Stamford University Bangladesh

Assignment On Course Title: Operation & Management of NGOs Course Code: MGMT 461 Topic: The Review and Concept of Micro Finance

Submitted To:
Asif Mahbub Karim Assistant professor, Department of Accounting Stamford University Bangladesh.

Submitted By:
Name: Md. Rafiuddin Biplab ID No. BBA 042 13331 Name: Md. Ashik Ahmed ID No. BBA 042 13351 Name: Md. Shahriar Abir ID No. BBA 042 13370 Name: Md. Mahmudul Hasan ID No. BBA 042 13401

Date of Submission: 01/06/2013

1. Review of Micro Finance Microfinance is the general term used for financial service targeting poor and lowincome people, who do not have access to typical banking services. This method, developed over the last 30 years, delivers very small loans to unsalaried borrowers, taking no collateral. This is an idea that low-income people are capable of lifting themselves out of poverty if given access to financial services. [International Center for Microfinance and Social Business, Okan University] Micro Finance is defined as, financial services such as Saving A/c, Insurance Fund & credit provided to poor & low income clients so as to help them to rise their income & there by improve their standard of living. From this definition it is clear that main features of Micro Financing: 1) Loan are given without security 2) Loans to those people who live BPL (Below Poverty Line) 3) Even members of SHG enjoy Micro Finance 4) Maximum limit of loan under micro finance 25,000/5) The terms and conditions given to poor people are decided by NGOs 6) Micro Finance is different from Micro Credit- under Micro Credit, small amount of loans given to the borrower but under Micro Finance besides loans many other financial services are provided such as Savings A/c, Insurance etc. Therefore Micro Finance has wider concept as compared to Micro Credit. Microfinance, according to Otero (1999, p.8) is the provision of financial services to low-income poor and very poor self-employed people. These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001, p.339) define microfinance as the attempt to improve access to small deposits and small loans for poor households neglected by banks. History of Microfinance Over the past centuries, practical visionaries, from the Franciscan monks who founded the community-oriented pawnshops of the 15th century to the founders of the European credit union movement in the 19th century (such as Friedrich Wilhelm Raiffeisen) and the founders of the microcredit movement in the 1970s (such as Muhammad Yunus and Al Whittaker), have tested practices and built institutions designed to bring the kinds of opportunities and risk-management tools that financial services can provide to the doorsteps of poor people. While the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success. In nations with lower population densities, meeting the operating costs of a retail branch by serving nearby customers has proven considerably more challenging. Hans Dieter Seibel, board member of the European Microfinance Platform, is in favor of the group model. This particular model (used by many Microfinance institutions) makes financial sense, he says, because it reduces transaction costs. Microfinance programmes also need to be based on local funds. Local Roots The history of micro financing can be traced back as far as the middle of the 1800s, when the theorist Lysander Spooner was writing about the benefits of small credits to

entrepreneurs and farmers as a way of getting the people out of poverty. Independently of Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany. The modern use of the expression "micro financing" has roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of micro financing. Another pioneer in this sector is Akhtar Hameed Khan. Microfinance standards and principles 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 CGAP and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004: 1. Poor people need not just loans but also savings, insurance and money transfer services. 2. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks. 3. "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. 4. Microfinance means building permanent local institutions. 5. Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. 6. "The job of government is to enable financial services, not to provide them." 7. "Donor funds should complement private capital, not compete with it." 8. "The key bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building. 9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit. 10. 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.

