MICRO-FINANCE

Introduction Microfinance is the provision of financial services to low-income clients or solidarity lending groups 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."[1] Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is endemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.

Features :Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity

that runs a heifer pool are engaged in microfinance. Ensuring financial services to poor people is best done by expanding the number of financial institutions available to them, as well as by strengthening the capacity of those institutions. In recent years there has also been increasing emphasis on expanding the diversity of institutions, since different institutions serve different needs. Some principles that summarize a century and a half of development practice were encapsulated in 2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: Poor people need not just loans but also savings, insurance and money transfer services. 1. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. 2. "Microfinance can pay for itself." Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself. 3. Microfinance means building permanent local institutions. 4. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. 5. "The job of government is to enable financial services, not to provide them."
6. "Donor funds should complement private capital, not compete with it." 7. "The key bottleneck is the shortage of strong institutions and managers." Donors should

focus on capacity building. 8. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.

9. Microfinance institutions should measure and disclose their performance both financially and socially. Microfinance is considered as a tool for socio-economic development,and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions. Is the microfinance industry sustainable? Is the microfinance industry financially sustainableis it profitable after making adjustments for subsidies not likely to continue in the future? Most MFIs are still unprofitable, especially if one includes the many small MFIs that do not report to the international databases described. A more meaningful way to look at profitability is to consider the overall number of overall clients served by profitable MFIs, rather than the number of profitable MFIs themselves. Are MFIs as profitable as banks? Measured by return on assets, MFIs are on average more profitable than the commercial banks in their countries. This does not show that microfinance is inherently more profitable than commercial banking. Rather, the differential is likely due to microfinance being an immature industry in most countries where providers profits have not yet been squeezed down. Measured by return on the equity invested by shareholders, MFIs are on the average less profitable than banks, but this is mainly because MFIs are not yet as fully leveraged as banksi.e., MFIs fund their assets with more of their own money and less of the money deposited by savers. Even so, wellmanaged microfinance have already shown to be profitable enough to integrate into mainstream financial sectors.

What

is

the

governments

role

in

supporting

microfinance?

Governments most important role is not provision of retail credit services, Government can contribute most effectively by:

Setting sound macroeconomic policy that provides stability and low inflation Avoiding interest rate ceilings - when governments set interest rate limits, political factors usually result in limits that are too low to permit sustainable delivery of credit that involves high administrative costssuch as tiny loans for poor people. Such ceilings often have the announced intention of protecting the poor, but are more likely to choke off the supply of credit

Adjusting bank regulation to facilitate deposit taking by solid MFIs, once the country has experience with sustainable microfinance delivery,

Creating government wholesale funds to support retail MFIs if funds can be insulated from politics, and they can hire and protect strong technical management and avoid disbursement pressure that force fund to support unpromising MFIs.

Where can one find financial performance data on MFIs worldwide?

Increasing numbers of MFIs report their performance to international databases each year. The MIX Market is the primary source for this information, containing financial and other performance data from almost 2,000 MFIs collected and processed by the Microfinance Information eXchange (MIX). Data for participating MFIs, including client outreach measures, simplified financial statements, and a number of standard financial performance indicators, is publicly available on their website.

The MIX also publishes MIX Microfinance World, featuring country, regional and global analyses based on the MIX Market database, such as benchmarking reports; and the MicroBanking Bulletin, a periodic publication covering a variety of topics including financial reporting, social performance, transparency, policy & regulation, and investment.

The Microcredit Summit Campaign collects outreach data annually from hundreds of MFIs around the world. Summary information is published annually and the State of the Campaign reports can be found on their website.