GigFlorida MicroFinance and MicroCredit Information:

Microfinance & Microcredit Info:

Principles of Microfinance:

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History of microfinance
Fundamentals of microfinancing
Economies of scale
Microfinance industry structure
Micro Financial Institutions
Funding / Financial Institutions
Microfinance products
Using IT and technology to reach scale
Weaknesses and strengths
Working method for microfinance institutions
Wordlist and sources
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Microfinance and Microcredit

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Welcome to Microfinanceinfo.com where you find information about microfinance and microcredit and how it makes wonder to fight poverty. Microfinanceinfo.com also keeps you updated with news on the microfinance blog.

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Microcredit

The definition of microfinance

money growth “Microcredit, or microfinance, is banking the unbankable, bringing credit, savings, and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without.” (Gert van Maanen, Microcredit: Sound Business or Development Instrument, Oikocredit, 2004)

“(Microcredit) is based on the premise that the poor have skills that remain unutilized or underutilized. It is definitely not the lack of skills that makes poor people poor….

charity is not the answer to poverty. It only helps poverty to continue. It creates dependency and takes away the individual’s initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.” (Muhammad Yunus, Expanding Microcredit Outreach to Reach the Millennium Development Goals, International Seminar on Attacking Poverty with Microcredit, Dhaka, Bangladesh, January 2003)

Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance are micro-savings, money transfer vehicles, and microinsurance.

Microcredit is an innovation for developing countries. Microcredit is a service for poor people that are unemployed, entrepreneurs, or farmers who are not bankable. The reason why they are not bankable is the lack of collateral, steady employment, income, and a verifiable credit history, because of these reasons they can´t even meet the minimal qualifications for ordinary credit. By helping people with microcredits it gives them more available choices and opportunities with reduced risk. It has successfully enabled poor people to start their own business generating or sustaining an income and often begin to build up wealth and exit poverty. The amount of money that´s loaned out seldom exceeds $100.00 USD.

Microcredit fits best to those with entrepreneurial capability and possibility. This translates to those poor who work in growing economies, and who can undertake activities that generate weekly stable incomes. For those who don´t qualify because they are extremely poor like destitute and homeless almost every microcredit institution has special safety programs that offer basic subsistence and later endeavors to graduate these members in their microfinance program making ordinary microcredits available.

Microcredit plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance increases household income, which leads to attendant benefits such as increased food security, the building of assets, and an increased likelihood of educating one’s children. Microfinance is also a means for self-empowerment. It enables the poor to make changes when they increase income, become business owners and reduce their vulnerability to external shocks like illness, weather, and more.

Microcredit has widely been directed by the non-profit sector while commercial lenders require more conventional forms of collateral before making loans to microfinance institutions. But now it´s successfully growing bigger and getting more credibility in the traditional finance world. Due to that the traditional banking industry has begun to realize that these borrowers fit more correctly in a category called prebankable. The industry has realized that those who lack access to traditional formal financial institutions actually require and desire a variety of financial products. Nowadays the mainstream finance industry is counting the microcredit projects as a source of growth. Before almost everyone were neglecting the success of microcredit at the beginning of the 1970s when pilot projects such as ACCION were released until the United Nations declared 2005 the International Year of Microcredit.

Most of the microcredit institutions and agencies all over the world focuses on women in developing countries. Observations and experience show that women are a small credit risk, repaying their loans and tend more often to benefit the whole family. In another aspect, it´s also seen as a method giving the women more status in a socioeconomic way and changing the current conservative relationship between gender and class when women are able to provide income to the household. Women are in most cases responsible for children, and in poor conditions, it results in physical and social underdevelopment of their children. 1.2 billion people are living on less than a dollar a day. There are many reasons why women have become the primary target of microfinance services. A recent World Bank report confirms that societies that discriminate on the basis of gender pay the cost of greater poverty, slower economic growth, weaker governance, and a lower living standard for all people. At a macro level, it is because 70 percent of the worlds poor are women. Women have a higher unemployment rate than men in virtually every country and make up the majority of the informal sector of most economies. They constitute the bulk of those who need microfinance services.