2. Benefits of Micro Finance Microfinance involves extending small loans, savings and other basic financial services to people that dont currently have access to capital. Its a key strategy in helping people living in poverty to become financially independent, which helps them become more resilient and better able to provide for their families in times of economic difficulty. Considering nearly half the world survives on less than $2 a day, microfinance is a vital solution. Here are ten benefits of microfinance: 1. Access: Banks simply wont extend loans to those with little or no assets, and generally dont engage in the small size of loans typically associated with microfinancing. Microfinancing is based on the philosophy that even small amounts of credit can help end the cycle of poverty. 2. Better loan repayment rates: Microfinance tends to target women borrowers, who are statistically less likely to default on their loans than men. So these loans help empower women, and they are often safer investments for those loaning the funds. 3. Extending education: Families receiving microfinancing are less likely to pull their children out of school for economic reasons. 4. Improved health and welfare: Microfinancing can lead to improved access to clean water and better sanitation while also providing better access to health care. 5. Sustainability: Even a small working capital loan of $100 can be enough to launch a small business in a developing country that could help the benefactor pull themselves and their family out of poverty. 6. Job creation: Microfinancing can help create new employment opportunities, which has a beneficial impact on the local economy. 7. Encourage self-sufficiency and entrepreneurship: Unprivileged people might have profitable business plans, but they lack sufficient funds to meet the start-up costs. These loans give clients enough capital to get their plans off the ground and then begin turning revenue. They can pay off their loans in time then continue to gain revenue from the business indefinitely. 8. Manage risk: Microfinance can give unprivileged people enough capital stability, which gives them financial security from sudden monetary problems. Also, savings allow for improved nutrition, reduced illness, better living conditions and educational investment. 9. Empower Women: Microcredit also empowers women since they are the major beneficiaries. In the past, women were not able to participate in economic activities. Microfinance institutions now provide women with the capital they require to start business projects. This gives them more confidence and allows them to participate in decision making, thereby encouraging gender equality.

3. Challenges of Microfinance 1. Reducing vulnerability Macro-economi instability or natural calamities, have serious implications on the management and viability of microfinance institutions. Several national and regional MFIs were forced to suspend microfinance operations (recovery and disbursement) that led to loss of income and portfolio. Some large MFIs have declared writing off loans but smaller MFIs could not afford to do so. There is no systematic study to assess the adverse impact on loan repayment rates in Sidr affected areas but field officials and beneficiaries report that they are having serious difficulties in maintaining high repayment rates even of new disbursements. Similarly, wide spread adverse impact has fallen on portfolio quality due to price hike when poor borrowers/poor had to spend more on family consumption. 2. Economic Growth and Microfinance Sector Microcredit provides capital to the poor and near poor for investing in various farm and non-farm income generating activities. The implicit assumption is that there are millions of such profitable investment opportunities and increasingly created in the rural economy so that more and more people with larger investment funds (large loans are given in successive years) can profitably invest. This is only possible when these sectors are growing at reasonable rate. Some specific examples of linkage between microfinance sector and growth can be visualized. One of the major areas of investment is poultry rearing for eggs and meat. Investment portfolio in poultry expanded with expansion of the sector. The eggs and meat produced by microcredit borrowers are sold not in rural areas but in urban centers. After the bird flu attack purchase fell, farmers lost money and thousands of farmers closed poultry farms, and MFIs faced huge loan default. Many of the farmers have borrowed from MFIs may now have problems of repayment and MFIs face poor portfolio quality. Good harvest and good price leads to high income and good repayment of loans and vice versa. There is no systematic study to show link between monga and microcredit repayment but staff members of MFIs operating in north-western part of Bangladesh report serious strain on repayment during monga period. Before considering any good package of response we need to acknowledge and understand the linkage of economic growth and microfinance sector. Poor people make profit and get more opportunities for investments in an era of growth. 3. Research and Innovation Bangladesh microfinance sector depends on the innovation of only a few organizations. The basic Grameen model was widely replicated by all. The next innovation in the form of flexible microfinance for the very poor, microenterprise loan or seasonal loan for farmers have been started by only a handful of MFIs and later replicated by many with encouragement from PKSF and demand from clients. Most of small and medium MFIs either do not have the capacity or willingness to take the risk of trying out new things. This approach of replication limits innovation and competition.

