Executive Summary

The concept of microfinance is not new. Savings and credit groups that have operated
for centuries. The main objective of microfinance is to provide financial services to
the low income or poor people. Microfinance finances the poor people for their
income producing activities and builds their assets that they can able to doing
something for their benefit.

In start Microfinance is called Micro credit but now it is not limited to credit but
include saving, Insurance, and Money transfers services for poor or low income
people. Main features of Microfinance are that provide financial services to poor and
low income clients such as very small loan against social collateral include group
lending. Micro business loan amount is 10000 to 40000 and loan tenure to 3 to 24
months. Microfinance client include poor and low income people, self employed,
Micro entrepreneurs and majority of women are the clients of Microfinance.

The main drawback of microfinance is high administrative cost, high interest rate on
small loans borrowers give no collateral to the so bank have no security and have a
high risk. One of failure of microfinance is that some time they provide loan more
then borrower capability that he can not able to pay backs it.

In Pakistan Microfinance institutions have approximately 1.8 million customers.

Microfinance borrowers will be 10 million by 2015. Pakistan is leader in the Asian
region in commercialized microfinance. Pakistan is first country to introduce a
comprehensive legal, regulatory, and supervisory framework for formal microfinance
in Asia.

In last few years there are lot of innovation occurs in Microfinance, such as Mobile
banking services also called branchless banking through agents in rural areas, Micro I
insurance is available for transfer the risk facing poor people, Micro insurance for
agriculture, Automated loan System New technology can automate and reduce errors,
and costs.

Success In Microfinance

It is a fact that Poor people are an essential part of any state and poor people have
also impact on whole economy. If poor people are go down day to day so, it have also
a negative impact on whole economy, and if poor people are well-off so the whole
economy will be consider.

One of major success of Microfinance is that it provides way of success to the poor
people to doing something for their welfare. A loan provide through microfinance is
very small in size, but it allow to a person who earn less then a dollar a day, that he
can able to open a shoe stand or start a small restaurant. A little money could enable
someone to buy a carrying mule, or a cell phone.
In Bangladesh 5% of Grameen Bank borrowers leave poverty each year. In
Bangladesh Microfinance institutions focus on women because the rate of repayment
from women side is 90 to 95%. Microfinance also brings a social change in society
because poor people improve their lifestyle through microfinance.

Micro finance industry is growing day by day, we can judge the microfinance success
through, SKS bank in India, Vikram Akula is the founder of SKS bank, Vikram
Akula built a successful enterprise SKS Microfinance by making finance available to
the poor. Today, SKS is the fastest-growing microfinance institution in the world.
Recently it raised Rs 366 crore through largest private equity deal in the history of the
microfinance sector. The growth was slow and painful but today after 10 years it
became the the largest microfinance institutions in India with 4 million borrowers,
1354 branches in about 60,000 villages. Total loan disbursed is around 6,640 crore
with repayment rate of 99%.
The main objective of micro finance is to provide high quality financial services to
low-income households and to finance their income-producing activities, build assets
to protect against risks and also provide savings, insurance, and money transfers
facility.

Traditionally poor people are unable to receive loan because they have no collateral,
so poor people have no way for success and go down day to day and at the end they
are not capable to fight against poverty but Microfinance allows the poor to receive
the loan without giving any collateral and capable the poor people to improve their
life.

Micro finance also plays an important role to empowering the women. Microfinance
give small loans to those women who live on less than $1 per a day by giving these
poor women loans the microfinance industry not only helps them to pull themselves
out of poverty, but it also promotes gender equality throughout the world.

Failures In Microfinance

Micro loans are more beneficial to borrowers living above the poverty line than to
borrowers living below the poverty line. Some time Microcredit is to do harm than
good to the poorest, one reason is that high interest rate charged by micro credit
institution, and some time microfinance institution give loan to those who have no
capability no specialized skill to generate income so, they are not able to repay the
loan and trapped in the loan net.

In most cases Microfinance Institutions give loan to the people for some productive
purpose to improve their life but people use it for some different purpose which is
useless and the end they can not re pay it back to MFI. In some cases microfinance is
available but most of poor people are not aware or have some social problems and
they prefer moneylender.
One of failure is that high operational cost face by Microfinance Institution and
Microfinance institution get no collateral so they get social collateral and provide loan
to the group not to the individual so, they also properly investigate about the group
and make the group which increase the cost.
Most of microfinance institutions charge high interest rate, so poor people can not pay
that too much high interest rate. Microfinance institutions are primarily non-profit
organizations that can not be sustainable and viable.

One of the drawback of micro loan is that have not a flexibility and in most cases
repayment schedule not meet the borrower capability.

