives Model
A co-operative is an autonomous association of persons united voluntarily to meet their
common economic, social, and cultural needs and aspirations through a jointly-owned
and democratically-controlled enterprise. Some cooperatives include member-financing
and savings activities in their mandate.
Credit Unions Model
A credit union is a unique member-driven, self-help financial institution. It is organized
by and comprised of members of a particular group or organization, who agree to save
their money together and to make loans to each other at reasonable rates of interest.
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23. The members are people of some common bond: working for the same employer;
belonging to the same church, labor union, social fraternity, etc.; or living/working in the
same community. A credit union's membership is open to all who belong to the group,
regardless of race, religion, color or creed.
A credit union is a democratic, not-for-profit financial cooperative. Each is owned
and governed by its members, with members having a vote in the election of directors
and committee representatives.
Grameen Model
The Grameen model emerged from the poor-focussed grassroots institution, Grameen
Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the
following methodology:
A bank unit is set up with a Field Manager and a number of bank workers, covering an
area of about 15 to 22 villages. The manager and workers start by visiting villages to
familiarize themselves with the local milieu in which they will be operating and identify
prospective clientele, as well as explain the purpose, functions, and mode of operation of
the bank to the local population.
Groups of five prospective borrowers are formed; in the first stage, only two of them are
eligible for, and receive, a loan. The group is observed for a month to see if the members
are conforming to rules of the bank.
Only if the first two borrowers repay the principal plus interest over a period of fifty
weeks do other members of the group become eligible themselves for a loan.
Because of these restrictions, there is substantial group pressure to keep individual
records clear. In this sense , collective responsibility of the group serves as collateral on
the loan.
Group Model
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24. The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at
the individual level are overcome by the collective responsibility and security afforded by
the formation of a group of such individuals.
The collective coming together of individual members is used for a number of purposes:
educating and awareness building, collective bargaining power, peer pressure etc.
The Group model is closely related to, and has inspired, many other lending models.
These include Grameen, community banking, village banking, self-help, solidarity, peer
pressure etc.
Individual Model
This is a straight forward credit lending model where micro loans are given directly to
the borrower. It does not include the formation of groups, or generating peer pressures to
ensure repayment.
The individual model is, in many cases, a part of a larger 'credit plus' programme, where
other socio-economic services such as skill development, education, and other outreach
services are provided.
Intermediaries Model
Intermediary model of credit lending positions a 'go-between' organization between the
lenders and borrowers. The intermediary plays a critical role of generating credit
awareness and education among the borrowers (ncluding, in some cases, starting savings
programmes. These activities are geared towards raising the 'credit worthiness' of the
borrowers to a level sufficient enough to make them attractive to the lenders.
The links developed by the intermediaries could cover funding, programme links,
training and education, and research. Such activities can take place at various levels from
international and national to regional, local and individual levels.
Intermediaries could be individual leaders, NGOs, microenterprise/microcredit
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25. programmes, and commercial banks (for government financed programmes). Lenders
could be government agencies, commercial banks, international donors, etc.
Most models mentioned here invariably have some form of organizational or operational
intermediary - dealing directly with microcredit, or non-financial services. Also called the
'partnership' model. Specifically see NGOs.
NGO Model
NGOs have emerged as a key player in the field of microcredit. They have played the
role of intermediary in various dimensions. NGOs have been active in starting and
participating in microcredit programmes. This includes creating awareness of the
importance of microcredit within the community, as well as various national and
international donor agencies.
They have developed resources and tools for communities and microcredit organizations
to monitor progress and identify good practices. They have also created opportunities to
learn about the principles and practice of microcredit. This includes publications,
workshops and seminars, and training programes.
Peer Pressure Model
Peer pressure uses moral and other linkages between borrowers and project participants
to ensure participation and repayment in microcredit programmes. Peers could be other
members in a borrowers group (where, unless the initial borrowers in a group repay, the
other members do not receive loans. Hence pressure is put on the initial members to
repay); community leaders (usually idetified, nurchured and trained by external NGOs);
NGOs themselves and their field officers; banks etc.
The 'pressure' applied can be in the form of frequent visits to the defaulter, community
meetings where they are identified and requested to comply etc.
The Grameen model extensively uses peer pressure to ensure repayment among its
borrower groups.
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26. ROSCA Model
Rotating Savings and Credit Associations or ROSCAs, are essentially a group of
individuals who come together and make regular cyclical contributions to a common
fund, which is then given as a lump sum to one member in each cycle.
