Micro Finance Introduction

8/6/2019 Micro Finance Introduction

1/29

MICROFINANCE A SMALL IDEA WITH BIG IMPACT


2/29

INTRODUCTION

Microfinance serves as an umbrella term that describes the provision of banking services by poverty-focused financial institutions (microfinance institutions MFIs) to poor parts of the population that arenot being served by mainstream financial services providers. According to the World Bank, around 1.1bn people live in extreme poverty of less than USD 1 a day and around 2.7 billion people equivalentto roughly 40% of the worlds population live on lessthan USD 2 per day.

POVERTY LEVELS IN DIFFERENT COUNTRIES

Extreme poverty shares in developing countries vary widely with regional figures ranging from 9% inEast Asia and the Pacific to 41% in Sub-Saharan Africa. The core service of microfinance is theprovision of microcredit.Typically, these are small loans to the working poor. These loans usually amount to a local currencyequivalent which starts at just below USD 100 and can, over time, reach several times this amountdepending on the geographic region. For instance, in Asia the average loan amounts to around USD150, while in Eastern Europe and Central Asia loans amount to approximately USD 1600 on average.4In addition, many MFIs are increasingly starting to offer micro-deposits and micro-insurance servicesto their clients. In terms of institutional and ownership structures, the MFI universe is composed of a


3/29

large variety of different forms which comprises NGOs, cooperatives, specialised financial institutionsand niche banks that in some cases are even regulated financial institutions.

Understanding Microfinance

Robinson (2001) defines microfinance as small-scale financial servicesprimarily credit and savingsprovided to people who farm, fish or herd and adds that it refers to all types of financial servicesprovided to low-income households and enterprises. In India, microfinance is generally understood butnot clearly defined. For instance, if an SHG gives a loan for an economic activity, it is seen asmicrofinance. But if a commercial bank gives a similar loan, it is unlikely that it would be treated asmicrofinance. In the Indian context there are some value attributes of microfinance: Microfinance is an activity undertaken by the alternate sector (NGOs). Therefore, a loan givenby a market intermediary to a small borrower is not seen as microfinance. However when an NGO givesa similar loan it is treated as microfinance. It is assumed that microfinance is given with a laudableintention and has institutional and non exploitative connotations. Therefore, we define microfinance not

by form but by the intent of the lender.

Second, microfinance is something done predominantly with the poor. Banks usually do notqualify to be MFOs because they do not predominantly cater to the poor. However, there is ambivalenceabout the regional rural banks (RRBs) and the new local area banks (LABs).

Third, microfinance grows out of developmental roots. This can be termed the alternativecommercial sector. MFOs classified under this head are promoted by the alternative sector and targetthe poor. However these MFOs need not necessarily be developmental in incorporation.

DEFINITION

Microfinance is the provision of a broad range of financial services such as deposits, loans, payment

services, money transfers, and insurance to poor and low-income households and, their

microenterprises. Microfinance services are provided by three types of sources:

Formal institutions, such as rural banks and cooperatives;

Semiformal institutions, such as nongovernment organizations; and

Informal sources such as money lenders and shopkeepers.

Institutional microfinance is defined to include microfinance services provided by both formal and

semiformal institutions. Microfinance institutions are defined as institutions whose major business is

the provision of microfinance services.


4/29

NEED OF MICROFINANCE

The systems and procedures of banking institutions was emphasizing on complicated qualifying

requirements, tangible collateral, margin, etc., that resulted in a large section of the rural poor shying

away from the formal banking sector. The banks too experienced that the rapid expansion of branch

network was not contributing to an increasing volume of business to meet high transaction costs and risk

provisioning, which even threatened the viability of banking institutions and sustainability of their

operations.

At the same time, it was not possible for them to allow a population of close to 300 million - even if

poor - to remain outside the fold of its business. The search for an alternative mechanism for catering to

the financial service needs of the poor was thus becoming imperative.

Microfinance in the Asian and Pacific Region

Over 900 million people in about 180 million households in the Region live in poverty. Most of the

Regions poor (i.e., those who earn less than $1.00 a day) or more than 670 million people, live in rural

areas (footnote 1), although urban poverty is also a growing problem in virtually all DMCs. Most rural

poor people are engaged in agricultural or related activities as laborers or small scale farmers. Many are

also involved in a variety of microenterprises. In many countries, women, who are a significant

proportion of the poor and suffer disproportionately from poverty, operate many of these

microenterprises.

Most formal financial institutions do not serve the poor because of perceived high risks , high costs

involved in small transactions ,perceived low relative profitability, and inability of the poor to provide

the physical collateral usually required by such institutions. The business culture of these institutions

is also not geared to serve poor and low-income households. Lacking access to institutional sources of

finance, most poor and low-income households continue to rely on meager self-finance or informal

sources of microfinance. However, these sources limit their ability to actively participate in and benefit

from the development process (Appendix 2). Thus, a segment of the poor population that has viable

investment opportunities persists in poverty for lack of access to credit at reasonable costs. The poor

also lack access to institutional credit for consumption smoothening and to other services such as

payments, money transfers, and insurance.10 Most of the poor households also find it difficult to

accumulate financial savings without easy access to safe institutions that provide deposit services.


5/29

MICROFINANCE IN INDIA

Microfinance in India started in the early 1980s with small efforts at forming informal self-help groups(SHG) to provide access to much-needed savings and credit services. From this small beginning, themicrofinance sector has grown significantly in the past decades. National bodies like the SmallIndustries Development Bank of India (SIDBI) and the National Bank for Agriculture and RuralDevelopment (NABARD) are devoting significant time and financial resources to microfinance. Thispoints to the growing importance of the sector. The strength of the microfinance organizations (MFOs)in India is in the diversity of approaches and forms that have evolved over time. In addition to the home-grown models of SHGs and mutually aided cooperative societies (MACS), the country has learned fromother microfinance experiments across the world, particularly those in Bangladesh, Indonesia, Thailand,and Bolivia, in terms of delivery of microfinancial services.

Microfinance is an activity that includes the provision of financial services such as credit, savings, and

insurance to low income individuals which fall just above the nationally defined poverty line, and poor

individuals which fall below that poverty line, with the goal of creating social value. The creation of

social value includes poverty alleviation and the broader impact of improving livelihood opportunities

through the provision of capital for micro enterprise, and insurance and savings for risk mitigation and

consumption smoothing. History of Microfinance in India In India, institutional credit agencies (banks)

made an entry in rural areas initially to provide an alternative to the rural money lenders who provided

credit support, but not without exploiting the rural poor. There are 3 main factors that count to the

bringing up of Microfinance as a Policy in India

1. The first of these pivotal events was Indira Gandhis bank nationalization drive launched in 1969

which required commercial banks to open rural branches resulting in a 15.2% increase in rural bank

branches in India between 1973 and 1985. Today, India has over 32,000 rural branches of commercial

banks and regional rural banks, 14,000 cooperative bank branches.