Giving women access to microcredit loans, therefore, generates a multiplier effect that increases the impact of a microfinance institution’s activities, benefiting multiple generations.

History of microfinance

The history of microfinancing can be traced back as long as the middle of the 1800s when the theorist Lysander Spooner was writing over the benefits from small credits to entrepreneurs and farmers as a way of getting people out of poverty. But it was at the end of World War II with the Marshall plan the concept had a big impact.

The today use of the expression microfinancing has its roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, were starting and shaping the modern industry of microfinancing. Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of microfinance initiatives introduced many new innovations into the sector. Many pioneering enterprises began experimenting with loaning to underserved people. The main reason why microfinance is dated to the 1970s is that the programs could show that people can be relied on to repay their loans and that it´s possible to provide financial services to poor people through market-based enterprises without subsidy. Shorebank was the first microfinance and community development bank founded in 1974 in Chicago.

An economical historian at Yale named Timothy Guinnane has been doing some research on Friedrich Wilhelm Raiffeisen´s village bank movement in Germany which started in 1864 and by the year 1901 the bank had reached 2million rural farmers. Timothy Guinnane means that already then it was proved that microcredit could pass the two tests concerning the peoples payback-moral and the possibility to provide financial service to poor people.

Another organization, The Caisse Populaire movement grounded by Alphone and Dorimène Desjardins in Quebec, was also concerned about poverty and passed those two tests. Between 1900 to 1906 when they founded the first Caisse, they passed a law governing them in the Quebec assembly, they risked their private assets and must have been very sure about the idea about microcredit.

Today the World Bank estimates that more than 16 million people are served by some 7000 microfinance institutions all over the world. CGAP experts mean that about 500 million families benefit from these small loans making new business possible. In a gathering at a Microcredit Summit in Washington DC, the goal was reaching 100 million of the world´s poorest people by credits from the world leaders and major financial institutions.

The year 2005 was proclaimed as the International Year of Microcredit by The Economic and Social Council of the United Nations in a call for the financial and building sector to “fuel” the strong entrepreneurial spirit of the poor people around the world.

The International Year of Microcredit consists of five goals:

Assess and promote the contribution of microfinance to the MFIs
Making microfinance more visible for public awareness and understanding is a very important part of the development situation
The promotion should be inclusive of the financial sector
Make a supporting system for sustainable access to financial services
Support strategic partnerships by encouraging new partnerships and innovation to build and expand the outreach and success of microfinance for all

The economics professor Mohammad Yunus and the founder of Grameen Bank were awarded the Nobel Prize 2006 for his efforts. The press release from nobelprize.org states:

“The Norwegian Nobel Committee has decided to award the Nobel Peace Prize for 2006, divided into two equal parts, to Muhammad Yunus and Grameen Bank for their efforts to create economic and social development from below. Lasting peace can not be achieved unless large population groups find ways in which to break out of poverty. Micro-credit is one such means. Development from below also serves to advance democracy and human rights. Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh but also in many other countries. Loans to poor people without any financial security had appeared to be an impossible idea. From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty. Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world.

Every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development.

Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy can not achieve their full potential unless the female half of humanity participates on an equal footing with the male.

Yunus’s long-term vision is to eliminate poverty in the world. That vision can not be realized by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part.”

Fundamentals of microfinancing

The managers at the MFIs are careful to ensure the borrower's success and inform about the risks involved, which makes, in general, the borrower perform better. This leads often to earned dignity and lasting self-confidence associated with responsible loan repayment.

To have a sustainable growing economy it takes high entrepreneurship and energy in order to develop the world and fight poverty. Independent and responsible entrepreneurs are valuable resources that can take advantage of the microfinance industry. They will not take big risks and must be supported by predictable financing.

Normal bank operations suits better to large transactions which are more profitable, the traditional operating philosophy is to invest in facilities and they have costly operating structures. The traditional financing industry must either change itself or stay out of the microfinance business. A new generation of banking institutions is growing in a market of very small transactions and less affluent clients. With lowered transactions costs through institutional specialization and innovation in delivery systems, they will be able to operate profitably in this market serving the poor with financial services.