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27. For example, a group of 12 persons may contribute Rs. 100 (US$33) per month for 12
months. The Rs. 1,200 collected each month is given to one member. Thus, a member
will 'lend' money to other members through his regular monthly contributions.
After having received the lump sum amount when it is his turn (i.e. 'borrow' from the
group), he then pays back the amount in regular/further monthly contributions. Deciding
who receives the lump sum is done by consensus, by lottery, by bidding or other agreed
methods.
Small Business Model
The prevailing vision of the 'informal sector' is one of survival, low productivity and very
little value added. But this has been changing, as more and more importance is placed on
small and medium enterprises (SMEs) - for generating employment, for increasing
income and providing services which are lacking.
Policies have generally focussed on direct interventions in the form of supporting systems
such as training, technical advice, management principles etc.; and indirect interventions
in the form of an enabling policy and market environment.
A key component that is always incorporated as a sort of common dinominator has been
finance, specifically microcredit - in different forms and for different uses. Microcredit
has been provided to SMEs directly, or as a part of a larger enterprise development
programme, along with other inputs.
Village Banking Model
Village banks are community-based credit and savings associations. They typically
consist of 25 to 50 low-income individuals who are seeking to improve their lives
through self-employment activities.
Initial loan capital for the village bank may come from an external source, but the
members themselves run the bank: they choose their members, elect their own officers,
establish their own by-laws, distribute loans to individuals, collect payments and savings.
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28. Their loans are backed, not by goods or property, but by moral collateral: the promise
that the group stands behind each individual loan.
The Village Banking model is closely related to the Community Banking and Group
models. This model is widely adopted and implemented by FINCA. See their Village
Banking Homepage.
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29. MICROFINANCE INSTITUTIONS
 Association for Sarva Seva Farms (ASSEFA)
 Mitrabharati - The Indian microfinance Information Hub
 Mysore Resettlement and Development Agency (MYRADA)
 SADHAN - The Association of Community Development Finance Institutions
 SEWA: Self-help Women's Association
 SKS India - Swayam Krishi Sangam
 Streedhan - Banking with Rural Womenο Working Women's Forum, Madras,
India
MICROFINANCE SUPPORT INSTITUTIONS IN THE FORMAL SECTOR
ο National Bank for Agriculture and Rural Development
ο Rashtriya Mahila Kosh
ο SIDBI - Small Industries Development Bank of India
ο Tamil Nadu Women's' Development Corporation
Other Institutions
 Commercial Banks:
 State Bank of India
 ABN-AMRO
 Andhra Bank
 ICICI-Citigroup
 ING-Vysya
 HDFC
Major Milestones
← 1969: Nationalization of Banks
← 1975: Establishment of Regional Rural Banks
← 1982: Establishment of NABARD
← 1992: Launching of the SHG – Bank Linkage
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30. ← 1998: NABARD sets a goal for linking one million SHGs by 2008
← 2000: Establishment of SIDBI Foundation for Microcredit
← 2005: One million SHG linkage target achieved 3 years ahead of date
← 2006: Committee on Financial Inclusion
← 2007: Proposed bill on microfinance regulation introduced in parliament
← 2008: Number of Kisan Credit cards – 76 million
← 2009: No. of rural bank branches – 31,727 constituting 39.7% of total
bank branches,
2010: Increased Rs.100 crore each for Financial Inclusion and Financial Inclusion
Technology.
ROLE OF MICRO FINANCE INSTITUTIONS
1. Poverty reduction tool
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31. Microfinance can be a critical element of an effective poverty reduction strategy.
Improved access and efficient provision of savings, credit, and insurance facilities in
particular can enable the poor to smooth their consumption, manage their risks better,
build their assets gradually, and develop their microenterprises. Microfinance is only a
means and not an end. The ultimate goal is to reduce poverty. Government, NGOs and
other financial institutions have introduced various welfare schemes and activities to
reduce poverty. Microfinance, by providing small loans and savings facilities to those
who are excluded from commercial financial services has been developed as a key
strategy for reducing poverty throughout the world.
2. Women Empowerment
In rural areas women living below the poverty line are unable to realize their potential.
Microfinance programmes are currently being promoted as a key strategy for
simultaneously addressing both poverty alleviation and women„s empowerment. The self
help groups (SHGs) of women as sources of microfinance have helped them to take part
in development activities. The participation of women in SHGs
made a significant impact on their empowerment both in social and economic aspects.
