MICROFINANCE

1.Introduction:
In developing economies and particularly in rural
areas, many activities that would be classified in the developed
world as financial are not monetized: that is, money is not used to
carry them out. This is often the case when people need the
services money can provide but do not have dispensable funds
required for those services, forcing them to revert to other means
of acquiring them.
Meaning:
Microfinance is an collective term used for financial
intermediation services to low income group and poor customers.
Services offered are credit facility, savings account, money
transfers, remittances, Insurance and even investment.
Microfinance means the provision of banking services to
lower income people, especially the poor and the very poor.
2.Features:
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.


3.prospects:
Several needs of microfinance are as follows
Lifecycle Needs: such as weddings, funerals, childbirth,
education, homebuilding, widowhood and old age.
Personal Emergencies: such as sickness, injury,
unemployment, theft, harassment or death.
Disasters: such as fires, floods, cyclones and man-made
events like war or bulldozing of dwellings.
Investment Opportunities: expanding a business, buying land
or equipment, improving housing, securing a job (which often
requires paying a large bribe), etc.
Problems:
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.

Muhammad Yunus, a Nobel Prize winner, introduced the
concept of Microfinance in Bangladesh in the form of the
"Grameen Bank". The National 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
between SHGs (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.
[needs update]
It involves commercial
banks, regional rural banks (RRBs) and cooperative banks in its
operations.
4.Challanges:
(a)Interest rates -
One of the principal challenges of microfinance is
providing small loans at an affordable cost. The global average
interest and fee rate is estimated at 37%, with rates reaching as
high as 70% in some markets.
[6]
The reason for the high interest
rates is not primarily cost of capital. Indeed, the local microfinance
organizations that receive zero-interest loan capital from the
online microlending platform Kiva charge average interest and fee
rates of 35.21%.
[7]
Rather, the main reason for the high cost of
microfinance loans is the high transaction cost of traditional
microfinance operations relative to loan size.
[8]

In recent years, the microfinance industry has shifted
its focus from the objective of increasing the volume of lending
capital available, to address the challenge of providing
microfinance loans more affordably. Microfinance analyst David
Roodman contends that, in mature markets, the average interest
and fee rates charged by microfinance institutions tend to fall over
time.
[11]
However, global average interest The answer to providing
microfinance services at an affordable cost may lie in rethinking
one of the fundamental assumptions underlying microfinance: that
microfinance borrowers need extensive monitoring and interaction
with loan officers in order to benefit from and repay their loans.
The P2P microlending service Zidisha is based on this premise,
facilitating direct interaction between individual lenders and
borrowers via an internet community rather than physical offices.
Zidisha has managed to bring the cost of microloans to below
10% for borrowers, including interest which is paid out to lenders.
However, it remains to be seen whether such radical alternative
models can reach the scale necessary to compete with traditional
microfinance programs.
[12]

rates for microfinance loans are still well above 30%.
(b)Use of loans- Practitioners and donors from the charitable side
of microfinance frequently argue for restricting microcredit to
loans for productive purposessuch as to start or expand
amicroenterprise. Those from the private-sector side respond
that, because money is fungible, such a restriction is impossible
to enforce, and that in any case it should not be up to rich people
to determine how poor people use their money
[citation needed
]
.
(c) Reach versus depth of impact- There has been a long-standing
debate over the sharpness of the trade-off between 'outreach' (the
ability of a microfinance institution to reach poorer and more
remote people) and its 'sustainability' (its ability to cover its
operating costsand possibly also its costs of serving new
clientsfrom its operating revenues). Although it is generally
agreed that microfinance practitioners should seek to balance
these goals to some extent, there are a wide variety of strategies,
ranging from the minimalist profit-orientation
of BancoSol in Bolivia to the highly integrated not-for-profit
orientation of BRAC in Bangladesh. This is true not only for
individual institutions, but also for governments engaged in
developing national microfinance systems.
(d) Gender- Microfinance experts generally agree that women
should be the primary focus of service delivery. Evidence shows
that they are less likely to default on their loans than men.
Industry data from 2006 for 704 MFIs reaching 52 million
borrowers includes MFIs using the solidarity lending methodology
(99.3% female clients) and MFIs using individual lending (51%
female clients). The delinquency rate for solidarity lending was
0.9% after 30 days (individual lending3.1%), while 0.3% of
loans were written off (individual lending0.9%).
[13]
Because
operating margins become tighter the smaller the loans delivered,
many MFIs consider the risk of lending to men to be too high. This
focus on women is questioned sometimes, however a recent
study of microenterpreneurs from Sri Lanka published by the
World Bank found that the return on capital for male-owned
businesses (half of the sample) averaged 11%, whereas the
return for women-owned businesses was 0% or slightly
negative.
[14]