The poor entrepreneurs are the future representing the population who will become successful in the nearby future. They have the same will and skills as the toughest business operators. They are economical, don’t take big risks, and repay debts as scheduled to maintain the possibility of borrowing money in the future.

This requires a totally new groundbreaking banking system with scale economics. Modifying the standard system will simply not be enough, the poor people will continue to stay outside their country´s economy. Building up microfinance institutions serving poor people is a relatively cost-effective use of subsidies for economic development compared to other supporting strategies for welfare.

Economies of scale

MFIs need both capital and internal operating capacity to achieve scale. Since 1970 microfinance has been proven to be one of the most effective and sustainable tools in poverty-fighting. But still are 80 percent of the working poor, more than 400 million families, are without the reach of financial services. To be able to serve everyone the microfinance industry must be even more efficient and grow to scale. At today's growth rates it will take decades for the rest 80 percent to be served.

access to microfinance regional breakdown

The most critical problem today is finding money to lend out to the poor. Existing microcredit programs are coming to a virtual halt in their expansion program, and finding it difficult to continue their present program because of a lack of funds.

microfinance failing to close the gap

Many microfinance institutions are self-sustaining but most of the microfinance institutions still rely on and must get rid of their dependency on donor money in order to reach scale. Large amounts of money are needed to expand their operational capacity in order to reach economies of scale rapidly. Without sufficient internal operating capacity growth suddenly stops once a program reaches several thousand clients. They must provide their financial products to a much bigger amount of clients. The only possibility to access large amounts of money is in the traditional financial market. The problem for most MFIs to attract this money is the lack of track record and well-formed business plans.

The key solution to the right internal operating capacity includes improving for example the information technology, internal controls, new product development, and human resources. When MFIs rely too much on donor money it´s very hard to do the necessary investments in the areas that are sustainable and with the possibility to expand. That´s why most MFIs are small and stay small which this figure visualizes. About 73% of all microfinance institutions serve less than 2500 clients.

Most MFIs are very small

Microfinance industry structure

Micro Financial Institutions (MFIs)

Poverty is the main cause of concern in improving the economic status of developing countries. A microfinance institution is an organization that offers financial services to low-income populations. Almost all give loans to their members, and many offer insurance, deposit, and other services.

A great scale of organizations is regarded as microfinance institutes. They are those that offer credits and other financial services to the representatives of poor strata of the population (except for extremely poor strata).

Microfinance is increasingly being considered as one of the most effective tools of reducing poverty by enabling microcredit to the financially poor. Microfinance has a significant role in bridging the gap between formal financial institutions and the rural poor. The Micro Finance Institutions (MFIs) accesses financial resources from the Banks and other mainstream Financial Institutions and provide financially and support services to the poor.

MFIs are the pivotal overseas organizations in each country that make individual microcredit loans directly to villagers, microentrepreneurs, impoverished women, and poor families. An overseas MFI is like a small bank with the same challenges and capital needs confronting any expanding small venture but with the added responsibility of serving economically marginalized populations. Many MFIs are creditworthy and well-run with proven records of success, many are operationally self-sufficient.

Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Non-governmental Organizations), cooperatives, and sectors of government banks. The emergence of “for-profit” MFIs is growing. In India, these ‘for-profit’ MFIs are referred to as Non-Banking Financial Companies (NBFC). NGOs mainly work in remote rural areas thereby providing financial services to people with no access to banking services.

The term “transformation,” or commercialization, of a microfinance institution (MFI), refers to a change in legal status from an unregulated nonprofit or non-governmental organization (NGO) into a regulated, for-profit institution. Regulated, transformed organizations differ from nonprofits in that they are held to performance and capital adequacy standards and are supervised by a financial authority, typically the central bank of the country where they are registered. A transformed MFI also attracts equity investors. The equity investors want to ensure that the values of their investments are maintained or enhanced and elect Board members who share a common vision for the new for-profit institution. Among transformed MFIs, varying classifications of regulated institutions exist, the strictest being banks — rural banks and thrift banks — followed by non-bank financial institutions. Different countries have varied names for these regulated MFIs.