2. The second national policy that has had a significant impact on the evolution of Indias banking and

financial system is the Integrated Rural Development Program (IRDP) introduced in 1978 and designed

to be a direct instrument for attacking Indias rural poverty. This program is interesting to this study

because it was a large program whose main thrust was to alleviate poverty through the provision of

loans and it was considered a failure.

3. The last major event which impacted the financial and banking system in India was the liberalization

of Indias financial system in the 1990s characterized by a series of structural adjustments and financialpolicy reforms initiated by the Reserve.


6/29

Micro-lending at a glance

Microfinance is based on recognising that the working poor can act in an entrepreneurial manner and

are, in principle, creditworthy. For these micro-borrowers, microcredit is often the only alternative to paying excessive interest rates charged by unofficial moneylenders or pawnshops in developingcountries. For instance, in the Philippines loan sharks often charge an annualised interest rate of up to1000% for a monthly loan.5 In contrast, interest rates charged by MFIs are in the range of 15% to 70%p.a. Seen from the perspective of a developed country this may still seem high but these rates result fromthe small size of loans and the high administrative costs as loan officers need to travel to remote placesand intensively advise clients. It is estimated that administrative costs amount of up to two thirds ofinterests paid by clients. In addition, there is a need for risk provisioning. Women make up the vastmajority of borrowers, especially in Asia. Shares of female debtors are as high as 99%.6 thepredominance of women reflects the fact that women are more reliable debtors because, due to strongersocial and family ties, they often follow a more conservative investment strategy which in turn results inlower default rates for MFIs. This lower credit risk is further supported by a relatively low degree oflabour mobility of female clients (due to strong family ties women tend to work from home) whichdecreases the cost of monitoring debtors for an MFI. In contrast to commercial banks, micro-lendinginstitutions usually refrain from taking collateral. Instead, in order to influence borrower behavior, manyMFIs apply the principle of group lending. This entails that an MFI lends a small loan to an individual,who belongs to a group of 5 to 20 people. As soon as the individual borrower proves reliable, credit isextended to additional people within the group. This procedure creates an incentive for the group tomonitor each others behaviour and to ensure borrower discipline, as the group is jointly liable for thefailure of any single member to repay her microloan. The average loan size starts from USD 100 and canreach several hundred dollars, depending on the debtors repayment history. Interest rates varysignificantly according to the geographic regions, e.g. in India microloans are usually granted at 15% to30%. Through weekly meetings between the group members and the MFI, the creditor monitors therepayment status of each debtor publicly, which increases the transparency within the group. Thisgenerates a form of peer pressure and is expected to foster internal monitoring among the members ofthe group.7 In addition, debt screening costs in general are minimised by meeting debtors in groups.However, not all MFIs apply the group lending principle; instead, some MFIs prefer to lend toindividuals without any shared liability aspect. This reflects, inter alia, the argument that group lendinghas some shortcomings, e.g. that it only fully works in rural settings where social control is higher. Inaddition, opponents of group lending argue individual lending is superior as it judges people on theirown merits rather than on the groups. In some countries, individual lending exhibits higher averageloan amounts and often primarily serves the self-employed rather than the very poor seeking to start abusiness.8 To sum up, both approaches have their advantages and respond to different circumstances;hence, it can be expected that individual and group lending techniques will continue to coexist over thelong term.


7/29

MFIs at a glanceGlobally, it is estimated that a total of over 10,000 MFIs exists that is made up of a large array of typesof MFIs such as credit unions, NGOs, cooperatives, government agencies, private and commercial banks

and various permutations of these forms. As MFIs were initially founded as non-profit enterprises thatfocused on assisting the poor through access to credit their activities were initially mainly fundedthrough donations, subsidies and grants provided by development agencies and private donors. Overtime, some MFIs gradually started to become more formal financial institutions or even regulated(niche) banks. This trend notably reflects the idea that becoming a more formal financial institutionhelps to reach financial sustainability as it facilitates access to commercial borrowing and deposit-taking. For instance, in many countries only regulated MFIs are allowed to take deposits. The greatvariety of MFIs can be classified into four categories according to the respective degree ofcommercialisation. While the two top segments include the most developed MFIs the bulk of MFIsbelong to the third and fourth categories that comprise approximately 90% of the total microfinancesector. However, in terms of outreach tier 1 MFIs serve the vast majority of borrowers and also holdmost assets. The top tier MFIs that already have transformed themselves into more formal structures areincreasingly attracting the interest of commercial banks and institutional and individual investors. As toptier MFIs are usually profitable and have a more experienced management, private-sector investorsconsider them the most suited to absorb commercial funding and to effectively channel it to micro-borrowers. In 2006, there were already about 30 MFIs with a loan portofolio in excess of USD 100 m.9While most of the top 150 MFIs are regulated financial institutions, tier 2 institutions are made up ofsmaller, younger MFIs. These are predominantly NGOs that are in the process of converting themselvesinto regulated MFIs. Some tier 2 MFIs also receive funding from foreign investors but to a lesser extentthan tier 1 MFIs. Experts estimate that in total 300 to 400 MFIs are ready to absorb microfinanceinvestments. Consolidation in the microfinance sector is expected to increasingly take place bothbetween tier 1 and tier 2 MFIs and within these groups of MFIs. Tier 3 MFIs are in the process ofapproaching profitability while suffering from a lack of funding. Tier 4 institutions are made up of start-up MFIs or institutions where microfinance is not the primary focus. Over the medium term, we expectthe current divide between larger, increasingly commercially oriented MFIs and smaller NGO-typeMFIs to become even more evident.

Loan volume, funding sources and funding structures of MFIsThe volume of total microfinance loans has risen sharply in recent years from an estimated USD 4 bn in2001 to around USD 25 bn in 2006. One important driver of this trend is the increasing access of leadingMFIs to commercial funding sources that comprise debt finance and national retail deposits. Dependingon the geographic region tier 1 MFIs finance lending operations to a larger (e.g. in Asia) or to a lesserextent (other regions except for Middle East & North Africa) with national deposits or foreign andnational debt finance. This trend is also reflected in foreign investments in microfinance that has morethan doubled from USD 1.7 bn in 2004 to around USD 4.4 bn in 2006. Traditionally the fundingstructure of an MFI has followed a certain pattern over its life cycle. While start-up MFIs arecharacterised by a larger dependency on donations usually made in the form of equity grants, donationsand technical assistance, the more advanced MFIs tend to display a higher debt leverage throughdomestic or foreign borrowing; over time some even evolve into more formalized financial institutions(e.g. non-bank financial institutions) or even regulated MFIs such as niche banks. Especially the mos


8/29

advanced tier 1 MFIs use domestic deposits (if their legal status permits their doing so) and debtfinancing as their core funding source. Apart from deposits, debt financing usually comprises bothsubsidised and commercial borrowing from a large variety of domestic and foreign sources that rangefrom (international) development agencies and social investors to quasi-commercial and commerciallenders. Some tier 1 MFIs even access capital markets by issuing bonds, going public or securitizing

their loan portfolios. However, an increasing number of institutions do not follow this traditional patternany longer. For instance, some start-up MFIs are even set up as regulated microfinance providers. Othersdecide to operate as specialised lenders and not to develop into a regulated MFI. There is of course nosingle optimal capital structure for an MFI; rather, decisions on funding structures for the individualoptimal funding mix is in practice based on a variety of determinants. On the one hand, internal factorssuch as growth of loan portfolio and savings mobilisation and external factors such as the regulatoryframework, the availability of donors and commercial lenders and, lastly, the development and opennessof the domestic financial system are very important factors. On the other hand, the costs and maturity ofindividual funding sources play a key role in determining the optimal funding mix. For MFIs, issuingequity is the most costly source of finance (except of grant equity and other donations) followed byunsecured and subordinated debt, while retail deposits are reported to be the cheapest funding source.