The sector also lacks resources and wiliness to undertake research related to microfinance. Only BRAC has in house capacity to conduct research. Bangladeshi universities and research agencies do not regularly produce useful research findings. Occasionally some donor funded projects do some research that can be at best called anecdotes.CDF produces an annual report on microfinance statistics which will be now produced in collaboration with InM. 4. Regulatory Environment Microfinance is now regulated under the Microcredit Act 2006 enforced by the Microcredit Regulatory Authority (MRA). Four hundred thirty two (432) MFIs have already received license and more MFIs are expected to receive license. This is first step to formally recognize and legitimize microfinance under licensed organizations. But MRA is yet to introduce the body of regulations that are supposed to actually guide the MFIs. Although it has produced a set of draft regulations but that has not been approved by the Ministry of Finance (MoF) reportedly due to protest from the leaders of the sector. 5. Application of ICT Application of information and communication technology in management of MFIs is limited. A few large MFIs have introduced accounting and MIS software at the branch level but the management system remains largely manual. MFIs will find it difficult to manage diversified products and effectively control internal management without deeper applications of ICT. Overall ICT can be used by MFIs, PKSF, and MRA to improve efficiency, ensure transparency, improve monitoring and internal control, disseminate accurate information and offer better services to respective clients and other stakeholders. 6. Support for Business Expansion Microfinance has eased supply of resources to the poor and near-poor for investments. But the expansion of actual IGAs as seen by the limited growth of loan size has been limited not because of lack of supply of money but because of other non-finance factors such as limited growth of demand, access to market, limited access and application of technology etc. Major challenges for the clients will be to have these services and for the MFIs and other stakeholders to provide or facilitate them. The activities and interventions in these areas are still in pilot or rudimentary stage. Although private sector providers are supposed to respond to demand for such services but that is not automatically happening. There is a case for support for expansion of non-financial services for the borrowers of MFIs.

4. Microfinance - Credit Lending Models "Microfinance:Credit Lending Models" is an attempt to document the various models currently being used by microfinance institutions throughout the world. There are 14 microfinance models. They include, associations, bank guarantees, community banking, cooperatives, credit unions, grameen, group, individual, intermediaries, NGOs, peer pressure, ROSCAs, small business, and village banking models. Some of them are described below. In reality, the models are losely related with each other, and most good and sustainable microfinance instititions have features of two or more models in their activities. The models were developed through extensive field work/observations and interviews carried out in India, Thailand, Philippines, Indonesia and Sri Lanka, and includes information from literature as well. 1. Associations Model: This is where the target community forms an 'association' through which various microfinance (and other) activities are initiated. Such activities may include savings. Associations or groups can be composed of youth, or women; they can form around political/religious/cultural issues; can create support structures for micro-enterprises and other work-based issues. In some countries, an 'association' can be a legal body that has certain advantages such as collection of fees, insurance, tax breaks and other protective measures. Distinction is made between associations, community groups, peoples organizations, etc. on one hand (which are mass, community based) and NGOs, etc. which are essentially external organizations. 2. Grameen Model: The Grameen model emerged from the poor-focused grassroots institution, Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the following methodology: A bank unit is set up with a Field Manager and a number of bank workers, covering an area of about 15 to 22 villages. The manager and workers start by visiting villages to familiarise themselves with the local milieu in which they will be operating and identify prospective clientele, as well as explain the purpose, functions, and mode of operation of the bank to the local population. Groups of five prospective borrowers are formed; in the first stage, only two of them are eligible for, and receive, a loan. The group is observed for a month to see if the members are conforming to rules of the bank. Only if the first two borrowers repay the principal plus interest over a period of fifty weeks do other members of the group become eligible themselves for a loan. Because of these restrictions, there is substantial group pressure to keep individual records clear. In this sense , collective responsibility of the group serves as collateral on the loan. 3. NGO Model NGOs have emerged as a key player in the field of microcredit. They have played the role of intermediary in various dimensions. NGOs have been active in starting and participating in microcredit programs. This includes creating awareness of the importance of microcredit within the community, as well as various national and international donor agencies.

They have developed resources and tools for comunities and microcredit organizations to monitor progress and identify good practices. They have also created opportunities to learn about the principles and practice of microcredit. This includes publications, workshops and seminars, and training programs. 4. ROSCA Model Rotating Savings and Credit Associations or ROSCAs, are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. For example, a group of 12 persons may contribute Rs. 100 (US$33) per month for 12 months. The Rs. 1,200 collected each month is given to one member. Thus, a member will 'lend' money to other members through his regular monthly contributions. After having received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he then pays back the amount in regular/further monthly contributions. Deciding who receives the lump sum is done by consensus, by lottery, by bidding or other agreed methods. 5.Small Business Model The prevailing vision of the 'informal sector' is one of survival, low productivity and very little value added. But this has been changing, as more and more importance is placed on small and medium enterprises (SMEs) - for generating employment, for increasing income and providing services which are lacking. Policies have generally focused on direct interventions in the form of supporting systems such as training, technical advice, management principles etc.; and indirect interventions in the form of an enabling policy and market environment. A key component that is always incorporated as a sort of common dinominator has been finance, specifically microcredit - in different forms and for different uses. Microcredit has been provided to SMEs directly, or as a part of a larger enterprise development programme, along with other inputs. 6. Village Banking Model Village banks are community-based credit and savings associations. They typically consist of 25 to 50 low-income individuals who are seeking to improve their lives through self-employment activities. Initial loan capital for the village bank may come from an external source, but the members themselves run the bank: they choose their members, elect their own officers, establish their own by-laws, distribute loans to individuals, collect payments and savings. Their loans are backed, not by goods or property, but by moral collateral: the promise that the group stands behind each individual loan. The Village Banking model is closely related to the Community Banking and Group models.