Vast sections of the rural poor are even now deprived of the basic amenities,
opportunities and oppressed by social customs and practices. Various governments and
nongovernmental organizations to uplift them both implemented several programmes
economically and socially. It has been an accepted premise that women were not given
enough opportunities to involve themselves in the decision making process of the family
as well as in the society. Hence, women were the main target groups under SHG
programme. Microfinance can provide an effective way to assist and empower oor
women, who make up a significant proportion of the poor and suffer disproportionately
from poverty.
3. Development of the overall financial system
Without permanent access to institutional microfinance, most poor households continue
to rely on meagre self- finance or informal sources of microfinance, which limits their
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32. ability to actively participate in and benefit from the development opportunities.
Microfinance can contribute to the development of the overall financial system through
integration of financial markets. Microfinance institutions (MFIs) can be small and
medium enterprises at the heart of rural sustainable development. Their development
positively correlates with rural business development.
4. Self-Employment
Poverty reduction through self-employment has long been a high priority for the
Government of India. Microfinance is an experimental tool in its overall strategies. Most
of poor people manage to optimize resources over a time to develop their enterprises.
Financial services could enable the poor to leverage their initiative, accelerating the
process of generating incomes, assets and economic security. However, conventional
finance institutions seldom lend down- market to serve the needs of low-income families
and women-headed households. Therefore fundamental approach is to create the self
employment by financing the rural poor through financial institutions. Microfinance,
thus, creates the hope and increases the self-esteem of the poor by giving the
opportunities to be employed.
5. SHG-bank linkage programme
Indian micro finance is dominated by the operational approach Self-help Groups (SHGs).
The approach is popularly known as SHG-Bank linkage model. This model is the
dominant model, initiated by the NABARD in the early 1990s. Today the SHG model
also links the informal groups of women to the mainstream system and it has the largest
outreach to micro financial clients in the world. SHGS comprise a group of 15-20
members. The groups begin by savings that are placed in a common fund. In a way,
SHGs are co-operative (credit) societies linked to a commercial bank rather than an apex
cooperative bank. Once linked to the bank, the SHGs may access a given multiple of the
pooled savings for disbursement to its members. The SHG-bank linkage programme was
conceived with the objectives of supplementary credit delivery services for the un-
reached poor, building mutual trust and confidence between the bankers and the poor and
encouraging
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33. Role of NGOS in the microfinance
 NGO are voluntary social work organization who renders help to government and
society for improvement of quality of life people
 Help in the formation of SHGs
 To reduce the smaller transaction NGO help banks
 Over the last quarter century, a few organizations, outside the preview of the
public sector, have succeeded in effective poverty alleviation through micro-credit
 Main objective is to draw attention about microfinance by conduction meetings in
rural areas.
 Providing the minimum knowledge related to the finance
 Helping people to improve their skills in education
 Making contact between the SHGs and the banks
ADVANTAGES OF MFIS
 Increased self-employment opportunities especially for women (Women are
granted 75% of microcredits)
 Micro entrepreneurs development: Small shopkeepers, peddlers, craftsmen or
farmers.
 Acquired the know-how
 To generate a regular income.
DISADVANTAGES AND CRITICISM OF MFIs
♦ A main disadvantages to micro-finance is that the deal is too small for lender to
devote ample time and money to doing proper due diligence.
♦ As the capital is low the profits are also low.
♦ Borrower seldom if ever give lenders the full story on their situation and with a
small amount at risk, it does not make sense for lenders to spend a lot of money to
check out the store. When lenders get burned, they decide to stop lending and the
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34. next round of lending must be done by greenhorns who have no idea what they
are getting into.
♦ In the other words, to some extend micro lending depends on an ever-increasing
number of lenders in order to be successful.
♦ The inability to reach the poorest of the poor is a problem that plagues most
poverty alleviation programs. As Gresham’s law reminds us, if the poor and non-
poor are combined within a single program, the non-poor will always drive out
the poor. To be effective, the delivery system must be designed and operated
exclusively for the poor.
♦ Some criticize that microfinance programs benefit the moderately poor more than
the destitute, and thus impact can vary by income group.
♦ Most microfinance programs target women (due to higher repayment rates),
which may result in men requiring wife to get loans for them
♦ Vicious cycle of debt, microcredit dependency, increased workloads, and
domestic violence associated with participation in microfinance programs.