For foreign funding, potential currency risks must also be considered. However, decisions on capitalstructure also need to consider the maturity of each instrument. While equity capital primarily serves asa long-term funding source, debt has rather a medium-term maturity while deposits have usually a short-term maturity. In the very long run and from a normative point of view, it would be desirable to enableMFIs to primarily refinance themselves from domestic funding sources, either through national deposit-taking or accessing local capital markets by issuing bonds or equity. After all, microfinance is a responseto the underdevelopment of the financial sector in a developing country. The ultimate objective ofdeveloping financial markets in emerging markets and developing countries is to mobilise domesticfinancial resources and to enable domestic investors to efficiently draw on domestic savings. Ultimatelyin the course of such a development, the role of foreign private sector investors in MFI financing wouldgradually change from providing direct loans to MFIs via structured debt instruments or funds towardincreasingly investing into a MFIs domestic bonds or shares


9/29

ACCESS TO MICROFINANCE

Thus, the absolute number of poor people that have access to MFIs may beincreased. Moreover, increased competition, technological change, and financial

market policies, which focus on strengthening market forces and improving thestability of MFIs, may positively contribute to the efficiency of MFIs. This, in turn,may help generating more financial resources with which the poor can be helped.Under these circumstances, outreach and financial sustainability and efficiencyseem to be compatible objectives. Yet, focussing on financial sustainability andefficiency may also go at the cost of lending to the poor. As lending money to thepoor especially the very poor and/or the rural poor can be very costly, theoutreach and sustainability goal may be conflicting. Especially in policy circlesthere is a hefty debate on the compatibility versus the trade-off betweensustainability and outreach. Whereas the so-called welfarist view stresses theimportance of outreach and the threat of focusing too much on sustainability, the

institutionalist view claims that MFIs should focus on sustainability. While from apolicy perspective it is very important to know whether the strife for financialsustainability and efficiency is compatible or conflicting with the outreach goal,there are surprisingly few studies that have investigated this issue in a systematicand appropriate way. Most studies only provide anecdotal evidence. This studyaims at contributing to closing this gap in the literature. In particular, we providean in depth analysis of the potential compatibility or trade-off between effciencyof MFIs and their outreach. We use stochastic frontier analysis (SFA), a techniquethat has not been used extensively in the field of microfinance, to measure theefficiency of individual MFIs. We then link the efficiency measures obtained fromthe SFA to measures of outreach. For the analysis we use data for 435 MFIs, which

we obtained from Mix Market over the period 1997-2007. The remainder of thepaper is organized as follows. Section 2 discusses the literature on the relationshipbetween financial sustainability, efficiency and outreach of MFIs.


10/29

Microfinance Home to about 1.1 billion people in India as in 2007.

India constitutes approximately one sixth of the worlds total population. It is the worlds largest

democracy and a key emerging market alongside China and Brazil. The picture of growing GDP and

rising foreign investments shows an environment where wealth is increasing for the nation. Due to its

large size and population of around 1000 million, India's GDP ranks among the top 15 economies of the

world. However, around 300 million people or about 60 million households, are living below the

poverty line. It is further estimated that of these households, only about 20 percent have access to credit

from the formal sector. Additionally, the segment of the rural population above the poverty line but not

rich enough to be of interest to the formal financial institutions also does not have good access to the

formal financial intermediary services, including savings services. A group of micro-finance

practitioners estimated the annualised credit usage of all poor families (rural and urban) at over Rs

45,000 crores, of which some 80 percent is met by informal sources. This figure has been extrapolated

using the numbers of rural and urban poor households and their average annual credit usage (Rs 6000

and Rs 9000 pa respectively) assessed through various micro studies.

.

Characteristics

1.Client outreach & services- The microfinance outreach of sample MFIs amounts to some 5.6 million

clients (M-CRIL, September 2006) to 6.6 million clients (for the MIX dataset, March 2007). Around three

quarters of these are based in South India and another 20% in the East. Most of the remainder are in North

India. There are relatively few MFIs in the West. Grameen MFIs with over 130,000 clients each are the largest


11/29

in the country and together serve over 50% of the total number of clients covered. Though extensive

government support for SHG programmes has resulted in the establishment of a large number of MFIs using the

SHG methodology, these are around half the size of Grameen MFIs and, as a result, provide outreach to only

about one-third of the total number of clients covered. From the perspective of the legal framework, the

proposed new microfinance law does not cover nearly 80% of these clients since 73% a served by NBFCs (or

MFIs on the verge of transformation to NBFCs) and another 6% by Section 25 (not-for-proft) companies. Suchinstitutions fall outside the ambit of the proposed law.


12/29

Indian MFIs have minuscule outstanding Rs3, 400 ($82) compared to the international average Rs19, 200 ($468)and has not grown over the past couple of years. The Grameen clients have the smallest loan balances Rs2,700($65). This has happened despite a high growth rate of MFI portfolios (40%) because client outreach hasexpanded even faster (84%). Large numbers of new MFI clients inevitably means small loan sizes. At an averageloan balance that is just 9.9% of GNI per capita, depth of outreach is apparently substantial. However, fieldexperience shows that significant numbers of not-so-poor women join microfinance groups - often for socialreasons - so the loan balance-GNI ratio is not a good indicator of poverty outreach (at least for India). A highlyrestrictive legal framework for deposit taking has severely constrained the offering of thrift services so client

savings form just 8.1% of outstanding loan balances. As Fig. indicates, all the methodologies have low averagesavings per member except for the individual banking model. Each of the bars reflects the nature of themethodologies and the legal framework in which the organizations operate.

