Micro Finance 4

7/30/2019 Micro Finance 4

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MICROFINANCE

Microfinance is also known as micro banking or

micro credit. Microfinance is a type of banking that is

given or provided to poor, needy or unemployed

people or groups that have no other means or ways ofgetting income.


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Microfinance Institutions

Microfinance is often used more narrowly to

refer to loans and other services from

providers that identify themselves as

microfinance institutions (MFIs).

These institutions deliver very small loans to

unsalaried borrowers, taking little or no

collateral.


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Continued

Most MFIs started as not-for-profit

organizations like NGOs (non-governmental

organizations), credit unions and other

financial cooperatives, and state-owneddevelopment and postal savings banks.

Some MFIs provide non-financial products,

such as business development or healthservices.


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Microfinance Providers In Pakistan

Microfinance Banks are those that are

licensed and prudentially regulated by the

State Bank of Pakistan to exclusively service

the microfinance market. These banks include:

Khushhali Bank (KB)

Network MicroFinance Bank Ltd. (NMFB)

Pak-Oman Microfinance Bank Ltd. (POMFB)

Rozgar Microfinance Bank Ltd. (RMFB)

Tameer Microfinance Bank Ltd. (TMFB)

The First MicroFinanceBank Ltd. (FMFB


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Why Microfinance Is Needed?

The main purpose or basic aim of

microfinance is to give loans to low income

people.

Provide an opportunity to become self-

sufficient by providing means of saving money,

borrowing money and insurance.

These services are not limited to credit, but

include savings, insurance, and money

transfers.


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Why Dont The Clients Go

Directly To Banks?Administrative cost of supplying loans to

the poor population is extremely high.

Poor do not have any assets to use as

collateral.

Microfinance is an expensive enterprise


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The Incidence Of High

Interest RatesMFIs need to cover three types of costs

1. Cost of the money that it lends

2. Cost of loan defaults

3. Transaction costs


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WHEN IS MICROFINANCE NOT

AN APPROPRIATE POVERTY

PREVENTION TOOLMicrocredit may be inappropriate where

conditions pose severe challenges to

standard microcredit methodologies.1. Populations that are geographically

dispersed

2. Microfinance may not be appropriate forpopulations with a high incidence of

debilitating illnesses


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Continued

3. Dependence on a single economic activity or

single agricultural crops.

4. Reliance on barter rather than cash

transactions

5. Hyperinflation or absence of law


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ALTERNATIVE STRATEGIES

Savings

Financial entitlements

Safety-net grants

Grants

Employment programmes


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ROLE OF STATE BANK IN

MICROFINANCE SECTOR State Bank Pakistan support to microfinance

commercialization

The State Bank of Pakistan has encouraged

the entry of private sector institutions. licensing, regulation and supervision of

Microfinance Banks (MFBs).

SBP is the implementing agency for

strengthening supervision and regulationMFIs.

SBP is also in charge of special funds ofmore than US$70 million.


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ROLE OF COMMERCIAL BANKS

IN MICROFINANCE SECTOR A commercial bank is a financial institution

that offers a broad range of deposit accounts,

including checking, savings, and timedeposits, and extends loans to individuals and

businesses

In Pakistan it is estimated that as many as 5.6million households need microfinance

services but these services reach only to less

than 1 percent


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Continued

Poor person just need to visit his local

commercial bank to get access to

microfinance benefits


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Advantages Of Microfinance

Loans are provided based on Group lending.

Micro credit enables substitution of physical

collateral.

The repeated nature of interaction and threat

to cut off loan in case of default is used to

overcome asymmetric information problem

and improve efficiency of loaning.

The cost of borrowing is lower for the clients.


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Disadvantages of Microfinance

It does not cater to the poorest of the poor.

UNDP Report of 2000 states: The hard-core

poor, having few assets, are reluctant to take

on the risks of credit, and when they do, it is

usually for emergencies and consumption not

for production.

Micro finance schemes are highly subsidized.


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Pakistans Experience With Micro

Financing

Poor Targeting,

Dependency on the Donors,

Low Coverage of the Poorest In the Society, Potential for Growth in the Economy.

NRSP is one of the largest lending NGO for

micro financing in the country its totalcoverage of the poor in the country is just 0.22

percent of the total poor in the country.


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Microfinance focusing Women

Women in households with an income below

the absolute or relative threshold of poverty

remain poorer than men of the same

households because of:

Inequities in education,

Levels of skill,

Social constraints on their mobility,


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The attitudinal and institutional barriers to

which their behaviour is subjected.

Women spend nearly all their income on

children, and the welfare of the home.

Prioritising women in micro finance schemes

hence, is expected to have positive

implications for taking the household out of

poverty.


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However, the essence of the need to

concentrate on women is misunderstood by

the UPAP. The Project emphasis is on

boosting the household economy, rather

than the empowerment of women.


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Effects of Microfinance

There are two impacts of microfinance

Positive impact

Negative impact


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Positive effects

1. On women

Empowerment

Wages

Nutrition

Credit with education.

2. Poverty reduction.


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Negative effects

An increase in child labor

On gender


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Can Microfinance Be

Profitable?Many feel that once microfinancebecomes mainstreamed, massive growth in

the numbers of clients can be achieved.


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When is microfinance NOT an

appropriate tool? Microfinance is particularly inappropriate for

the destitute, who may need grants or other

public resources to improve their economic

situation

Governments and development agencies

often use microfinance as a tool to address

socio-economic problems such as relocationof refugees from civil strife, generating

employment among demilitarized soldiers, or

assistance following a natural disaster.


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Case study of Microfinance

50 aid organisations and 7 banks provide

microcredit

Kashf Foundation: first microcredit provider

Its aim: better the economic position of low

income households

Achievements so far:

Has disbursed loans of US $ 202 million

Has supported more than 300,000 families.

Network ranges from shoemakers to poultry


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Beneficiary of Kashf

Parveen bibi has become a restaurant owner

Khwaja Ghareeb Nawaz- seats 8 to 10 clients

Improvement in lifestyle:

Able to send her children to schoolBrought peace to her marital life

Have access to greater amenities of life

Loan was of Rs.6000 with 1.5 percent insurancecosts and 20 percent service costs.

Has many sources of income now


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Need For Microfinance In Light

Of The Recent Flood Crisis

Wide scale devastation and displaced 20

million people

Faster resumption of economic activitythrough microcredit

Management and proper use ensured

Preserves self esteem and createsindependent individuals


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Conclusion

Microfinancing may not be the best way to

help the poorest

It can not be the sole instrument of poverty

reduction

Strong macroeconomic policies creating high

and equitable growth can reduce poverty

Microfinance can only supplement the process


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Your questions are

welcome!

Micro Finance 4

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