Microfinance (1)

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

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

• Siddhesh Kadam (9119)

• Swapnil Lalwani (9128)

• Amol Mohite (9136)

Lessons in finance from the slums of Egypt…

… slum huts in Ahmedabad, India

… villages in Bangladesh

… city slums & rural villages in Indonesia

What is microfinance?What is microfinance?Microfinance is a service which

offers poor people access to basic financial services such as loans, savings, money transfer services and micro insurance.

CGAP (Consultative Group to Assist the Poor)

Financial needs of poor Financial needs of poor peoplepeopleTypes 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.

Majority of poor are excluded from financial services. This is due to, the following reasons1.Bankers feel that it is fraught with risks and uncertainties.2.High transaction costs3.Unfavourable policies like caps on interest rates which effectively limits the viability of serving the poor.

The solution to the financial requirements of poor is ……..

MICROFINANCE

ORIGINORIGINIn 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.

BANKERS GO TO BORROWERSBANKERS GO TO BORROWERS

BANGLADESH: Grameen Bank - 7.41 million borrowersGroup leaders collect loan payments and hand them to their bicycle banker—assuring complete transparence. Members of the group pledge to support one another.

EGYPTNat’l Bank for

Development• Loan officers recruit poor

borrowers and collect loans at their workplace

• Loan sizes vary from $25–$500• Loan officers trained

Loan Requirements• Established business ‘place’• National ID card• Signature or thumbprint

98% repayment rateSustainability =

non-subsidizedinterest rates

INDONESIABank Rakyat

Indonesia• A microfinance ‘unit’

in EVERY village in Indonesia

• DAILY collections• Uneconomical for

borrowers to pay for transport to the bank

• Loss of sales while away from the business

• Transparent transactions

• Non-subsidized ratesMicrofinance profitability

masked rest of bank’s losses during country’s economic collapse!

INDIA: SEWA Bank Bank workers go to the slums to serve their clients Women repay loans and deposit savings in any amount 2003: 113,583 savings accounts; 50,849 loans outstanding 2007-08: 307,558 savings accounts; 103,679 loans outstanding

Is micro finance charity?Is micro finance charity?

NO!! Microfinance is not charity..

Loan is not charity.Microfinance org. provide loans to families who are poor now but will have the capacity to repay loans in future.

Types of organizationsTypes of organizationsMicrofinance providers in India can be classified under three broad categories: ◦Formal ◦Semiformal ◦Informal.

FORMAL SECTORFORMAL 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 SECTORSEMI 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 MFI involved in microfinancemicrofinanceAssociation 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

NGOs involved in NGOs involved in microfinancemicrofinanceCDF (Co-operative Development

Foundation) in Andhra PradeshLHWRF (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 SECTORINFORMAL SECTORFriends and familyMoneylenders, 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.

Business modelBusiness modelThe Business Model on which most of

the Microfinance works is SOLIDARITY LENDING.

Solidarity lending is a lending practice where small groups borrow collectively and group members encourage one another to repay.

Solidarity lending lowers the costs to a financial institution related to assessing, managing and collecting loans, and can eliminate the need for collateral.

Obstacles to build a sound Obstacles to build a sound commercial microfinance commercial microfinance industry industry 1. Poor regulation and supervision of

deposit-taking MFIs2. Few MFIs that meet the needs for

savings, remittances or insurance3. Limited management capacity in

MFIs4. Institutional inefficiencies5. Need for more awareness and

adoption of rural, agricultural microfinance methodologies.

Types of microfinance Types of microfinance productsproducts

Bangladesh India Egypt Indonesia

Focus on women! Why?•Women boast 95-98% repayment rates•Women reinvest their profits in feeding & educating their children•Repaid loans & interest create more money to lend to more women

PROVEN IMPACT OF MICRO-PROVEN IMPACT OF MICRO-FINANCINGFINANCING

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 PROVEN IMPACT OF MICRO-FINANCINGMICRO-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 PROVEN IMPACT OF MICRO-FINANCINGMICRO-FINANCING

Impact on income

◦The average net income per household increased from Rs 20177 to Rs. 26889. (PER ANUM)

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