The microfinance sector consistently focuses on understanding the needs of the poor and on devising better ways of delivering services in line with their requirements, developing the most efficient and effective mechanisms to deliver finance to the poor. Continuous efforts towards automation of operations are steadily improving inefficiency. The automated systems have also helped accelerate the growth rate of the microfinance sector.

The goal for MFIs should be:

To improve the quality of life of the poor by providing access to financial and support services;
To be a viable financial institution developing sustainable communities;
To mobilize resources in order to provide both, financial and support services to the poor, particularly women, for viable productive income generation enterprises enabling them to reduce their poverty;
Learn and evaluate what helps people to move out of poverty faster;
To create opportunities for self-employment for the underprivileged;
To train rural poor in simple skills and enable them to utilize the available resources and contribute to employment and income generation in rural areas.

Many institutions practice microfinance, or raise funds for microfinance, including the following:

Accion International
ACDI/VOCA
BRAC
Enterprise Development International
Five Talents International
Freedom from Hunger
Grameen Foundation
Kiva
Microloan Foundation
Microcredit Summit Campaign
Microenterprise Access to Banking Services
Opportunity International Australia
ShoreBank
Unitus
World Council of Credit Unions
SKS

Funding / Financial Institutions

The mission of the funding institutions is to help MFIs operate more efficiently and be more effective. They provide each partner with financial products and services that are tailored to meet their needs.

A goal is to ensure the partners are moving their clients out of poverty and to foster good practices for measuring the progress of the individuals' movement across poverty lines. MFIs must show results, yet many do not have the tools to evaluate how well they are fulfilling their mission of reducing poverty, reaching people excluded from financial services, empowering women, or promoting community solidarity. That´s why they should also equip microfinance institutions with tools to measure their clients’ progress out of poverty. Built on the learnings of previous efforts in the microfinance industry they can develop the operational methods in reaching the clients. Innovative financing solutions and strategies to expand the capacity and efficiency of the MFIs provide a direct impact on the lives of the poor and advance the microfinance industry as it moves toward even higher standards in terms of anti-poverty impact and financial performance.

Microfinance products

Offering financial services to the homeless, vagrant, the poor, and down-trotted, the financially uneducated and fiscally unwise, people in financial development, for the successes of their households, businesses, neighborhoods... This is an expensive business...

The cost is one of the biggest reasons why traditional banks do not make small loans, the resources required for a 50$ loan are the same as for a 1000$ loan.

GigFlorida MicroFinance, llc also has personnel and administration costs. Field staff managers must perform household and business surveys before entering a household or business, conduct interviews with potential borrowers, in a lot individual cases, we have to educate the borrowers in credit discipline, travel to the households and businesses every week to collect interest, and distribute loans and control that the loans are being used for the given purpose.

The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically six months to a year with payments plus interest, paid weekly. Shorter loan cycles and weekly payments help the borrowers stay current and not become surprised by large payments. Clearly, the transaction-intense nature of weekly payment collections, often in rural areas, is more expensive than running a bank branch that provides large loans to economically secure borrowers in a metropolitan area. As a result, GigFlorida MicroFinance, llc must charge interest rates that might sound high.

In order to be able to lend out money, the microfinance institutions must in addition borrow from the traditional finance sector with a commercial perspective. There´s always about 1-2% loss on loans due to people not paying back. To be able to expand business the GigFlorida MicroFinance, llc must also make some profit, at least 1-2%. All in all, it´s easier to understand why the GigFlorida MicroFinance, llc charge their customer interest rates which at first sight might appear high. With a growing market, better economics of scale and increasing efficiency the cost will reduce, and lower interest rates are able.

For a financial institution to scale and remain sustainable, at a bare minimum it has to cover its costs. A large bank can charge lower rates in order to recoup its costs. Because of the smaller loan size and more transactions, the MFI has to charge higher minimum rates.