2. Operating efficiency & portfolio quality-Staff productivity in India is now higher than in any othermajor region offering microfinance. Some 326 staff members per MFI serve over 230 borrowers each while theleading MFIs average 275 borrowers per member of staff. This results in some of the lowest servicing costs forMFIs anywhere in the world. Both Grameen and SHG MFIs record average servicing costs of the order of Rs400($10) per borrower, lower than the MIX median even for Bangladesh. As MFIs have grown and staffproductivity has increased over the years, servicing costs have come down even in nominal terms. With aninflation rate averaging 5% per annum in the mid- 2000s, this has resulted in a decline of around 9% per annum

in the cost of servicing borrowers. Indian MFIs are now amongst the most efficient internationally. The effectiveinterest rate paid by the average Indian microfinance borrower is no more than 25% - not significantly differentfrom the ~24% usually charged even by commercial banks on consumer finance. By and large, new institutionshave low yields and high OERs but, as expansion takes place, and economies of scale set in, yields improve andOERs decline to acceptable levels. There are significant economies of scale up to a portfolio size of Rs2.5 crores($600,000)


13/29

3. Financial performance- The financial viability of microfinance institutions in India is under threat, despiteimprovements in the yield gap. The 2.1% weighted return on assets of the 2005 sample has been reduced to zerowhile typical MFI returns are -9.8%, well behind Bangladeshi institutions reporting to the MIX, which lead theregion in profitability. Low portfolio yields, combined with poor portfolio quality and rising financial costs havereduced Indian MFI surpluses though improvements in collection measures have boosted portfolio yields to 93%of the expected figure, up from 85% in 2005 (Table 4.6). Yields, however, remain low, with 43% of Indian MFIs

earning less than 24% on their portfolios. In comparison with 36-50% real costs of bank loans and moneylenderinterest rates ranging from 36% to 120%, MFI average yields represent a substantial benefit for low incomeclients.

4. Products- Several MFIs have conducted careful market research and are in the process of developingproducts based on it. Ujjivan's research into the market for housing loans revealed the life-time progression ofthe typical customer from renting to "leasing" (in which the tenant pays in lieu of rent a relatively large interest-free lump sum to the owner), to buying a house site, to building a house, to extending and repairing it. For goodcustomers who have established a track-record Ujjivan has started offering loans of up to Rs 30,000 for any ofthese purposes using a loan from HDFC which should suffice for 1700 customers. (Box 5.5). It is looking also ateducational loans required specially at the beginning of the school year, and loans for higher education. These

products are in addition to Ujjivan's standard family-needs (or personal) loans, business loans, top-up loans,emergency loans and festival loans. SWAWS and VWS also have educational loans. SEWA's products haveevolved over 30 years to result in the diversity.

5. Processes- As regards processes, one response to urban mobility and heterogeneity has been to do away withcenter meetings altogether, and experiment with smaller sized JLGs, more suited to accommodating the diversityof occupations, loan sizes requirements and time availabilities. As Veena Mankar points out, a maid and ahawker are unlikely to be free at the same time to attend a group meeting (assuming they have any free time atall). Both Ujjivan and Swadhaar have introduced monthly instead of weekly repayments, given the particularlyacute time pressures experienced by borrowers in metros (many of who have long commutes). Swadhaar evengives them the option to pay a little extra to have their repayments collected at the doorstep. Also, doing awaywith center meeting makes a virtue out of necessity, since sufficient space for a gathering (let alone for a branch

office) is prohibitively expensive, if available at all, in many urban localities.

6. Individual loans- The next logical step of course is to do away with JLGs altogether and introduceindividual loans, which are already the norm in Latin America. The advantage of individual loans is that they canbe more easily tailored to the loan size, gestation period and other cash flow requirements of the specific activitychosen by each borrower. Individual loans are usually made to borrowers who have established a track recordthrough group borrowing and who require larger loans. Their higher risk is usually addressed by security in someform and higher interest on account of the risk premium. Many MFIs have in fact already been makingindividual loans for housing purposes to senior group members, although, since funds for these usually comefrom the housing financing institutions, their interest rates are lower and tenor longer. What are more recent, areloans made to small entrepreneurs and traders referred to by names such microenterprise loans, etc.33 For mostMFIs individual loans are still a small part of their portfolio, except for SEWA Bank, the MFI with the longest

experience in India (and perhaps anywhere) of individual loans.

7. SHGs or JLGs- As a delivery vehicle SHGs (instead of JLGs) would also be affected by the mobility andtime scarcity related constraints of urban life, perhaps even more so, since SHGs have more members than JLGs,which should make it even harder to find a time for meetings suitable for all members, and increase thelikelihood of at least one member moving out of the locality. On the other hand, in theory at least, SHGs arebetter suited to handle urban heterogeneity since they are expressly designed to accommodate different loan


14/29

amounts, and like chit funds can accommodate non-borrowing or net saver members who prefer to sit back andearn interest on loans taken by others. Moreover, given adequate accounting skills they should be able toaccommodate heterogeneity in respect of variation in desired savings, both between membersand over time.Despite this, their use is very much the exception, although Indian Bank's Microstate branch, SPMS and RoshanVikas rely on them exclusively, the last two as SHG federations.

8. Human resources- While the MFI human resources challenge - not just training, but attracting and retainingstaff - has been engaging the attention of the MFI community generally in the last few years, its severity in theurban areas has taken the new urban MFIs by surprise. Nearly all of them are finding it difficult to recruit andretain staff in conditions of a tightening job market, especially in cities like Bangalore where Ujjivan reportsattrition rates of 20 to 30 percent a year. The skills field workers acquire are turning out to be in high demand inother parts of the financial sector, and in marketing. Also, as Veena Mankar points out, many young entrants tothe labour force find the multi-tasking nature of MFI field work too demanding, and prefer a more uni-dimensional job (and one offering, preferably, a little more "glamour" or office comfort). Finally, the relativelyflat nature of the MFI pyramid doesn't help when it comes to promotion prospects. Clearly better pay andincentives will have to be part of the solution, but will raise costs. Another solution being tried out is recruitingstaff in the rural areas and providing them with accommodation.

Role of Microfinance Services

1. Do not restrict loan us- Access to financial services provides the poor with the opportunity toaccumulate assets, to reduce their vulnerability to shocks (such as illness or death in the household, cropfailure, theft, dramatic price fluctuations, the payment of dowries) and to invest in income-generationactivities. It also enables them to improve the quality of their lives through better education, health andhousing. One of the most important roles of access to credit is that it enables the poor to diversify theirincomes. Most poor households do not have one source of income or livelihood. Instead they pursue a

mix of activities, depending on the season, prices, their health and other contingencies. This may includegrowing their own food, working for others, running small production or trading businesses, hunting andgathering, and accessing loans.

2. Provide access to financial services, not subsidies. For microenterprises, the most common constraintis the lack of access to working capital to grow their business. Low-income entrepreneurs want rapidand continued access to financial services rather than subsidies, and they are able and willing to payfor these services from their profits. Most micro entrepreneurs borrow small amounts for short-termworking capital needs. The returns from their economic activities are normally sufficient to pay highinterest rates for loans and still make a profit. Micro entrepreneurs value the opportunity to borrow andsave with MFIs since they provide services that are cheaper than those that would normally be available

to poor clients or that would be entirely unavailable to them. Moneylenders charge very high interestrates, often many times the rate charged by MFIs, and the moneylenders' terms may not be suited to theBorrower. Micro entrepreneurs have consistently demonstrated that they will pay the full interest cost tohave continued access to financial services from MFIs.

3. Financial services contribute to womens empowerment- Women entrepreneurs have attracted specialInterest from MFIs because they almost always make up the poorest segments of society, they havefewer economic opportunities, and they are generally responsible for child-rearing, including education,


15/29

health and nutrition. Given their particularly vulnerable position, many MFIs seek to empower womenby increasing their economic position in society. Experience shows that providing financial servicesdirectly to women aids in this process. Women clients are also seen as beneficial to the institutionbecause they are seen as creditworthy. Women have generally demonstrated high repayment and savingsrates.

