Micro Finance Unit -1

8/2/2019 Micro Finance Unit -1

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Micro finance


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What is Micro financeMicrofinance refers to a variety of financialservices that target low-income clients,particularly women. Since the clients of microfinance institutions (MFIs) havelower incomes and often have limited

access to other financial services,


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microfinance products tend to be forsmaller monetary amounts thantraditional financial services. Theseservices include loans, savings,insurance, and remittances.

Contn--


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Cont--Microloans are given for a variety of purposes, frequently for microenterprisedevelopment. The diversity of products andservices offered reflects the fact that thefinancial needs of individuals, households,

and enterprises can change significantlyover time, especially for those who live inpoverty.


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Cont--Because of these varied needs, and becauseof the industrys focus on the poor,microfinance institutions often use non-traditional methodologies, such as grouplending or other forms of collateral not

employed by the formal financial sector.


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History of micro finance


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historyThe concept of microfinance is not

new. Savings and credit groups thathave operated for centuries include the"susus" of Ghana, "chit funds" in

India, "tandas" in Mexico, "arisan" inIndonesia, "cheetu" in Sri Lanka,"tontines".


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Cont--in West Africa, and "pasanaku" in Bolivia,as well as numerous savings clubs andburial societies found all over the world


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Cont--Formal credit and savings institutions forthe poor have also been around fordecades, providing customers who weretraditionally neglected by commercialbanks a way to obtain financial services

through cooperatives and developmentfinance institution


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Cont--in the early 1700s by the author andnationalist Jonathan Swift.1800s, various types of larger and more

formal savings and credit institutions beganto emerge in Europe,1870, the unions expanded rapidly over a

large sector of the Rhine


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Cont--Indonesian People's Credit Banks (BPR) orThe Bank Perkreditan Rakyat opened in1895In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America.1950s and 1970s, governments and donorsfocused on providing agricultural credit .


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Cont-Meanwhile, starting in the 1970s,experimental programs in Bangladesh,Brazil, and a few other countries extendedtiny loans to groups of poor women toinvest in micro-businesses. This type of

microenterprise credit was based onsolidarity group lending in which everymember of a group guaranteed repayment


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Challenge of micro finance----Traditionally, banks have not

provided financial services, such asloans, to clients with little or no

cash income. Banks incursubstantial costs to manage a client

account, regardless of how smallthe sums of money involved
http://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Bank


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Cont-- most poor people havefew assets that can besecured by a bank as

collateral . This meansthat the bank will havelittle recourse against

defaulti ng borrowe rs
http://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Collateral_(finance)http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Default_(finance)http://en.wikipedia.org/wiki/Collateral_(finance)http://en.wikipedia.org/wiki/Assets


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Cont--when poor people

borrow they often relyon relatives or a local

moneylender , whose interest rates can be very high.
http://en.wikipedia.org/wiki/Moneylenderhttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Interest_rateshttp://en.wikipedia.org/wiki/Moneylender


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Challenges facing Microfinance1 Sustainability of the institutions

2Recovery mechanism of loans3out reach of these institutions


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4performance assesment of institutions5long term socio-political impact

of the microfinance activities6 service delivery approaches


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Principlesof micro finance

t have a real, physical presence as does a product. For example, motor insurance may have a certificate, but the financial service itself cannot be touct have a real, physical presence as does a product. For example, motor insurance may have a certificate, but the financial service itself cannot be touct have a real, physical presence as does a product. For example, motor insurance may have a certificate, but the financial service itself cannot be touc


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1 Some principles that summarize acentury and a half of development practicewere encapsulated in 2004 by ConsultativeGroup to Assist the Poor (CGAP) andendorsed by the Group of Eight leaders at

the G8 Summit on June 10, 2004:
http://en.wikipedia.org/wiki/Consultative_Group_to_Assist_the_Poor_(CGAP)http://en.wikipedia.org/wiki/Consultative_Group_to_Assist_the_Poor_(CGAP)http://en.wikipedia.org/wiki/Group_of_Eighthttp://en.wikipedia.org/wiki/Group_of_Eighthttp://en.wikipedia.org/wiki/Consultative_Group_to_Assist_the_Poor_(CGAP)http://en.wikipedia.org/wiki/Consultative_Group_to_Assist_the_Poor_(CGAP)