Innovation In Microfinance

The term innovation generally means a new way of doing something. An innovation
is a technology developed by the MFI that produces a product or service for poor
clients at the least cost possible. It could be a new way of screening and lending to
clients that overcome problems of information. An innovation could be a product that
meets the risk-management requirement of poor people, Micro-insurance is providing
a way to the poor people to transfer or minimize their risk.

Innovation in technology also improved the delivering financial services reduce the
cost and also increase the outreach.
Examples are solidarity group lending, village banking, and repayment incentive
schemes.
Many microfinance practitioners see ICT innovation as a key strategy to take
microfinance to the next level in terms of outreach and sustainability. The most
fundamental ICT application is the back-office MIS. This raises the need to either
modify off-the-shelf software or develop in-house software, which assumes that the
MFP has the internal capacity to develop and maintain software or the financial
resources to outsource this work. More needs to be done to make standard and
affordable MIS software accessible to smaller but expanding MFPs.

Innovation is widely believed to be a response to competitiveness pressures and to

enhance competitiveness. For example that when easy paisa in Pakistan is launched
so they provide only money transfer facility. After that UBL Omni (branchless
banking) is also came in the market provide money transferring as well as Bill
payment services and now also mobile account of people and now competition is
more strong and Mobilink also provide bill payment facility through agent base or
baranchless banking.

Some major innovations in Microfinance Include:

Internet Banking

Internet banking provides clients with real-time information about their accounts, and
the ability to transfer funds between their accounts. It is an empowering tool because
it gives bank clients the flexibility to manage their financial resources deliberately, at
their own leisure, and without having to visit a bank office during opening hours. In
particular, it is a vital accompaniment to card-based services, allowing clients to keep
track of numerous small electronic transactions.
From the bank perspective, Internet banking is an efficiency tool because it reduces
the work of (human) tellers and therefore reduces labour costs. It is a relatively easy
and inexpensive service to offer. The main constraint to MFPs implementing Internet
banking is their clients’ minimal access to the Internet. In some areas, this will be
overcome somewhat with the roll-out of rural telecentre networks. It is also possible
for MFPs to develop modified ATMs that provide this functionality.
Automated Teller Machines (ATMs)

Their should be ATM facility provide to the microfinance clients that they can easily
withdrawal their money or loan from ATM machine. They can easily access to their
account check their account balance.

Interactive Voice Response (IVR) Technology

This helps MFIs clients to quickly get information via telephone rather than by traveling
to MFI office and request the service in person. It give more easy way to MFI client to
access their account information.

Smart Cards

The use of Smart Cards can help MFIs deliver services like managing savings accounts,
disbursing loans, or making transfers. With the ability of the card to store all relevant
client’s information (e.g. account balances, credit, etc. including personal identification)
it functions as an electronic passbook on which transactions can be recorded once,
speeding up the process and improving accuracy.

Personal Digital Assistants (PDAs).

MFIs staff can benefit from the use of PDAs, which can be customised to run specific
programs to manage MFIs and client’s data and perform financial calculations. PDAs can
help officers who are away in the field provide electronic data concerning
clients/borrowers which can be useful for loan applications and review and approval.
Biometrics Technology

Despite being new, biometric methods of measuring individuals’ unique physical

characteristics, for purposes of identification, are being adopted by MFIs who have
become alerted to the importance of data security. Some MFIs find low-cost biometric
technology to be preferable to passwords and PINs to access the clients’ financial data.

Credit Scoring

Credit scoring systems technology analyse the pattern of clients’ historical data to predict
how they will act in the future, and can help MFIs make more reliable decisions on loan
applications, collections strategies, marketing, and client retention.

Recommendations

Most of MFIs are dependent on donors assistance to grow, which is not good for their
sustainability, MFIs should move toward deposit mobilization to increase funds for
lending and to improve their services.
Cost efficiency is especially important in the current environment of the global
financial crisis because if MFIs will not reduce their cost so it is big problem for their
sustainability.
Micro finance institution must also be strengthened to provide quality microfinance
services to their clients. Their should be proper regulatory framework for Micro
finance.
Due to limited infrastructure and the complications of religious and political pressure
there are many areas where microfinance is not available so, identifying the way to
reach these remote areas.
Microfianance Institute should increase their outreach to catch the unserved customer
of Microfinance who need microfinance services, such as Mobile banking through
agent base model in rural areas to reduce their cost.
Microfinance Institution should be flexible and design the product which matches the
microfinance borrower capability.
Central Bank should pass the regulation for Microfinance institution which
strengthens this sector, like Pakistan state bank raise minimum capital requirement for
Microfinance institutions. State bank also advise the commercial banks that their
should be one counter of microfinance in every branch to serve the poor.