133981997-Micro-Financing.doc

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Micro-Financing: concept, models, and its role inpoverty alleviation

Microfinance DefinedMicrofinance is the provision of a broad range of financial services

such as deposits, loans, payment services, money transfers, andinsurance to poor and low-income households and, their microenterprises

Microfinance has evolved as an economic development approach intendedto benefit low-income groups. The term refers to the provision of financialservices to low-income clients, including the self-employed. Financialservices generally include savings and credit, and some microfinanceorganizations also provide insurance and payment services.

HISTORY OF MICROFINANCEThe concept of microfinance mainly started after the initiated by

Nobel winner for peace Prof ens !n "#$%, famine struc&'angladesh. (t the time, )r. Muhammad ens was a professor ofeconomics at the *niversity of +hittagong. )isillusioned by theelegant theories of economics that could not eplain the thousands ofpoor people dying of starvation on the streets he was determined tofind a practical way to help the poor. )uring a visit to the nearbyvillage of erboa, he was astounded to find that a sum of /0$ couldradically change the lives of %0 people in the village. This was thesum of money they collectively needed to buy bamboo to ma&e the

stools they sold to ma&e a living. 1e too& /0$ from his poc&et andmade %0 loans to the stool ma&ers in this tiny village. They were ableto pay him bac& with interest and ta&e a step towards liftingthemselves out of poverty.

This simple idea that the poor could use credit to lift themselves outof poverty, led )r. ens to create The 2raeme 3ural 'an& in "#45.6ince its inception, it has made over /4.#7 billion in loans to overeight million borrowers. !ts methodologies have become thecornerstone of the microfinance industry. !n 0887, The 2raeme 'an&and )r. ens were awarded the Nobel Peace Prize.

SCOPE: Micro Financing has greatest scope in the world especially in

developing countries li&e Pa&istan. 'ecause mostly people don9t have highincome and low purchasing power and MF institutions target mar&et as lowincome group and it is common impression that poor people need and use


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a variety of financial services including deposits, loans etc. they usefinancial services for some reason li&e seize business opportunities,improve homer and living standard, deal with large cope with emergencies.

SERVICES PROVIDE BY MICRO FINANCE BANK:6o many services provide by MF!. Providing loans car financing

home financing, personnel loans, taleemi loans.

o PROVIDING LOANS:

The important service is provided by Mf is given loan. Theseloans are provided from some productive activities li&e starting newbusiness, epansion of business improving life etc.

o CAR FINANCING:MFI also assist those people who cannot pay total

amount at once. So, these MFI gave them car on installments like UBL

car financing scheme is too popular and too many people takingadvantage from this scheme.

o HOME FINANCING:

Pa&istan is a poor country. Purchasing power of Pa&istan isvery low. 6o many people are living on rent. They cannot have too manyamounts to purchase homes. MF!9s provide loans be considering their :obstability and ta&e security for it.

o PERSONNEL LOANS:

MF! also obtain personnel loans. Those people who havepermanent employment and stable :obs. This credit facility depends on theincome of an individual.

o TALEEMI LOANS:

MF! also provide financial aid to the students who cannot bare educationalepenses but want to study. MF! assist them in return of some security andit would have to pay after completing the education.

CHALLENGES AND OPPORTNITIES OF MICRO

FINNACING:The 2overnment has indicated its willingness to speed up the paceof structural reforms to meet the ma:or challenges of

o 3;)*+!N2 PThe basic motto of the government to eliminate the poverty

and bring prosperity in the country. MF! providing small loans and other


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credit facilities to the poor and low-income groups which are beginningpositive changing li&e their standard of living group and earning haveincreased

o IMPROVING SOCIAL INDICATORS:

!nade?uate access to productive resources and socialservices has resulted low social indicators and low employment

opportunities. This situation is compounded in rural areas whereaccess is more difficuilt. 6o, by providing small loans and credit facilitiesthey can over come this issue and can improve social indicators.

o IMPROVING THE FISCAL AND BALANCE OF PAYMENTS

POSITIONS:

Pa&istan is a poor country whose balance of payment alwaysin deficit, because of low productivity, lac& of resources and lac& ofproductive men9s power. !f M!F provide loans new business can beestablished. (nd eport of Pa&istan can be improved which create

balance of payments.

o 3;6T


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'ut if you are poor, you are also probably out of luc& with ban&s it istough persuading them to even let you open a ban& account. Theconse?uences have been devastating. +onsider these numbers> $Bmillion households in !ndia depend on money lenders to meetfinancial needs almost #8 percent of the people in the rural !ndiahave no access to insurance B8 million households are landless and

need small credit to start some economic activity. (nd even familiesearning 3s %888-B888 a month in urban areas spends huge portionsof their earning to service their ever continuous debt.

Models of microfinance

". The 612-'an& Ain&age Model

0. Partnership Model

PRINCIPLES OF MICRO FINANCE

1. Poor !eo!"e need a #arie$% of financia" &er#ice&' no$ ()&$ "oan&. Ai&e everyone else, the poor need a range of financialservices that are convenient, fleible, and affordable. )epending oncircumstances, they want not only loans, but also savings, insurance, andcash transfer services.