4. Savings-One additional means for promoting household welfare is the development of facilities forsafe but liquid savings deposits. Early microfinance programs were not effective in mobilizing savingsand showed little interest in doing so. Partly, it was thought that poor households were too poor to save.But recent microfinance experience shows that even poor households are eager to save if givenappealing interest rates, a conveniently located facility, and flexible accountswith bankers inIndonesia and South Asia finding that convenience generally trumps interest rates. From an institutionalviewpoint, incorporating savings mobilization in microfinance programs makes sense for a variety ofreasons.

First, it can provide a relatively inexpensive source of capital for re-lending. Second, todays depositors may be tomorrows borrowers, so a savings program creates

a natural client pool. Third, building up savings may offer important advantages to low-income householdsdirectly: households can build up assets to use as collateral, they can build up a reserve toreduce consumption volatility over time, and they may be able to self-finance investments ratherthan always turning to creditors.

5. Support institutions, not projects. Microfinance has made a clear shift away from the limited-durationprojects of the 1970s and 1980s when donors usually subsidized the credit to the borrowers. Providingcredit at subsidized rates through the project approach was problematic for a number of reasons. Itturned out to be costly and unsustainable because loans were viewed as charity and were rarely paidback. The funds were quickly depleted before they could reach many people. Another shortcoming was

that donors often specified target groups related to geographical location, gender, poverty level oreconomic activity. These externally imposed objectives were difficult to accomplish and often resultedin failure. Finally, training for health, education, social empowerment or business skills was also oftenprovided along with the credit. Training, too, proved to be costly, patronizing and a waste of clientstime. Because of the problems inherent in the project approach, a new viable alternative was needed.This resulted in a move towards a financial- systems approach, which stresses the creation of institutionsrather than projects to meet the financial needs of the poor on a sustained basis.


16/29

Impact of Microfinance in Terms of Female Empowerment and Education

Any review of microfinance is incomplete without a discussion of its impact on women. TheMicrocredit Summit Campaign Report (2000) lists over a thousand programs in which 75 percent of theclients were women. Yunus (2003) recounts the initial difficulties overcoming the social mores in ruralBangladesh and lending to women in this predominantly Islamic nation. However, his efforts wererewarded and 95 percent of the Grameen Banks current clients are women. This focus on womenfollows largely from Yunuss conviction that lending to women has a stronger impact on the welfare ofthe household than lending to men. This has been confirmed by a large volume of research onmicrofinance. In countries where microfinance is predominant, country-level data reveal signs of asocial transformation in terms of lower fertility rates and higher literacy rates for women. Pitt andKhandker (1998) show that loans to women have a positive impact on outcomes such as children'seducation, contraceptive use, and the value of women's non-land assets. Khandker (2005) finds thatborrowing by a woman has a greater impact on per capita household expenditure on both food and non-food items than borrowing by a man. Among other things, this also improves nutrition, health care, andeducational opportunities for children in these households. Smith (2002) validates this assertion usingempirical data from Ecuador and Honduras to compare microfinance institutions that also offer healthservices with institutions that offer only credit. He notes that, in both countries, health bankparticipation significantly raises subsequent health care over credit-only participation. In particular, he
http://s3-1.kiva.org/img/w800/246.jpg


17/29

found that participation in MFIs that offer health services reduces the tendency to switch to bottlefeeding as incomes rise. He notes that breast-feeding children under age two is a key health-enhancingbehavior. A pro-female bias in lending works well for the MFIs. Practitioners believe that women tendto be more risk averse in their choice of investment projects, more fearful of social sanctions, and lessmobile (and therefore easier to monitor) than menmaking it easier for MFIs to ensure a higher rate of

repayment. Various studies from both Asia and Latin America have shown that the repayment rates aresignificantly higher for female borrowers compared with their male counterparts. However, critics haveargued that microfinance has done little to change the status of women within the household. A much-cited paper by Goetz and Gupta (1996) points to evidence that it is mostly the men of the householdand not the women borrowers who actually exercise control over the borrowings. Moreover,microfinance does little to transform the status of women in terms of occupational choice, mobility, andsocial status within the family. Therefore, microfinance hardly empowers women in any meaningfulsense.

LITERATURE REVIEW

Microfinance A Way Forward. Thankom Arun, 1 David Hulme, 2October 2008

This paper1 identifies key processes shaping the microfinance sector in the coming decades. The paper

examines the geography of microfinance, highlighting differing evolution patterns and challenges across

the world. It looks at the widespread adoption of a financial systems approach in the microfinance

sector.This is set to continue because of two main processes: a shift in focus from poverty-lending

towards financial service provision; and the involvement of formal banks in microfinance. The paper

looks at the increasing focus on graduation programmes to support ultra-poor people, linking

microfinance to social protection and other services. It outlines the great potential of new, low-cost ICT

products to enable the development of new microfinance services. Finally, the need to regulat

microfinance is discussed.

GLOBAL RECESSION AND MICROFINANCE IN DEVELOPING COUNTRIES: THREATS

AND OPPORTUNITIES

Roberto Moro Visconti, March 24h, 2009

The global recession which started in 2008 after the subprime crisis and the unprecedented default orrescue of many financial institutions has strongly affected the credibility of the international bankingsystem, damaging also the real economy. Due to this joint crisis, the credit crunch is severely affectingthe economy in Western globalized countries. Developing countries, not fully integrated withinternational markets, seem less affected and local microfinance institutions might also allow for a


18/29

further shelter against recession, even if foreign support to donor driven NGOs or not fully independentmicrofinance banks is slowing down and collection of international capital is harder and moreexpensive. Intrinsic characteristics of microfinance, such as closeness to the borrowers, limited risk andexposure and little if any correlation with international markets have an anti-cyclical effect. In hard andconfused times, it pays to be little, flexible and simple.

Marrying Microfinance to Small-holder Agriculture

- B.S.Suran and P.Satish121 November 2005Large numbers of small farms coupled with many resource limitations make crop diversification adifficult proposition in India. Though, contract farming systems do offer a solution by reducing the riskfor the producers as well as processors, but, farmer enrolments are generally limited to large farms onlyin such contract farming arrangements. However, no contracts are said to be fool proof as both thepartners exhibit opportunistic behavior in maximizing returns, this brings to fore the problems ofmoral hazard and adverse selection. This paper suggests a conceptual framework for getting small-holder agriculturists into crop diversification, which is a key ingredient in agriculture transformation in

India. Cooperative models and models based on microfinance improvisations do offer a scope for broadbased relationship models that doesnt terminate with contracts and facilitates greater participation ofsmall-holder agriculturists. The framework suggested charts the role of intermediaries like aggregators.The paper argues that fair contract systems can be achieved if the farmer power is aggregated tomutually benefit and enable more longer and sustained relationships.