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Poor people need not just loans but alsosavings, insurance and money transfer services.Microfinance must be useful to poorhouseholds: helping them raise income,build up assets and/or cushion themselvesagainst external shocks.
http://en.wikipedia.org/wiki/Insurancehttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Electronic_funds_transferhttp://en.wikipedia.org/wiki/Insurance


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Donor funds should complement privatecapital , not compete with it."The key bottleneck is the shortage of strong institutions and managers.Donorsshould focus on capacity building.Interest rate ceilings hurt poor people bypreventing microfinance institutions fromcovering their costs, which chokes off thesupply of credit.
http://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Bottleneckhttp://en.wikipedia.org/wiki/Bottleneckhttp://en.wikipedia.org/wiki/Financial_capital


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Microfinance can pay for itself.Subsidiesfrom donors and government are scarceand uncertain, and so to reach largenumbers of poor people, microfinance mustpay for itself.

Microfinance means building permanentlocal institutions.


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Microfinance also means integrating thefinancial needs of poor people into acountry's mainstream financial system."The job of government is to enablefinancial services, not to provide them.


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Boundaries of micro finance

Practitioners and donors from thecharitable side of microfinance frequentlyargue for restricting microcredit to loansfor productive purposes such as to start orexpand a microenterprise
http://en.wikipedia.org/wiki/Microenterprisehttp://en.wikipedia.org/wiki/Microenterprise


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Cont--influenced by traditional Western viewsabout usury , the role of the traditionalmoneylender has been subject to muchcriticism, especially in the early stages of modern microfinance. As more poor people

gained access to loans from microcreditinstitutions however, it became apparentthat the services of moneylenders

continued to be valued.
http://en.wikipedia.org/wiki/Usuryhttp://en.wikipedia.org/wiki/Usury


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Cont--Borrowers were prepared to pay very highinterest rates for services like quick loandisbursement, confidentiality and flexiblerepayment schedules.
http://en.wikipedia.org/wiki/Confidentialityhttp://en.wikipedia.org/wiki/Confidentiality


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Beneficiaries of micro financeIt has ability to touch upon all aspect of rural economyIt helps women in rural area to improvetheir lives to a large extents


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Financial Needs of poor prople

In developing economies and particularlyin the rural areas, many activities thatwould be classified in the developed worldas financial are not monetized : that is,money is not used to carry them out.

Almost by definition, poor people havevery little money. But circumstances oftenarise in their lives in which they need

money or the things money can buy.
http://en.wikipedia.org/wiki/Monetizationhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Monetization


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Types of NeedsLifecycle Needs : such as weddings,funerals, childbirth, education,homebuilding, widowhood, old age.Personal Emergencies : such as sickness,injury, unemployment, theft, harassment ordeath.Disasters : such as fires, floods, cyclonesand man-made events like war or

bulldozing of dwellings.


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Cont

Investment Opportunities : expanding abusiness, buying land or equipment,improving housing, securing a job (whichoften requires paying a large bribe), etc.


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Way to manage moneyRutherford argues that the basic problempoor people as money managers face is togather a 'usefully large' amount of money.Building a new home may involve savingand protecting diverse building materials

for years until enough are available toproceed with construction


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Cont--Childrens schooling may be funded bybuying chickens and raising them for saleas needed for expenses, uniforms, bribes,etc. Because all the value is accumulatedbefore it is needed, this money

management strategy is referred to as'saving up'


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The work of Rutherford, Wright and othershas caused practitioners to reconsider a keyaspect of the microcredit paradigm: thatpoor people get out of poverty byborrowing, building microenterprises and

increasing their income


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Cont----The new paradigm places more attentionon the efforts of poor people to reduce theirmany vulnerabilities by keeping more of what they earn and building up their assets.While they need loans, they may find it as

useful to borrow for consumption as formicroenterprise.


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Delivery vehicles of micro

financeNon governmental organization(NGO)

Commercial Banks

Micro finance institutes

Micro Finance Unit -1

Documents

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