Data from the MicroBanking Bulletin reports that 63 of the world’s top GigFlorida MicroFinance, llc had an average rate of return, after adjusting for inflation and after taking out subsidies programs, of about 2.5% of total assets. This leads one to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream in the retail banking sector.

Typical microcredit products look like this (the numbers are only hypothetical):

The Income Generating Loan is used for a variety of activities that generate income for their families. Clients submit a loan application and based on approval receive the loan after one week. Loans are paid in 50 equal, weekly installments. After completion of a loan cycle, the client can submit a loan application for a future loan. The approach with a smaller short-term loans is to avoid long-term economic problems with bigger loans.

Product: Mid-Term Loan (MTL) - Same as IGL, available at the middle (week 25) of IGL - 50 weeks loan paid weekly - 12.5% (flat) 24% (effective)

The Mid Term Loan is available to clients after 25 weeks of repaying their IGL loan. A client is eligible for an MTL if the client has not taken the maximum amount of the IGL. The residual amount can be taken as an MTL. The terms and conditions of the MTL are otherwise exactly the same as IGL.

Product: Emergency Loan (EL) - All emergencies such as health, funerals, hospitalization - 20 weeks loan - 0% Interest-free

The Emergency Loan is available to all clients over the course of a fiscal year. The loan is interest-free and the amount and repayment terms are agreed upon by the MFI and the client on a case by case basis. The amount is small compared to the income-generating products and is only given in times of dire need to meet expenses such as funerals, hospital admissions, prenatal care, and other crisis situations.

Product: Individual Loan (IL) - Income generation, asset development - 1-2 years loan repaid monthly - 11% (flat) 23% (effective)

The Individual Loan is designed for clients and non-clients that have specific needs beyond the group lending model. Loans are given to an individual outside of the group lending process. Amounts are typically higher than that of the income-generating loan and repayments are less frequent. Applicants must complete a strict business appraisal process and have both collateral and a guarantor.

Microfinance is not a panacea from all troubles, this also means that not any poor person can obtain a loan. In particular, representatives of very poor population, lacking stable income, living by means of chance earnings, and particularly having debts (in relation to community facilities, relatives, friends, etc…) cannot be clients of microfinance, since in the case of microcredit non-repayment they will have more debts, becoming poorer. For such people special programs of social assistance are needed, which are able to support the main needs of people living in the poorest dwellings, lacking garments and food.

There are some restrictions regarding what the money is used for. Usually, micro-credits can not be used for the purposes like:

Payments of other loans or other debts;
Production of tobacco and liquor;
Forming turnover capital of trade and intermediary business;
Organization or purchasing products for gambling or entertainment services for the population;
Establishing trading points;
Purchase of property that´s not used for business.

In the microfinance sector, there are other services expanding as well. The poor need, like all of us, a secure place to save their money and access to insurance for their homes, businesses, and health. Microfinance institutions are now innovating new products to help meet these needs, empowering our reachable poor sector to improve their own lives. Products common used in the microfinance sector today is:

Microsavings –

A possibility to save money without no-minimum balance. Allows people to retain money for future use or for unexpected costs. In SHGs, the members save small amounts of money, as little as a few rupees a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHGs prove capable of managing their funds well, they may borrow from a local bank to invest in small business or farm activities. Banks typically lend up to four rupees for every rupee in the group fund;

Microinsurance –

Gives the entrepreneurs the chance to focus more on their core business which drastically reduces the risk affecting their property, health, or working possibilities. There are different types of insurance services like life insurance, property insurance, health insurance, and disability insurance. The spectrum of services in this sphere is constantly expanded, as schemes and terms of providing insurance services are determined by each company individually;

Microleasing –

For entrepreneurs or small businesses who can´t afford to buy at the full cost, they can instead lease equipment, agricultural machinery, or vehicles. Often no limitations of minimum cost of the leased object;

Money transfer –

A service for transferring money, mainly overseas to family or friends. Money transfers without opening current accounts are performed by a number of commercial banks through international money transfer systems such as Western Union, Money Gram, and Anelik. On the surface, they may seem like small money transfers, but when one considers that such transactions take place millions of times around the world each week, the numbers start to become impressive. According to the World Bank, the annual global market for remittances – money transferred home from migrant workers – is around 167 billion US dollars. The estimated total is closer to 230 billion dollars if one counts unregulated transactions. Remittances are also an important source of income for many developing countries including India, China, and Mexico, all of which receive over 20 billion dollars each year in remittances from abroad.