Financial Development and the Efficiency of Microfinance Institutions

March 2009Niels HermesThis paper investigates whether the country-level financial environment in which microfinanceinstitutions (MFIs) have to work affects their operations. In particular, we argue that the efficiency ofMFIs is determined by the extent to which financial markets of countries are developed. On the onehand, well-developed financial markets provide an environment in which MFIs are able to flourish andincrease their efficiency. On the other hand, however, well-developed financial markets may alsosubstitute for MFIs, which reduces demands for their services, thus potentially reducing their efficiencyGiven the fact that the relationship may go both ways, we empirically investigate the direction of therelationship between measures of financial development and measures of MFI efficiency, using data for435 MFIs over the period 1997-2007.

Efficiency of Microfinance Institutions: A Data Envelopment Analysis

Michael SkullyThis study examines the cost efficiency of 39 microfinance institutions across Africa, Asia and the LatinAmerica using non-parametric data envelopment analysis. Our findings show non-governmentamicrofinance institutions particularly; under production approach, are the most efficient and this result isconsistent with their fulfillment of dual objectives: alleviating poverty and simultaneously achievingfinancial sustainability. However, bank-microfinance institutions also outperform in the measure ofefficiency under intermediation approach. This result reflects that banks are the financial intermediariesand have access to local capital market. It may be possible that bank microfinance institutions mayoutperform the non-governmental microfinance institutions in the long run.


19/29

Efficiency Analysis of Microfinance Institutions in Developing Countries

M. Kabir Hassan and Benito Sanchez

October 2009This paper investigates technical and scales efficiencies of microfinance institutions (MFI) in threeregions: Latin America countries, Middle East and North Africa (MENA) countries, and South Asiacountries, and compares efficiencies across regions and across type of MFIs. We find that technicalefficiency is higher for formal MFIs (banks and credit unions) than non-formal MFIs (nonprofitorganizations and non-financial institutions). Furthermore, South Asian MFIs have higher technicaefficiency than Latin American and MENA MFIs. The source of inefficiency is pure technical ratherthan scale, suggesting that MFIs are either wasting resources or are not producing enough outputs(making enough loans, raising funds, and getting more borrowers).

A Model of Microfinance With Adverse Selection, Loan Default, and Self-Financing1

Amitrajeet A. Batabyal2We analyze a market for microfinance in a region of a developing nation in which all projects are eitherof high or low quality. There is adverse selection because only borrowers know whether their project isof high or low quality but the microfinance institutions (MFIs) do not. The MFIs are competitive, riskneutral, and they offer loan contracts specifying the amount to be repaid only if a borrower's projectmakes a profit. Otherwise, this borrower defaults on his contract. Design/methodology/approach: Weuse a game theoretic model that explicitly accounts for adverse selection and then we study the trinity ofadverse selection, loan default, and self-financing.

Microfinance and Small Deposit Mobilization Fact or Fiction

June, 2009, Richard MeyerTwo primary arguments can be made for voluntary deposit mobilization among microfinanceinstitutions (MFIs). 2 First, deposit mobilization is an alternative source of funds that was neglected bymost MFIs until a few years ago. From this perspective, voluntary deposit mobilization helps MFIsachieve independence from donors and investors, which is particularly important in periods of liquidityconstraints. Second, poor households benefit greatly from having access to deposit mechanisms, and thebenefits can be even greater than those derived from access to credit.3 On the funding side, the industryhas demonstrated great progress, with savings mobilization now representing more than half of theassets reported by deposit mobilizing MFIs, even though this share seems to have decreased a bit duringthe last three years. Since voluntary deposit mobilization has become an important source of funding forthe microfinance industry, the main question explored in this paper is whether deposit mobilizing MFIsare really serving small depositors. Most microfinance observers automatically assume that all voluntarydeposit mobilization by MFIs would be from small size accounts, and, hopefully, from depositors withsimilar socioeconomic traits as the clients they reach with their other services. 4 But until now, no one


20/29

has addressed the question of depth of outreach of deposit mobilization on a global scale as is routinelydone for microloans.

Microfinance and Poverty Reduction in Asia and Latin America

John Weiss and Heather MontgomerySeptember 2004the current enthusiasm among the donor community for microfinance programs, rigorous research on theoutreach, impact and cost-effectiveness of such programs is rare. Design of aid programs would ideallyincorporate evidence on all three points, but the research that does exist generally focuses on only one ofthese criteria: either outreach, impact or cost-effectiveness. In part this reflects the difficulty ofestablishing an appropriate statistical methodology and implementing those standards in practice, and inpart no doubt reflects the variation found in practice in the way in which microfinance operates. Theevidence surveyed here suggests that the conclusion from the early literature, that whilst microfinanceclearly may have had positive impacts on poverty it is unlikely to be a simple panacea for reaching thecore poor, remains broadly valid. Reaching the core poor is difficult and some of the reasons that made

them difficult to reach with conventional financial instruments mean that they may also be highrisk and therefore unattractive microfinance clients.

Should banks in Palestine invest in microfinance market

Osama K. Najjar ,Palestine 12/2009This study is prepared for academic & scientific purposes only and is not intended for investment orcommercial purposes. The data and information contained in this study are taken from published sourcesso, the author dose not bears any responsibility for any error or mistake stated in the study. All analysisand recommendations in the study reflect the opinion of the author only.

Is Microfinance Growing Too Fast?

Adrian Gonzalez

The aggregate number of borrowers served by microfinance institutions (MFIs) reporting to MIXMarket (www.mixmarket.org) grew 21 percent per year on average in the 2003-2008 period, while theloan portfolio grew 34 percent per year on average in the same period.2 For many microfinance practitioners and analysts, this level of growth is a reason for celebration, as it points towardmicrofinances success in increasing access to financial services for poor and low-income householdsand businesses. This paper quantifies the point at which the level of growth appears to overstretch MFIresources and at which portfolio quality begins to decline for any higher growth level. This issue isimportant in order for microfinance institutions to understand the trade-offs between growth andportfolio quality. One additional question explored is whether the growth strategy has a significant effecton portfolio quality. In particular, this paper distinguishes between local growth (growth in the numberof borrowers per branch) versus expansive growth (growth in the number of branches per MFI) andtries to measure how much is too much for each case, and whether differences in the growth path chosenby MFIs matter. Finally, the analysis concludes with a review of the market context in which MFIs arebuilding their borrower bases and the extent to which that context impacts portfolio quality.


21/29

OBJECTIVES1. POVERTY ELIMINATION BY MICROFINANCE

The interest in microfinance has burgeoned during the last two decade , multilatral lending

agencies ,bilateral donor agencies , developing and developed country government s, and non-

government organizations (NGOs ) all support the development of microfinance. A variety of private

banking institutions has also joined this group in recent years. As a result , microfinance services

have grown rapidly during the last decade , although from an initial low level, and have come to theforefront of development discussions concerning poverty reduction. Despite this growth, as concluded

in the recently completed Rural Asia Study, rural financial market s in Asia are ill -prepared for

the twenty - first century. About 95 percent of some 180 million poor households in the Asian

and Pacific Region still have little access to institutional financial services . Development

practitioners, policy makers, and multilateral and bilateral lenders, however, recognize that providing

efficient microfinance services for this segment of the population is important for a variety of reasons.

