UNIT -1 OVERVIEW OF MICROFINANCE

1.1 Concept of Microfinance:

Microfinance has evolved as an economic development social services are discussed briefly in chapter 3, as some
approach intended to benefit low-income women and MFIs provide these services.) men. The term refers to the
provision of financial services MFIs can be nongovernmental organizations to low-income clients, including the
self-employed.

Financial services generally include savings and credit; however, some micronance organizations also provide
insurance and payment services. In addition to nancial intermediation, many MFIs provide social intermediation
services such as group formation, development of self condence, and training in nancial literacy and management
capabilities among members of a group. Thus the denition of micronance often includes both nancial
intermediation and social intermediation. Micronance is not simply banking, it is a development tool. Micronance
activities usually involve: Small loans, typically for working capital ,Informal appraisal of borrowers and
investments ,Collateral substitutes, such as group guarantees or compulsory savings ,Access to repeat and larger
loans, based on repayment performance ,Streamlined loan disbursement and monitoring ,Secure savings products.
Although some MFIs provide enterprise development services, such as skills training and marketing, and social
services, such as literacy training and health care, these are not generally included in the denition of micronance.

MFIs can be nongovernmental organizations (NGOs), savings and loan cooperatives, credit unions, government
banks, commercial banks, or nonbank nancial institutions. Micronance clients are typically self-employed, low-
income entrepreneurs in both urban and rural areas. Clients are often traders, street vendors, small farmers, service
providers (hairdressers, rickshaw drivers), and artisans and small producers, such as blacksmiths and seamstresses.
Usually their activities provide a stable source of income (often from more than one activity). Although they are
poor, they are generally not considered to be the poorest of the poor. Moneylenders, pawnbrokers, and rotating
savings and credit associations are informal micronance providers and important sources of nancial
intermediation but they are not discussed in detail in this handbook. Rather, the focus is on more formal MFIs.

1.2 Revolution of Microfinance:

Microfinance institutions (MFIs) have expanded rapidly over the last 10 to 15 years:

According to the Microcredit Summit (Microcredit Summit Campaign 2012), the

number of very poor families with a microloan has grown more than 18-fold from 7.6
million in 1997 to 137.5 million in 2010.

Microcredit has generated considerable enthusiasm and hope for fast poverty alleviation,
culminating in the Nobel Prize for Peace, awarded in 2006 to Mohammed Yunus and the
Grameen Bank for their contribution to the reduction in world poverty.

A change in lending methodology: Individual lending seems to be getting most of the attention
and the excessive focus on women is being questioned.

A change in the supply of financial products: Over the past decade, however, the almost
exclusive attention on microcredit has evolved into a broader vision as captured by the use of
 the word microfinance instead of microcredit. These include savings, insurance, remittances,
and many more.

A change in lending methodology: Individual lending seems to be getting most of the attention
and the excessive focus on women is being questioned.

A change in the supply of financial products: Over the past decade, however, the almost
exclusive attention on microcredit has evolved into a broader vision as captured by the use of
the word microfinance instead of microcredit. These include savings, insurance, remittances,
and many more.

A larger and a more diverse pool of suppliers: NGOs and cooperatives with banks, microfinance
banks and financial intermediaries.

A radical transformation in supervision and regulation: In most countries, microfinance

institutions are prevented from monopolistic practices.

Local governments are trying to foster competition, and stringent supervision for fully regulated
suppliers is being set-up in many countries.

A fundamental change in financial priorities: Focus on self-sustainability does not seem to be the
greatest challenge anymore.

Microfinance has demonstrated that it can not only be self-sustainable, but also
generate handsome returns.

1.3 Development of Microfinance:

Internationally:

Establishment of Grammeen Bank Bangladesh and replicated to more than 50 countries

Village Banks in Latin America and then to Africa
In Nepal:

Informally - in the form of local moneylenders, informal groups (mother groups)

Formally establishment of cooperative societies, Small Farmer Development
Programme (SFDP), Grameen Bikash Banks, Microfinance Development Banks and
Financial Intermediary NGOs
1.4 Characteristics of Microfinance:

Mostly collateral free

MFIs go to clients rather than clients going to MFIs.
Simplified saving and loan procedures.
Small size of loans and saving
Close supervision of clients.
Quick repayment with repeated loans and size of loan increases in the subsequent cycles.
Interest rates usually in between money lenders and formal banks.
 Repayment from business as well as other sources.

1.5 Rationale of growing microfinance:

The promise of reaching the poor.

Promise of Financial sustainability.
The potential to build on traditional systems.
Contribution of microfinance to strengthening and expanding existing formal financial system.
Growing number of success stories of MFIs.
The availability of better financial products as a result of experimentation and innovation.

1.6 Key Principles of Microfinance:

A variety of financial services to the poor, not just loans

A powerful instrument against poverty
Building permanent local financial institutions/systems that serve the poor
Operationally and financially sustainable
Credit plus approach
Micro-credit is not always the answer

1.7 How microfinance differs from commercial finance?