Using IT and technology to reach scale

A key factor to be more successful in scaling the microfinance industry efficiently is to use the power of IT technologies which already thousands of MFIs recognized. Technology is essential to reach new people, controlling risks make the business sustainable and more effective due to the costs. With mobile phones, ATM machines, and other new innovations the possibilities are unlimited to provide financial services more efficiently to poor people. Once improved the technology more “unbankable” are reached. Despite the big potential, there are still not enough MFIs reaching scale.

Access to affordable telecommunications simply does not exist for millions in the developing world. For some, placing a phone call can require traveling over six miles from their homes. This can mean leaving work and losing out on desperately needed income. Cut off from easy access to communications, these communities are at both an enormous economic and social disadvantage.

point of sale terminal “Point Of Sale” (POS) terminals can be computers, bank card readers, or even mobile phones. Already many MFIS are using those tools to conduct business with their clients. POS terminals enable money transfers, bank transactions from balance inquiries, bill and loan payment, cash withdrawal, and deposits.

Using POS terminals Is much cheaper than building brick and mortar branches everywhere in order to reach the huge demand. Although they need staff to operate the terminal, it´s cheaper than staff a bank office. Common technology is already something we can use today, it does not have to be innovated. The mobile phone is the most used tool today, people that don´t even have a telephone line now can be reached. That’s why most applications for microfinance also are innovated to work together with mobile phones. Solar energy systems are developed to charge the mobile phones in the villages where they even lack a traditional power grid.

ACCION International is using a system called “PortaCredit” and the “Mifa” system innovated by Grameen aiming to make heavy business transactions to clients cost less and be more efficient.

While the client always in the end has to pay for all costs, microfinance needs to bring costs down even though it is enabling and empowering with personal contact with the clients. Their time has to be used effectively to improve the process. MFIs want to provide their financial services to clients with the same quality of products and services that clients receive from other service providers.

When putting together micro-financial knowledge and technological knowledge, two different branches, a totally new area of innovations can arise creating new business opportunities. It´s also about helping individuals to understand the power of technology and how they can benefit from it.

Weaknesses and strengths

Weakness

There´s not much research done on the actual effectiveness of microfinance as a tool for economic growth. Some argue that there´s too much focus on microfinance which will motivate less spending in other helping assistances as public health, welfare, and education.

Some are doubting microfinance really has that impact on poverty as the practitioners would submit. Others describe micro-crediting as a privatization of public safety-net programs. There are also some microfinance institutions charging excessive interest rates.

Questions against the Grameen Bank were raised in a Wall Street Journal article. It was regarding the repayment rate, collection methods, and questionable accounting practices.

Studies of microcredit programs have found that women often act as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. Some borrowers have become dependent on loans for household expenditures rather than capital investments.

The key debate about microfinance is whether it should focus on improved welfare or financial sustainability. The two different approaches are usually named as “poverty lending” or “the welfarist approach” and “the institutionalist approach” or “financial system approach”. The welfarist approach could be for example supplying the customer with education and health whilst the institutionalists focus only on the financial service. The reason for that is only with a total focus on financial sustainability the huge demand can be met. MFIs with the welfarist approach are for example the Grameen Bank and Women´s World Banking. Examples of institutionalists are ACCION International and BRI Unit Desa.

Strength

The biggest strength is bringing financial services to poor people and making it financially sustainable by the economies of scale effect. In India, the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks that lend funds to Self Help Groups (SHG). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes and tribes. Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Opportunity International, Catholic Relief Services, CARE, APMAS, and Oxfam. Also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth.

