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What is Microfinance ?

According to famous economist Robinson, Microfinance refers to small-scale financial services for both credits and deposits - that are provided to

unemployed or low-income individuals or groups who would otherwise have no other means of gaining

financial services . Ultimately, the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money,

borrowing money and insurance.

What is the need of Microfinance ?

Traditionally , Macro-financial institutes like banks have been reluctant to provide financial services to

clients with little or no cash income, because of various reasons –

1. ‘Break Even Point‘ in providing loans. 2. Few assets to be secured as collateral.

What is the need of Microfinance ?

Lack of loan and other financial services from banks and other institutes forces them to rely heavily on relatives or local money lenders at

the time of need . Usually interest rate of moneylenders are

very high . They are often accused of Usury .

What is the need of Microfinance ?

According to a 1995 World Bank estimate, in most developing countries the formal

financial system reaches only the top 25% of the economically active population - the

bottom 75% have no access to financial services apart from moneylenders .

How Microfinance helps the poor ?

1:It provides a long-term increase in income and consumption of poor families. 2: Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost.3: Credit make it easier to manage shocks like sickness of a wage earner, theft, or natural disasters.

How Microfinance helps the poor ?

4: It provides support to Micro Enterprises . Thus booster support to Entrepreneurship among the jobless people . 5: Plays an important role in Women Empowerment , particularly in Developing countries like India.

History of Microfinance

middle of the 1800s Theorist Lysander Spooner wrote about small credits , as a way of

getting the people out of poverty .

End of World War II Marshall Plan was introduced for revival of post war economy . It

gave emphasize on micro finance .

1970’s Micro-Credit movement started in countries like Bangladesh ( Grameen

Bank led by Muhammad Yunus) , Pakistan , Vietnam etc.

2005 Declared as International year of Microcredit by The Economic and

Social Council of the United Nations

Microfinance Lending Models1: Associations , Ex : Self Help Groups, SHGs (India)

2: Bank Guarantees , Ex : Latin America Bridge Fund

3: Community Banking , Ex: Grameen Bank (Ban.)

4: Cooperatives , Ex: Co-operative Bank (England)

5: Credit Unions

6: Non-Governmental Organizations , Ex: KIVA ,US

7: For-profit Banks , Ex: Khushali Bank (Pakistan)

8: Rotating Savings and Credit Associations (ROSCAs)

Major Features of MFI’s

Most of the major MFI’s (like SHGs , Community banks ) follows certain methods

( developed over last 30 years ) to deliver very small loans to unsalaried or poor borrowers.

Major Features of MFI’s

These include – 1. Negligible Amount of Collateral required.2. Group lending and liability.3. Pre-loan savings requirements.4. Gradually increasing loan sizes & guarantee of ready access to future loans if present loans are repaid fully and promptly.

Major Features of MFI’s

Usually High Interest rates are charged by the MFI’s for the following reasons : 1: The administrative cost of making tiny loans is much higher in percentage terms than the cost of making a large loan. 2: More Risk factor is involved in Micro-credit than mainstream banking .

Microfinance in India

Major Microfinance activities followed in India are – 1. Micro credits2. Micro savings3. Small scale Insurance

Role of NGOS in the microfinance

>What are NGOs?>NGOs are voluntary social work organization who renders help to government and society for improvement of quality of life people >Help in the formation of SHGs>To reduce the smaller transaction NGOs help banks >Over the last quarter century, a few organizations, outside the purview of the public sector, have succeeded in effective poverty alleviation through micro-credit>Main objective is to draw attention about microfinance by conduction meetings in rural areas

Role of NGOS in the microfinance

> Providing the minimum knowledge related to the finance> Helping people to improve their skills in education> Making contact between the SHGs and banks> How banks are benefited by NGOs???