Microfinance can be a critical element of an effective poverty reduction strategy.

Improved access and efficient provision of savings, credit, and insurance facilities in

particular can enable the poor to smoothen their consumption, manage their risks better, buildtheir assets gradually, develop their microenterprises, enhance their income earning

capacity, and enjoy an improved quality of life. Microfinance services can also contribute to the

improvement of resource allocation, promotion of markets, and adoption of better technology;

thus, microfinance helps to promote economic growth and development.


22/29

Without permanent access to institutional microfinance, most poor households continue

to rely on meager self-finance or informal sources of microfinance, which limits their ability

to actively participate in and benefit from the development opportunities.

Microfinance can provide an effective way to assist and empower poor women, who

make up a significant proportion of the poor and suffer disproportionately from poverty.

Microfinance can contribute to the development of the overallfinancial system through

integration of financial markets.

Developing countries in the Region have used microfinance services to reduce poverty. About 21

percent of the Grameen Bank borrowers and 11 percent of the borrowers of the Bangladesh Rural

Advancement Committee, a microfinance NGO, managed to lift their families out of poverty within

about four years of participation.

4. These services also had a significant positive impact on the depth (severity) of poverty among the

poor. Extreme poverty declined from 33 percent to 10 percent among Grameen Bank participants, and

from 34 percent to 14 percent among Bangladesh Rural Advancement Committee participants.

Without exclusively targeting the poor, the unit desas of the Bank Rakyat Indonesia (BRI) have also

assisted hundreds of thousands of households in lifting themselves out of absolute poverty over the

past decade.

5. A 1988 sample survey of unit desa borrowers showed that microcredit has had a major impact on

their families' standards of living. The study estimated that net household incomes of borrowers

increased by about 76 percent and employment increased by 84 percent with three years of program

participation.

6. The studies have ,in general, shown that microfinance services have also had a positive impact on

specific socioeconomic variables such as childrens schooling , household nutrition status, and

womens empowerment.

7. Microfinance institutions (MFIs) have also brought the poor, particularly poor women, into the formal

financial system and enabled them to access credit and accumulate small savings in financial assets,

reducing their household poverty. However , researchers and practitioners generally agree that the

poorest of the poor are yet to benefit from microfinance programs in most countries partly because most

MFIs do not offer products and services that are attractive to this category.

8. Thus, to increase the overall impact of microfinance on poverty reduction , it is essential to

extend a wide range of services o n a continuing basis to the poor who are still excluded from the

benefits of microfinance.


23/29


24/29

external development strategies. In their collectivity, micro-loans lead to large-scale economicimprovements and foster growth in target countries. In 2006, Prof. Yunus and the Grameen Bank wereawarded the Nobel Peace Prize for their efforts to create economic and social development frombelow. The Nobel committee honoured the contribution microcredit has made to the advance ofdemocracy and human rights worldwide.

2nd OBJECTIVE

PROGRAMME OF GOVERNMENT OF INDIA

Arranging fixed deposits for MFIs/NGOs: Under this scheme government of India arrange money to

MFI/NGO like SIDBI for micro credit to poor.

Training and studies on micro-finance programme: Government of India would help SIDBI in meeting

the training needs of NGOs, SHGs, intermediaries and entrepreneurs and also in enhancing awarenessabout the programme

. Institution building for intermediaries for identification of viable projects: The Government of India

would help in institution building through identification and development of intermediary

organization, which would help the NGOs/SHGs in identification of product, preparation of project

report, working out forward and backward linkages and in fixing marketing/ technology tie-ups. The

SISIs would help in the identification of such intermediaries in different areas Budgetary provision for

the scheme during 10th plan: There was a budgetary provision in 10th five year plan and hoping more

funds in next plan. Administrative arrangement: A committee has been formed to control and monitor

the administrative arrangement of MFI/NGOs Creating self employment opportunities is one way ofattacking poverty and solving the problems of unemployment. There are over 24 crore people below the

poverty line in our country. The Scheme of Micro-finance has been found as an effective instrument for

lifting the poor above the level of poverty by providing them increased self-employment opportunities

and making them credit worthy. A basic effort of last decade, the microfinance objectives in India has

reached at top point similar to Bangladesh. With some effort substantial progress can be made in taking

MFIs to the next orbit of significance and sustainability. There is a need of Designing financially


25/29

sustainable models and increase outreach and scale up operations for poor in India. People belong to

villages are still unaware about banking policies and credit system. So NGO should communicate to

them and share their view with villagers. Banks should convert and build up professional system into

social banking system for poor. Government of India and state governments should also provide support

for capacity building initiatives and ensure transparency and enhance credibility through disclosures.

Creating self employment opportunities is one way of attacking poverty and solving the problems of

unemployment. There are over 24 crore people below the poverty line in our country. The Scheme of

Micro-finance has been found as an effective instrument for lifting the poor above the level of poverty

by providing them increased self-employment opportunities and making them credit worthy. A basic

effort of last decade, the microfinance objectives in India has reached at top point similar to Bangladesh.

With some effort substantial progress can be made in taking MFIs to the next orbit of significance and

sustainability. There is a need of Designing financially sustainable models and increase outreach and

scale up operations for poor in India. People belong to villages are still unaware about banking policies

and credit system. So NGO should communicate to them and share their view with villagers. Banks

should convert and build up professional system into social banking system for poor. Government ofIndia and state governments should also provide support for capacity building initiatives and ensure

transparency and enhance credibility through disclosures. Creating self employment opportunities is one

way of attacking poverty and solving the problems of unemployment. There are over 24 crore people

below the poverty line in our country. The Scheme of Micro-finance has been found as an effective

instrument for lifting the poor above the level of poverty by providing them increased self-employment

opportunities and making them credit worthy. A basic effort of last decade, the microfinance objectives

in India has reached at top point similar to Bangladesh. With some effort substantial progress can be

made in taking MFIs to the next orbit of significance and sustainability. There is a need of Designing

financially sustainable models and increase outreach and scale up operations for poor in India. People

belong to villages are still unaware about banking policies and credit system. So NGO shouldcommunicate to them and share their view with villagers. Banks should convert and build up

professional system into social banking system for poor. Government of India and state governments

should also provide support for capacity building initiatives and ensure transparency and enhance

credibility through disclosures.

Micro Finance Services

We are seeing a new type of loan methodology being evolved that is somewhat of a hybrid in nature. It

considers itself in the business of improving livelihoods, in which livelihood financial services is one

piece. It places equal emphasis on the provision of agricultural business development services and

technical services in addition to the provision of financial services, which includes credit but is not

limited to it. Credit is not sufficient alone to guarantee an improvement in the livelihoods of the rural

poor. It is believed that other financial and technical services are necessary and can be provided on a

revenue model in order to be sustainable. Therefore Micro-Finance Institutions were structured in dia.