Working method for microfinance institutions

The Grameen Bank of Bangladesh has developed a joint liability model that its MFIs are using suited for local conditions.

When choosing a village the MFI conducts a comprehensive survey to brief the potential for operations and the local conditions in a village. The MFI is evaluating some key factors like village population, degree of poverty, road accessibility, political stability, and safety. When a village has been selected, the MFI introduces its mission, methodology, and the services they are offering.

After the informational presentation interested women are gathered in group formations. They have to be in the age between 18 and 59. The women put themselves together in groups of five to serve as guarantors for each other. Earlier experience has shown that a group of five persons is small enough to create group pressure between the members, enforcing them to be loyal to each other. In case one of the group members is not able to repay the loan the group is big enough to help with the payments. The company does not influence the selection of group members nor the decision regarding the income generation activity nor the loan amount they intend to take. Group members must live close to each other and cannot be related to each other.

If a borrower defaults on her loan, the entire group typically is penalized and sometimes barred altogether from taking further loans. This peer pressure encourages borrowers to be very selective about their peer group members and to repay loans in full and on time.

Then the group training begins, usually as a five-day program. The purpose is to educate the members in the procedures of the financial products, delivery methods, calculation of interest rates, business development skills, and how to sign their names. The members are also taught in quality management, to identify an income generation activity, how to set prices and how to market. The field staff also build a culture of credit discipline and collective responsibility. The field staff makes sure the members qualify for the program and collect data for future analysis. Within the village, a center is created to collect the groups. The center is responsible for the payments of all groups, enabling a dual liability system. When the village center is created the financial transactions can begin.

The groups meet weekly in the village center where they can discuss new loan applications, loan utilization, and community issues. The field staff of the MFIs conducts the meetings with rigid discipline in order to sustain the credit discipline of the group. All financial transactions are conducted during the meetings.

Microfinance is a relatively new segment of the market economy that is why institutions created in this segment have short experience in their activities, and their personnel is not sufficiently experienced and qualified. Taking this into consideration, staff of these institutes is recommended to follow the internationally recognized principles of microfinance:

a thorough examination of potential clients of the microfinance institution;

thorough estimation of business viability and also factors which can positively or negatively affect the results of work in specific conditions;

thorough registration of documents and contracts related to loan issuance and microfinance services providing;

keep in touch with the client in combination with monitoring the terms of paying a credit, interests payments and with the aim to find out potential and real problems;

the setting of interest rates for microfinance services compatible with market ones;

quick reaction to any problems which can complicate the perspectives of getting of issued credit paid back.

Wordlist and sources

List of words:

NGO = Non-Government Organization

MFI = Micro Finance Institution

SHG = Self Help Group

CGAP = The Consultative Group to Assist the Poor

NBFC = Non-Banking Financial Company

IGL = Income Generation Loan

MTL = Mid Term Loan

EL = Emergency Loan

ILP = Individual Loan

Sources

Information:

http://www.sharemicrofin.com/

http://www.sksindia.com

http://en.wikipedia.org/wiki/Microcredit

http://en.wikipedia.org/wiki/Microfinance

http://www.unitus.com/sections/poverty/poverty_mf_main.asp

http://www.cgap.org

Pictures:

http://www.grameenfoundation.org/what_we_do/technology_programs/village_phone/

http://www.unitus.com/sections/poverty/poverty_mf_main.asp

Links

Microfinance institutions:

Accion International

ACDI/VOCA

BRAC

Enterprise Development International

Five Talents International

Freedom from Hunger

Grameen Foundation

Kiva

Microloan Foundation

Microcredit Summit Campaign

Microenterprise Access to Banking Services

Opportunity International Australia

ShoreBank

Unitus

World Council of Credit Unions

SKS

Environment:

Green microfinance – Working through microfinance institutions to provide “green” practices, products, and services.

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Wednesday, April 15, 2020

GigFlorida MicroFinance & MicroCredit Information