Role of govt in microfinance

> Government interested in SHGs> Rashtriya Mahila Kosh , Indira Mahila Yojana, Swarnajayanti Gram Swarojgar Yojana (SGSY) launched in 1999> Swarnjayanti Gram Swarojgar Yojana (SGSY) has emerged as a main anti-poverty programme

Working of SHG

How it works??> Formation of group with (10-20) members> Monthly savings about 20-50 rs per each member> Money lending from banks> Money lending from SHG> Interest rates > Repayment of money

In Andhra Pradesh

> Initiative taken by govt of A.P to enhance the profit of shg members> Loans are at 2.5 % interest> Achieved great response from poor> Presently there are 1.15 lakh DWCRA groups and 2.19 lakh SHG groups in Andhra Pradesh with a membership of 46 lakh women having a savings of Rs.300 crores.

In Orissa

> It is the state that have only microfinance as tool eliminate the poor.> In Orissa Mission shakti , a government driven programme, formed in 2001 with a target to organize 2 lakhs WSHGs(women self help group) covering all revenue villages of the State. The main aim is to provide supports to different stakeholders working in the field of women empowerment such as Banks, NGOs, MFIs and other institutions.

In Orissa

> In 2008 IDBI Fortis Life Insurance has tied up with Regional Rural Development Centre (RRDC) to offer rural consumers the protection of Termsurance Grameen Suraksha in Orissa.

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In Orissa

> There are around 35 MFIs registered in the state out of which 8-10 are functional, with the recovery rate of these institutions being around 95%..>Micro-Finance Institutions (MFIs) operating in Orissa have advanced loans worth Rs 1500 crore in the past three to four years, reaching out to more than two million customers in the state.

Disadvantages & Criticisms of Microfinance

Disadvantages to the Micro-lenders:1. To the bank the borrowers are few for the problem of reaching out to the people.2. A main disadvantage to micro-finance is that the deal is too small for the lender to devote ample time and money to doing proper due diligence.

Disadvantages & Criticisms of Microfinance

3.As the capital is low the profits are also low.4 .Borrowers seldom if ever give lenders the full story on their situation and with a small amount at risk, it does not make sense for lenders to spend a lot of money to check out the story. When lenders get burned, they decide to stop lending and the next round of lending must be done by greenhorns who have no idea what they are getting into.

Disadvantages & Criticisms of Microfinance

5.In other words, to some extent microlending depends on an ever-increasing number of lenders in order to be successful

Disadvantages & Criticisms of Microfinance

6.The inability to reach the poorest of the poor is a problem that plagues most poverty alleviation programs. As Gresham’s law reminds us, if the poor and non-poor are combined within a single program, the non-poor will always drive out the poor. To be effective, the delivery system must be designed and operated exclusively for the poor.

Disadvantages & Criticisms of Microfinance

7.Some criticize that microfinance programs benefit the moderately poor more than the destitute, and thus impact can vary by income group.8. Most microfinance programs target women (due to higher repayment rates), which may result in men requiring wife to get loans for them.

Disadvantages & Criticisms of Microfinance

9.Vicious cycle of debt, microcredit dependency, increased workloads, and domestic violence associated with participation in microfinance programs.10. Low repayment rates in comparison with traditional financial institutions.11. Use of harsh and coercive methods to push for repayment and excessive interest rates

Disadvantages & Criticisms of Microfinance

12.Concerns have been raised that the reliance on microfinance programs to aid the poor may result in a reduction of government and charitable assistance (“privatization of public safety net programs”).‐

Conclusion

In Bangladesh microfinance has successfully enabled extremely impoverished people to

engage in self-employment projects that allow them to generate an income and, in many

cases, begin to build wealth and exit poverty.

Conclusion

> In India micro-finance has succeeded with repayment rates upto 98% reported all

across the country ( from the states like AP, Tamil Nadu, Karnataka, Kerala ,West Bengal

and Orissa etc. )> This tells us that micro finance has

certainly has the capacity to reduce poverty by a great margin .

Thank You