26/29

The different organizations in this field can be classified as "Mainstream" and "Alternative" Micro

Finance Institutions (MFI).

1. Mainstream Micro Finance Institutions

NABARD, Small Industries Development Bank of India (SIDBI), Housing Development Finance

Corporation (HDFC), Commercial Banks, Regional Rural Banks (RRBs), the credit co-operative

societies etc are some of the mainstream financial institutions involved in extending micro finance.

2. Alternative Micro Finance Institutions

These are the institutions, which have come up to fill the gap between the demand and supply for

microfinance. MFIs were recently defined by the Task Force as "those which provide thrift, credit and

other financial services and products of very small amounts, mainly to the poor, in rural, semi-urban or

urban areas for enabling them to raise their income level and improve living standards."

The MFIs can broadly be classified as:

NGOs, which are mainly engaged in promoting self-help groups (SHGs) and their federations at a

cluster level, and linking SHGs with banks, under the NABARD scheme.

NGOs directly lending to borrowers, who are either organised into SHGs or into Grameen Bank style

groups and centres. These NGOs borrow bulk funds from RMK, SIDBI, FWWB and various donors.

Mainstream

Micro financeInstitutions

Alternative

micro finance

institutions

Types of Microfinance

institutions


27/29

MFIs which are specifically organised as cooperatives, such as the SEWA Bank and various Mutually

Aided Cooperative Thrift and Credit Societies (MACTS) in AP.

MFIs, which are organised as non-banking finance companies CFTS, Mirzapur and SHARE Microfin

Ltd.

A Conceptual Model Lets take a virtual MicroCredit Financing unit XYZ Corporation. Let it be an

organization which brings together both , the organizational structures of an Nonbanking Finance

Corporation(NBFC) like Samruddhi , and an NGO (Indian Grameen Services (IGS)) under a holding

company in order to give itself the benefit of both donor funds for research and development as well

greater access to commercial sources of funding.

The functions of XYZ operations are 3 fold

1. Firstly, XYZ targets small enterprises for employment creation through the provision of individual

loans with collaterized security to the top of its customer pyramid, the non poor.

2. It then targets the middle of the pyramid, micro-entrepreneurs and small farmers whom we might

estimate are the marginally poor or vulnerable with individualized loans to join liability groups

(Grameen Model). 3. For the bottom of its pyramid, whom we estimate are the poorest of the poor,

XYZ offers loans to self-help-groups for onlending to members.

Explaning this Triad

In terms of demand for micro-credit, there are three segments:

1. At the very bottom in terms of income and assets, are those who are landless and engaged in

agricultural work on a seasonal basis, and manual labourers in forestry, mining, household industries,construction and transport. This segment requires, first and foremost, consumption credit during those

months when they do not get labour work, and for contingencies such as illness. They also need credit

for acquiring small productive assets, such as livestock, using which they can generate additional

income.

2. The next market segment is small and marginal farmers and rural artisans, weavers and those self-

employed in the urban informal sector as hawkers, vendors, and workers in household micro-enterprises.

This segment mainly needs credit for working capital, a small part of which also serves consumption

needs. This segment also needs term credit for acquiring additional productive assets, such as irrigation

pumpsets, borewells and livestock in case of farmers, and equipment (looms, machinery) andworksheds in case of non-farm workers.

3. The third market segment is of small and medium farmers who have gone in for commercial crops

such as surplus paddy and wheat, cotton, groundnut, and others engaged in dairying, poultry, fishery,

etc. Among non-farm activities, this segment includes those in villages and slums, engaged in

processing or manufacturing activity, running provision stores, repair workshops, tea shops, and


28/29

various service enterprises. These persons are not always poor, though they live barely above the

poverty line and also suffer from inadequate access to formal credit.If XYZ is indeed able to provide a

much wider range of services to a wider range of poor individuals , it would provide compelling reasons

for considering the benefits of MFIs becoming NBFCs but also retaining a nonprofit arm for the

purpose of preserving one of the largest benefits of an NGO-MFI, the ability to innovate through

researching and testing products that could enhance the lives of the poor in India. XYZs Program

Design

The main objectives of a Neo-Hybrid microfinance unit such as one taken above wil include the

following:

Catalyze market-oriented MFIs through direct investment

Attract additional independent service providers by demonstrating the viability of the market.This

hopes to bridge the gap between the current state of microfinance in India and the positive social impact

that catalyzing microfinance can have on India's communities and families

A Neo-Design Model

In this model we propose a basic concept of a Microfinance unit combined within a structure of a

NBFC . Its main aim must be to :

1. Catalyze and grow access to microfinance in India's rural areas. Directly invest in market-oriented

MFIs to serve millions of clients in India's villages over the next 10 years

2. Attract additional independent service providers by demonstrating the viability of the microfinance

market through measurable results .

3. Invest in a portfolio of financially sound, operationally effective, microfinance start-up institutions to

bring financial services to the poor.

4. Bring commercial banks to the table from the inception of the MFIs to ensure they are configured to

support rapid growth through access to expanding commercial sources of funds

5. Attract new leaders who can combine world class management skills with the vision for massive

social impact to build scalable institutions to serve the millions of poor micro-entrepreneurs

FEW SCHEME OF A GOVERNMENT OF INDIA

There are so many schemes for the upliftment of poor In India. One of them Micro-credit programmes is

run primarily by NABARD in the field of agriculture and SIDBI in the field of Industry, Service and

Business (ISB). The success of Micro-credit programme lies in diversification of services. Micro

Finance Scheme of SIDBI is under operation since January, 1999 with a corpus of Rs. 100 crore and a

network of about 190 capacity assessed rated MFIs/NGOs. Under the programme, total amount of Rs.

191 crore have been sanctioned upto 31st December, 2003, benefiting over 9 lakh beneficiaries. Under


29/29

the programme, NGOs/MFIs are supposed to provide equity support in order to avail SIDBI finance. But

they find it difficult to manage the needed equity support because of their poor financial condition. The

problem has got aggravated due to declining interest rate on deposits. The office of the development

commissioner (Small Scale Industries) under Ministry of SSI is launching a new scheme of Micro

Finance Programme to overcome the constraints in the existing scheme of SIDBI, whose reach is

currently very low. It is felt that Governments role can be critical in expanding reach of the scheme,

ensuring long term sustainability of NGOs / MFIs and development of Intermediaries for identification

of viable projects.

http://www.academicjournals.org/AJBM/PDF/pdf2009/Apr/Shastri.pdf

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/88991.pdf

http://mpra.ub.uni-muenchen.de/3675/1/MPRA_paper_3675.pdf

(www.laghuudyog.com/schemes/microfinance.htm)
http://www.academicjournals.org/AJBM/PDF/pdf2009/Apr/Shastri.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/88991.pdfhttp://mpra.ub.uni-muenchen.de/3675/1/MPRA_paper_3675.pdfhttp://www.academicjournals.org/AJBM/PDF/pdf2009/Apr/Shastri.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/88991.pdfhttp://mpra.ub.uni-muenchen.de/3675/1/MPRA_paper_3675.pdf

Documents

Micro Finance Introduction