5. Literature Survey of 2 Decades The use of the Sustainable Livelihoods Framework in impact measurement We have seen that microfinance can have a wide range of impacts on households involved in the project, but also can have wider social impacts. There are different ways of measuring impact such as using Social Performance Assessments (SPAs) (Copestake, 2004), AIMS toolkit (Simanowitz, 2001c) and Internal Learning Systems (Noponen, 2005). Most assessments use quantitative research tools such as surveys, financial ratios and participatory tools, and qualitative tools such as focus group discussions and participant observation (Simanowitz, 2001c). This research is focused on the impact of microfinance on livelihood security. Hussein (2000, p.5) states that a livelihoods impact assessment highlights the need to understand the significance of a project to the livelihoods of project beneficiaries and other local people. This is the objective of this dissertation. Simanowitz (2001b, p.17), states that impact assessment must be based on a sound conceptual framework that can be used for developing hypothesis about possible impact channels, and as a framework for analysis and understanding. Particularly useful is a livelihoods analysis that helps contextualise specific interventions in a broader understanding of poverty. One such livelihood analysis approach is a livelihoods framework. According to Neefjes (2000, p.82) a livelihoods framework is people centred and aims to explain the relationships between people, their livelihoods, (macro) policies and all kinds of institutions. Brocklesby and Fisher (2003, p.187) explain the four main components of the livelihoods framework, as used by DFID21 which has been widely adopted in the development field. These are: people live within a vulnerability context i.e. they are exposed to risks such as sudden shocks, trends over time and seasonal change; people have a number of capital assets22 which they draw upon to make their livelihoods; these assets are drawn upon within peoples livelihood strategies; policies, institutions and processes help to shape peoples assets, livelihood activities and the vulnerability context within which they live. Carney (1998) states that an examination of the five capital assets offers a holistic analysis of peoples livelihoods. These capital assets form the centrepiece of peoples livelihoods as these assets dictate the level of vulnerability of beneficiaries to shocks and trends. Policies and institutions also have an impact on these assets. These policies and institutions, and beneficiaries own vulnerability context influence their livelihood strategies which in turn dictate their livelihood outcomes as indicated in Figure 2.2 (ibid.). IDS (2004) also states that such a framework allows investigation into the ways in which a project directly and indirectly affects peoples livelihoods. This framework therefore will be used in this study to assess the impact of microfinance on the beneficiaries livelihoods by focusing on its impact on their five capital assets.

[Taken from DFID Sustainable Livelihoods Guidance Sheets, Section Two]

Bibliography Books: M.Yunus, A. Jolis, Vers un monde sans pauvret, J.-C. Latts (1997) M.Yunus, A world without poverty, Public Affairs (2008) Websites Definition: http://muhammedyunus.okan.edu.tr/what-is-microfinance.php 1. Bangladeshi Women and the Grameen Bank (International Development Research Centre) 2. Grameen Banking for the Poor (Grameen Bank Grameen Bank Bhaban Mirpur, Section-2 Dhaka-1216, Bangladesh) 3. Microfinance and the Poor: Breaking Down Walls between Microfinance and Formal Finance Finance and Development, Vol. 41, No. 2, June 20054, pp. 38-40 4. Women and Microcredit in Rural Bangladesh: An Anthropological Study of Grameen Bank Lending American Anthropologist, Vol. 103, No. 1, 2001, pp. 258-258 5. Rural Credit Programs and Women's Empowerment in Bangladesh World Development, 1996, 24, 4, Apr, Vol. 24, No. 4, pp. 635-653