“Self realization and self initiative are the two most powerful weapons to wash poverty out from the world”

– CHANAKYA (World’s Greatest Ancient Economic and Political Scholar).

MICROFINANCE

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

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

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

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

WHAT IS MICRO FINANCING?

More broadly, it refers to a movement that envisions “a world in which poor have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty.

ORIGIN OF MICRO FINANCING

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

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

ORIGINIn 1720 the first loan fund

targeting poor people was founded in Ireland by the author Jonathan Swift.

Professor Yunus founded his Grameen Bank in 1976 i.e. first MICROFINANCE institute.

Professor Yunus Pioneer of Grameen bank & microfinance.

GRAMEEN BANKProfessor Yunus founded his Grameen Bank

in 1976 during a devastating famine in Bangladesh.

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

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

PROVEN IMPACT OF MICRO-FINANCING

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

PROVEN IMPACT OF MICRO-FINANCING

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

PROVEN IMPACT OF MICRO-FINANCING

Impact on income

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

HOW DOES MICROFINANCE WORK?

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

Grameen transactions take place at the village level, usually in a local hall or temple.

By avoiding both employers and immoral local money lenders the Grameen loan aims to break a circle of exploitation that frequently condemns rural villagers to lives of poverty.

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

HOW DOES MICROFINANCE WORK?

OTHER SIDE OF COIN.Critics argue that the Grameen idea is in danger of being oversold.

But, Professor Yunus was adamant that his bank could repay all of the money it raised from the commercial sector.

WHY MICRO FINANCING?

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

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

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

WHY MICRO FINANCE?Microfinance has been growing

rapidly. The industry has been growing

rapidly and there have been concerns that the rate of capital flowing into microfinance is a potential risk unless managed well.

IS MICRO FINANCE CHARITY?

Microfinance can also be distinguished from charity.

It is better to provide grants to families who are poor, or so poor they are unlikely to be able to generate the cash flow required to repay a loan.

So microfinance is not charity.

OBSTACLES TO BUILD A SOUND

COMMERCIAL MICROFINANCE

INDUSTRY

1. Inappropriate donor subsidies2. Poor regulation and supervision of

deposit-taking MFIs3. Few MFIs that meet the needs for

savings, remittances or insurance4. Limited management capacity in

MFIs5. Institutional inefficiencies6. Need for more spreading and

adoption of rural, agricultural microfinance methodologies. 

OBSTACLES TO BUILD A SOUND COMMERCIAL MICROFINANCE

INDUSTRY

MICRO FINANCING IN INDIA

Since independence, various governments in India have experimented with a large number of grant and subsidy based poverty improvement programmes.

These programmes became unsustainable.

This not only led to misuse of both credit and subsidy but banks never looked at it as a profitable and commercial activity as well.

Success stories in neighboring countries, like Grameen Bank in Bangladesh, Bank Rakiat in Indonesia, Commercial & Industrial Bank in Philippines etc, gave further boost to the concept in India in the 1980s.

India thus adopted the similar model of extending credit to the poorest sector and took a number of steps to promote micro-financing in the country.

MICRO FINANCING IN INDIA

FINANCIAL NEEDS OF POOR PEOPLE

Types of financial needs:-

Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing of dwellings.

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

FINANCIAL NEEDS OF POOR PEOPLE

Poor people find creative and often joint ways to meet these needs, primarily through creating and exchanging different forms of non-cash value.

Including livestock, grains, jewellery and precious metals.

FINANCIAL NEEDS OF POOR PEOPLE

TYPES OF ORGANIZATIONS

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

FORMAL SECTORThe formal sector comprises of

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

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

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

SEMI FORMAL SECTORThe majority of institutional

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

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

MFI INVOLVED IN MICROFINANCE

Association for Sarva Seva Farms (ASSEFA)

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

SADHAN - The Association of Community Development Finance Institutions

SEWA: Self-help Women's AssociationSKS India - Swayam Krishi SangamStreedhan - Banking with Rural WomenWorking Women's Forum, Madras, India

Ngo’s involved in microfinance

CDF (Co-operative Development Foundation) in Andhra Pradesh

LHWRF (Lupin Human Welfare Research Foundation) in Rajasthan

UPLDC (Uttar Pradesh Land Development Corporation) in Uttar Pradesh

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

INFORMAL SECTOR

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

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

Steps taken by India to promote micro-financingGovernment set up

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

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

Steps taken by India to promote micro-financing

They were provided supplementary credit needed to fund the credit, paper work was reduced between them and the banks.

Also, the govt assisted in mobilizing funds from formal financial institutions to meet the larger credit needs of these organizations.

FOCUS ON WOMEN FOR MICRO - CREDITS

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

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

FOCUS ON WOMEN FOR MICRO - CREDITS

Evidence shows that groups of women are better customers than men - they are better managers of resources - benefits of loans are spread wider among the household if loans are routed through women - mixed groups are often inappropriate in Indian society - record of all-male groups is worse than that of all-women groups, everywhere.

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