2. Microfinance i& a !o*erf)" $oo" $o fi+,$ !o#er$%.

@hen poor people have access to financial services, they canearn more, build their assets, and cushion themselves against eternalshoc&s. Poor households use microfinance to move from everydaysurvival to planning for the future> they invest in better nutrition, housing,health, and education.

3. Microfinance i& a-o)$ -)i"din+ !er.anen$ "oca" financia"in&$i$)$ion&.


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Finance for the poor re?uires sound domestic financialinstitutions that provide services on a permanent basis. These institutionsneed to attract domestic savings, recycle those savings into loans, andprovide other services. (s local institutions and capital mar&ets mature,there will be less dependence on funding from donors and governments,including government development ban&s.

4. Micro credi$ i& no$ $,e -e&$ $oo" for e#er%one or e#er% &i$)a$ion.)estitute and hungry people with no income or means of

repayment need other &inds of support before they can ma&e good use ofloans. !n many cases, other tools will alleviate poverty betterCfor instance,small grants, employment and training programs, or infrastructureimprovements. @here possible, such services should be coupled withbuilding savings.

5. T,e ro"e of +o#ern.en$ i& $o ena-"e financia" &er#ice&' no$ $o

!ro#ide $,e. direc$"%.National governments should set policies that stimulate

financial services for poor people at the same time as protecting deposits.2overnments need to maintain macroeconomic stability, avoid interest ratecaps, and refrain from distorting mar&ets with subsidized, high-default loanprograms that cannot be sustained.

6. T,e /e% -o$$"enec/ i& $,e &,or$a+e of &$ron+ in&$i$)$ion& and.ana+er&.

Microfinance is a specialized field that combines ban&ingwith social goals. 6&ills and systems need to be built at all levels>managers and information systems of microfinance institutions, centralban&s that regulate microfinance, other government agencies, and donors.Public and private investments in microfinance should focus on buildingthis capacity, not :ust moving money.

FNCTIONS OF MICRO FIANANCE

o 6mall loans, typically for wor&ing capitalo !nformal appraisal of borrowers and investmentso (ccess to repeat and larger loans based on debt capacity and

repayment performanceo 6ecure savings products.o To provide financing facilities, with or without collateral 6ecurityo To accept deposits


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o To encourage investments in such cottage industries and incomegenerating pro:ects for poor persons as maybe prescribed

o To mobilize and provide financial and technical assistance andtraining to micro enterprises

o To invest in shares of any body corporate, the ob:ective of which is toprovide microfinance services to poor persons

NET0ORK MICRO FINANCE BANKThe MFN has played an important role in helping the industry

develop and improve upon &ey issues in microfinance. This special groupof institutions is committed to transparency in their operations, thusadvancing the standards of performance in microfinance. Through theirvision and drive to provide the best services possible to the wor&ing poor,the members of the Microfinance Networ& are playing a fundamental rolein revolutionizing the process of poverty alleviation. 'y providing

microfinance practitioners and institutions with a forum for informationechange to ta&e place

o SEMIANNAL INSTITTIONS:

The number of registered N2


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!nformal sources account for about 45D of the credit supply. Threeprincipal informal sources of credit are

EiG +ommercial creditors lin&ed with mar&eting intermediaries,commission agents, village traders, and shop&eepers

EiiG Aand-based credit arrangement etended by landlords to farmersfor inputs and to meet consumption needs and

EiiiG 6ocially based arrangements of friends and family Ethe mostnumerousG. 'oth in rural and urban areas, mainly supply short-termcredit at terms that reflect the wea& bargaining power of the poor,particularly for land-based credit arrangements and provide loans forfulfill their consumption needs with out interest

FORMAL SORCES

Formal refers to an organized, registered and regulated system ofinstitutions providing microfinance services. The involvement of formalsources in microfinance has increased during the last two decades. Thisgreater involvement has "07 stemmed from

"G The epansion of the scope of formal institutions into microfinancethrough downscaling Efor eample, 2overnment 6avings 'an&,ThailandG

0G ;stablishment of lin&age programmers with semi-formal sources ofdifferent types E6elf-help 2roup-'an& Ain&age Programme, !ndiaG

5G The emergence of formal institutions focused on microfinance Eforeample, 2raeme 'an& of 'angladesh and hushhaliban& in Pa&istanG

%G EdG 3eforms of state-owned financial institutions Efor eample, unitdegas of 'an& 3a&yat !ndonesiaG

BG EeG The introduction of microfinance programmers by the governmentsthrough non-financial institutions Efor eample, =iet Nam @omen9s9*nionG and

7G EfG ;ntry of private sector institutions Efor eample, 'aden &redit-desasowned by


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$G !ndonesian villagersG. +ooperatives are also playing a significant role asfinancial intermediaries in the region, particularly in !ndia, 6ri Aan&a,Thailand and =iet Nam.

4G 1owever, the formal operations concentrate mostly on providing creditfacilities, and savings mobilization has yet to receive ade?uateattention' with few eceptions.

SCENARIO OF MICROFINANCE

IN INDIA

!ndia9s population is more than "888 million, around5B8 million,are living below poverty.