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 major benefit of microfinance projects is that it
allows low income families to save their money; most of the poor
live day to day with the little money that they earn and cannot
afford to save. Poor people need such alternatives in order to turn
their savings in to large lump sums or receive large sums and pay
monthly with low interest rates. Banks and other money lending
institutions have high interest rates and simply wont extend loans
to poor people with little or no assets or employment.
Microfinance helps the poor people get access or save funds over
a period of time with low interest rates. Also, the poor could solve
their own issues by working together as a community and this
creates trust and social capital in their communities. It also leads
to stability and growth in their households, as well as their
communities.
5. Inclusive Financial System:
The new financial systems approach pragmatically
acknowledges the richness of centuries of microfinance history
and the immense diversity of institutions serving poor people in
developing world today. It is also rooted in an increasing
awareness of diversity of the financial service needs of t he
worlds poorest people, and the diverse settings in which they live
and work.
Informal financial service providers
These include moneylenders, pawnbrokers, savings
collectors, money-guards, ROSCAs, ASCAs and input
supply shops. Because they know each other well and live in
the same community, they understand each others financial
circumstances and can offer very flexible, convenient and
fast services. These services can also be costly and the
choice of financial products limited and very short-term.
Informal services that involve savings are also risky; many
people lose their money.
Member-owned organizations
These include self-help groups, credit unions, and a variety
of hybrid organizations like 'financial service associations'
and CVECAs. Like their informal cousins, they are generally
small and local, which means they have access to good
knowledge about each other's financial circumstances and
can offer convenience and flexibility. Grameen Bank is a
member-owned organization. Since they are managed by
poor people, their costs of operation are low. However, these
providers may have little financial skill and can run into
trouble when the economy turns down or their operations
become too complex. Unless they are effectively regulated
and supervised, they can be 'captured' by one or two
influential leaders, and the members can lose their money.
NGOs
The Microcredit Summit Campaign counted 3,316 of these
MFIs and NGOs lending to about 133 million clients by the
end of 2006.
[40]
Led by Grameen
Bank and BRAC inBangladesh, Prodem in Bolivia, Opportuni
ty International, and FINCA International, headquartered in
Washington, DC, these NGOs have spread around the
developing world in the past three decades; others, like
the Gamelan Council, address larger regions. They have
proven very innovative, pioneering banking techniques
like solidarity lending, village banking and mobile
banking that have overcome barriers to serving poor
populations. However, with boards that dont necessarily
represent either their capital or their customers, their
governance structures can be fragile, and they can become
overly dependent on external donors.
Formal financial institutions
In addition to commercial banks, these include state banks,
agricultural development banks, savings banks, rural banks
and non-bank financial institutions. They are regulated and
supervised, offer a wider range of financial services, and
control a branch network that can extend across the country
and internationally. However, they have proved reluctant to
adopt social missions, and due to their high costs of
operation, often can't deliver services to poor or remote
populations. The increasing use of alternative data in credit
scoring, such as trade credit is increasing commercial banks'
interest in microfinance.
[41]

With appropriate regulation and supervision, each of
these institutional types can bring leverage to solving
the microfinance problem. For example, efforts are
being made to link self-help groups to commercial
banks, to network member-owned organizations
together to achieve economies of scale and scope,
and to support efforts by commercial banks to 'down-
scale' by integrating mobile banking and e-payment
technologies into their extensive branch networks.
6. Conclusion:
Most criticisms of microfinance have actually
been criticisms of microcredit. Criticism focuses on the
impact on poverty, the level of interest rates, high
profits, overindebtedness and su Critics say that
microcredit has not increased incomes, but has driven
poor households into a debt trap, in some cases even
leading to suicide. They add that the money from loans
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.