♦ Low repayment rates in comparison with traditional financial institutions
♦ Use of harsh and coercive method to push for repayment and excessive interest
rates
♦ Concerns have been raised that the reliance on microfinance programs to aid the
poor may result in reduction of government and charitable assistance
(privatization of public safety-net programs).
♦ Mixing of charity with business by microfinance providers
♦ High interest rates of loans made to the poor
♦ Lack of customized microfinance models for the poor
♦ Inappropriate targeting of poor
♦ Lack of microfinance training for MFIs
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35. ♦ Poor distribution system to spread out loan facilities into rural areas
♦ Dual mission of MFIs to be financially sustainable as well as development
oriented
http://www.slideshare.net/kabrapiyush/microfinance-introduction-small?related=1
What is the difference between microfinance and microcredit?
Microcredit is a small amount of money loaned to a client by a bank or other institution.
Microfinance refers to loans, savings, insurance, transfer services, microcredit loans and
other financial products targeted at low-income clients. Microcredit has been changing
the lives of people and revitalizing communities worldwide since the beginning of time.
Who are the clients of microfinance?
The clients of microfinance are generally poor and low-income people. They may be
female heads of households, pensioners, artisans or small farmers. The client group for a
given financial organization depends on that organization’s mission and goals.
How do financial services help poor and low-income people?
Anyone who has access to savings, credit, insurance and other financial services is more
resilient and better able to deal with everyday demands. Microfinance helps poor and
low- income clients deal with their basic needs. For example, with access to micro
insurance, poor people can cope with sudden expenses associated with serious illness or
loss of assets. Merely having access to formal savings accounts has also proved to be an
incentive to save. Clients who join and stay in microfinance programmes have better
economic conditions than non-clients.
What is a microfinance institution?
A microfinance institution (MFI) is an organization that provides financial services
targeted to the poor. While every MFI is different, all share the common characteristic of
providing financial services to a clientele poorer and more vulnerable than traditional
bank clients.
What is an inclusive financial sector? An inclusive financial sector allows poor and
low- income people to access credit, insurance, remittances and savings products. In
many countries, the financial sectors do not provide these services to the lower income
people. An inclusive financial sector will support the full participation of the lower
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36. income levels of the population.
If microfinance is about serving the poor, why does the provision of financial
services need to be profitable?
Microfinance institutions need to be profitable in order to cover the costs of reaching out
and meeting the demand of underserved segments of the population over a sustained
period of time. Additionally, after a series of very small loans, a micro entrepreneur often
wants to expand her business; a microfinance institution must keep up with the demand
for larger loan amounts so businesses can grow into small enterprises.
How can poor people afford such high interest rates?
Microcredit interest rates are set to provide viable, long-term financial services on a large
scale, while subsidized interest rates generally benefit only a small number of borrowers
for a short period. Studies conducted in India, Kenya and the Philippines found that the
average annual return on investments by microbusinesses ranged from 117 to 847 per
cent. These high returns are commonplace among microentrepreneurs, and while the
interest rates seem high, they usually represent only a small portion of
microentrepreneurs’ total returns. Interest rates charged by informal moneylenders are
overwhelmingly higher than those of MFIs.
Do poor people save?
Poor people save all the time, although mostly in informal ways. They invest in assets
such as jewelry, domestic animals, building materials and things that can be easily
exchanged for cash.
Access to secure, formal savings services provides a cushion when families need more
money for seasonal expenses and in tough times. Secure savings accounts allow people to
guard against unexpected expenses associated with illnesses, build assets, prepare for old
age or pay for school fees, marriages and births.
Why is microfinance so important for women?
In a world where most poor people are women, studies have shown that access to
financial services has improved the status of women within the family and the
community. Women have become more assertive and confident. Furthermore, as a result
of microfinance, women own assets, including land and housing, play a stronger role in
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37. decision-making, and take on leadership roles in their communities.
When is microcredit NOT appropriate?
Microcredit may be inappropriate where conditions pose severe challenges to loan
repayment. For example, populations that are geographically dispersed or have a high
incidence of disease may not be suitable microfinance clients. In these cases, grants,
infrastructure improvements or education and training programmes are more effective.
For microcredit to be appropriate, the clients must have the capacity to repay the loan
under the terms by which it is provided.
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