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Micro-credit portfolio of !ndia Microfinance was 3s. 00,888 core

$BD are accounted for by 612 Ain&age, 08D by large MF!s andBD by medium and small MF!s

612 Ain&age reports over 3s. 5,B88 crore savings, only MF! 'an&,'6 'an& reports about 3s. %8 crore savings portfolio

MF!s operate in 08# out of 55" districts of the country, 04D of thenew clients are from urban areas.

DEMAND OF MICRO1FINANCE

SERVICES IN INDIA Through all channels, reach is only 58 million

0B8 million people live below poverty line

3upee


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O!!or$)ni$%

huge demand and supply gap.employment opportunityhuge untapped mar&et.

opportunity for pvt.ban&s, N'F+s, foreign ban&s to enter thisbusiness segment.

MICRO1FINANCE INSTITTIONS

o formal institutions, such as rural ban&s and cooperativeso semiformal institutions, such as nongovernmental organizations ando informal sources such as money lenders and shop&eepers

FORMAL INSTITTIONS

". hushali 'an&0. The First Micro Finance 'an& Atd5. Networ& Micro Finance 'an&

THE FIRST MICRO FINANCE BANK LTD2

(lmost 78-$8D of the population in Pa&istan is deprived offinancial services with the ma:ority of them being poor. The managementof FMF' believes that this large segment of the population is very muchban&able and access to microfinance services can bring substantialpositive change in their lives. FMF' is loo&ing ahead to cover as many ofthis poor segment of the population through its micro finance services witha ma:or focus on women the service which are being provided by this ban&are

o Microfinance !ntermediation - Aoan Products, 6aving Products, Micro!nsurance Products, and other Financial 6ervices

o 6ocial !ntermediation J 2roup Formation for building human and social

capital for sustainable financial intermediationo ;nterprise )evelopment 6ervices J non-financial services that assist

micro-entrepreneurso 6ocial 6ervices J non-financial services that focus on well being of

micro entrepreneurs. This includes health, nutrition, education andliteracy trainings.


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K,)&,a"i Ban/hushhali 'an& is the countryLs first ma:or initiative to bridge the

demand for microfinance services. !ntegral to microfinance services is theintensive and sustained social support for mobilization, management anddevelopment of all clients of the ban& and their access to basicinfrastructure services.

(s a for-profit, commercial microfinance institution, our purpose is to>

". ;stablish a sustainable, scalable pro-poor financial services platformwith retail delivery capacity to reach 788,888 poor households by the

0887.

0. +atalyze an enabling environment, within which the microfinancesector can develop in Pa&istan.

5. (ssist the central ban& in setting up an appropriate and responsiveregulatory framewor& within which microfinance institutions canoperate on sustainable grounds, thereby epanding outreach to thepoor.

%. Promote transparency, financial rigor and good governance asleading indicators of ecellence within the microfinance sector inPa&istan.


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SE OF FINANCE IN DIFFERENT FIELDS:

POVERTY:Microfinance has emerged as one of the most effective instruments

of fighting poverty. The husshali 'an&, which is now entering third year ofits operations, has opened branches in 5B districts. 6o far it has disbursed3s.".5 billion to about $B,888 poor borrowers. 'ranches of husshal 'an&will be opened in all the districts of the country. Pa&istan Poverty

(lleviation Fund EPP(FG, which was set-up to provide wholesale credit tomicrofinance institutions, including N2


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into an increasingly commercial operation to serve a larger segment of thepotential mar&et. ( number of challenges need to be overcome to facilitateand accelerate this process to realize the vast potential of microfinance.This call for a comprehensive approach, as outlined above that ta&escognizance of the diversity of microfinance development issues acrosscountries. ()' interventions in support of microfinance pursue thisapproach to catalyze the development of sustainable microfinancesystems in the region. @ith a view to leveraging its support, ()' iscoordinating with other funding agencies involved in microfinance andenhancing the involvement of its private sector operations in microfinance.

http://www.adb.org/gender/practices/microfinance/default.asp

www.adb.org

http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo23/micro-finance.html

www.ita!u-u.ac."p#$%&'

http://www.paistaneconomist.com/database2/pabans.asp

www.unescap.org #$%&'

www.sbp.org.p#$%&'

http://www.hushhaliban.com.p/

http://www.mfb.com.p
http://www.adb.org/gender/practices/microfinance/default.asphttp://www.adb.org/http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo23/micro-finance.htmlhttp://www.kitakyu-u.ac.jp/http://www.pakistaneconomist.com/database2/pakbanks.asphttp://www.unescap.org/http://www.sbp.org.pk/http://www.khushhalibank.com.pk/http://www.mfb.com.pk/http://www.adb.org/gender/practices/microfinance/default.asphttp://www.adb.org/http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo23/micro-finance.htmlhttp://www.kitakyu-u.ac.jp/http://www.pakistaneconomist.com/database2/pakbanks.asphttp://www.unescap.org/http://www.sbp.org.pk/http://www.khushhalibank.com.pk/http://www.mfb.com.pk/

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133981997-Micro-Financing.doc