Micro finance

What is Micro finance

Microfinance refers to a variety of financial services that target low-income clients, particularly women. Since the clients of microfinance institutions (MFIs) have lower incomes and often have limited access to other financial services,

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microfinance products tend to be for smaller monetary amounts than traditional financial services. These services include loans, savings, insurance, and remittances.

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Microloans are given for a variety of purposes, frequently for microenterprise development. The diversity of products and services offered reflects the fact that the financial needs of individuals, households, and enterprises can change significantly over time, especially for those who live in poverty.

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Because of these varied needs, and because of the industrys focus on the poor, microfinance institutions often use nontraditional methodologies, such as group lending or other forms of collateral not employed by the formal financial sector.

History of micro finance

history

The concept of microfinance is not new. Savings and credit groups that have operated for centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia, "cheetu" in Sri Lanka, "tontines".

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

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Formal credit and savings institutions for the poor have also been around for decades, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development finance institution

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in the early 1700s by the author and nationalist Jonathan Swift. 1800s, various types of larger and more formal savings and credit institutions began to emerge in Europe, 1870, the unions expanded rapidly over a large sector of the Rhine

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Indonesian People's Credit Banks (BPR) or The Bank Perkreditan Rakyat opened in 1895 In the early 1900s, various adaptations of these models began to appear in parts of rural Latin America. 1950s and 1970s, governments and donors focused on providing agricultural credit .

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Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed repayment

Challenge of micro finance---Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved

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few assets that can be secured by a bank as collateral. This means that the bank will have little recourse against defaulting borrowers

Cont-when poor people borrow they often rely on relatives or a local

moneylender, whose interest rates can be very high.

Challenges facing Microfinance 1 Sustainability of the institutions 2Recovery mechanism of loans 3out reach of these institutions

4performance assesment of institutions 5long term socio-political impact of the microfinance activities 6 service delivery approaches

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

Principles of micro finance

1 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. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.

Donor funds should complement private capital, not compete with it. "The key bottleneck is the shortage of strong institutions and managers.Donors should focus on capacity building. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.

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. Microfinance means building permanent local institutions.

Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system. "The job of government is to enable financial services, not to provide them.

Boundaries of micro finance

Practitioners and donors from the charitable side of microfinance frequently argue for restricting microcredit to loans for productive purposessuch as to start or expand a microenterprise

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influenced by traditional Western views about usury, the role of the traditional moneylender has been subject to much criticism, especially in the early stages of modern microfinance. As more poor people gained access to loans from microcredit institutions however, it became apparent that the services of moneylenders continued to be valued.

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Borrowers were prepared to pay very high interest rates for services like quick loan disbursement, confidentiality and flexible repayment schedules.

Beneficiaries of micro finance

It has ability to touch upon all aspect of rural economy It helps women in rural area to improve their lives to a large extents

Financial Needs of poor prople

In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy.

Types of Needs

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings.

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

Way to manage money

Rutherford argues that the basic problem poor people as money managers face is to gather a 'usefully large' amount of money. Building a new home may involve saving and protecting diverse building materials for years until enough are available to proceed with construction

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Childrens schooling may be funded by buying chickens and raising them for sale as needed for expenses, uniforms, bribes, etc. Because all the value is accumulated before it is needed, this money management strategy is referred to as 'saving up'

The work of Rutherford, Wright and others has caused practitioners to reconsider a key aspect of the microcredit paradigm: that poor people get out of poverty by borrowing, building microenterprises and increasing their income

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The new paradigm places more attention on the efforts of poor people to reduce their many 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 for microenterprise.

Delivery vehicles of micro finance

Non governmental organization(NGO)

Commercial Banks Micro finance institutes