MICROFINANCE

WHAT IS MICRO FINANCING? They are very small loans, made to the

rural poor in developing countries who normally do not qualify for traditional banking credit.

This is often the only way they can establish a business and lift themselves out of poverty.

Microfinance refers to the provision of financial services to low-income clients, including consumers and the self-employed.

WHAT IS MICRO FINANCING?

More broadly, it refers to a movement that envisions “a world in which poor have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.

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Micro Finance is the supply of loans, savings, and other basic financial service to the poor .

-> CGAP

To most, micro finance means providing very poor families with very small loans (micro credit) to help them engage in productive activities or grow their tiny businesses. -> Financial Gateway

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WHAT IS MICRO FINANCE ?

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ABOUT MICRO FINANCE

The modern micro finance movement dates back to the 1970s when experimental programs in Bangladesh, Brazil, and a few other countries began to extend tiny loans to groups of poor women to invest in micro enterprises

ORIGIN OF MICRO FINANCING

Although neither of the terms microcredit or microfinance were used in the academic literature before the 1980s or 1990s, the concept of providing financial services to low income people is much older.

While the emergence of informal financial institutions in Nigeria dates back to the 15th century, they were first established in Europe during the 18th century as a response to the enormous increase in poverty since the end of the extended European wars.(1618 –1648).

ORIGINProfessor Yunus founded his

Grameen Bank in 1976 i.e. first MICROFINANCE institute.

Professor Yunus Pioneer of Grameen bank & microfinance.

GRAMEEN BANKProfessor Yunus founded his Grameen Bank

in 1976 during a devastating famine in Bangladesh.

Today it has 6.6 million borrowers of whom 97% are women.

This focus on female borrowers in a society where women are frequently forced to take responsibility for their entire family is one of the features that caught the Nobel Committee's attention.

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MICRO FINANCE IN INDIA

Evolution of Micro finance in India Micro finance has been in practice for

ages ( though informally). Reserve Bank of India Act, 1934

provided for the establishment of the Agricultural Credit Department.

Nationalization of banks in 1969 Regional Rural Banks created in 1975. established as an apex agency for

rural finance in 1982.

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THE PROFILE OF MICRO FINANCE IN INDIA

The scenario Estimated that 350 million people live

Below Poverty Line This translates to approximately 75

million households. Annual credit demand by the poor in the

country is estimated to be about Rs. 60,000 crores.

Only about 5 % of rural poor have access to micro finance

PROVEN IMPACT OF MICRO-FINANCING

Increase in Savings◦While most households given micro-credits were having negligible or no savings, this improved to Rs. 160-Rs. 460 and in some cases, the average household savings rose to as high as Rs. 1444.

PROVEN IMPACT OF MICRO-FINANCING

Changes in Borrowing Patterns◦With improvement in above two factors, people were more ready to borrow from the semi-formal and formal sector rather than their traditional creditors i.e. friends and family, moneylenders, landlords.

Impact on income◦The average net income per household increased from Rs 20177 to Rs. 26889.

The poor stay poor, not because they are lazy but because they have no access to capital.

Grameen transactions take place at the village level.

By avoiding both employers and immoral local money lenders the Grameen loan aims to break a circle of exploitation.

Typically a Grameen borrower will use a loan to buy tools and equipment to set up on their own business.

WHY MICRO FINANCING?

Traditionally, banks have not provided financial services to clients with little or no cash income.

There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below it.

Because of these difficulties, when poor people borrow they often rely on relatives or a local moneylender, whose interest rates can be very high.

FINANCIAL NEEDS OF POOR PEOPLE

Types of financial 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.

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

FINANCIAL NEEDS OF POOR PEOPLE

TYPES OF ORGANIZATIONS

Microfinance providers in India can be classified under three broad categories: ◦formal, ◦semiformal, ◦And informal.

FORMAL SECTORThe formal sector comprises of

the banks such as NABARD, SIDBI and other regional rural banks (RRBs).

They primarily provide credit for assistance in agriculture and micro-enterprise development and primarily target the poor.

Their deposits at around Rs. 350billion and of that, around Rs. 250billion has been given as advances.

SEMI FORMAL SECTORThe majority of institutional

microfinance providers in India are semi-formal organizations broadly referred to as MFIs.

Registered under a variety of legal acts, these organizations greatly differ in values, size, and capacity. There are over 500 non-government organizations (NGOs) registered as societies, public trusts, or non-profit companies.

MFI INVOLVED IN MICROFINANCE

Association for Sarva Seva Farms (ASSEFA)

Mitrabharati - The Indian microfinance Information Hub Mysore Resettlement and Development Agency (MYRADA)

SADHAN - The Association of Community Development Finance Institutions

SEWA: Self-help Women's AssociationSKS India - Swayam Krishi SangamWorking Women's Forum, Madras, India

Ngo’s involved in microfinance

CDF (Co-operative Development Foundation) in Andhra Pradesh

LHWRF (Lupin Human Welfare Research Foundation) in Rajasthan

UPLDC (Uttar Pradesh Land Development Corporation) in Uttar Pradesh

Group Enterprise Development Project of EDI (Entrepreneurship Development Institute of India) in Nagaland.

INFORMAL SECTOR

In addition to friends and family, moneylenders, landlords, and traders constitute the informal sector.

While estimates of their importance vary significantly, it is undeniable that they continue to play a significant role in the financial lives of the poor.

Steps taken by India to promote micro-financingGovernment set up

development banks, such as SIDBI, NABARD which focused on rural credit and micro-financing.

NGOs and SHGs were encouraged to become the govt’s arm in extending micro-credit to the poor.

FOCUS ON WOMEN FOR MICRO - CREDITS

Among the poor, the poor women are the most disadvantaged - they are characterized by lack of education and access to resources, both of which are required to help them work their way out of poverty and for upward economic and social mobility.

The problem is more acute for women in countries like India, despite the fact that women’s labor makes a critical contribution to the economy.