micro finance 4
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MICROFINANCE
Microfinance is also known as micro banking or
micro credit. Microfinance is a type of banking that is
given or provided to poor, needy or unemployed
people or groups that have no other means or ways ofgetting income.
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Microfinance Institutions
Microfinance is often used more narrowly to
refer to loans and other services from
providers that identify themselves as
microfinance institutions (MFIs).
These institutions deliver very small loans to
unsalaried borrowers, taking little or no
collateral.
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Continued
Most MFIs started as not-for-profit
organizations like NGOs (non-governmental
organizations), credit unions and other
financial cooperatives, and state-owneddevelopment and postal savings banks.
Some MFIs provide non-financial products,
such as business development or healthservices.
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Microfinance Providers In Pakistan
Microfinance Banks are those that are
licensed and prudentially regulated by the
State Bank of Pakistan to exclusively service
the microfinance market. These banks include:
Khushhali Bank (KB)
Network MicroFinance Bank Ltd. (NMFB)
Pak-Oman Microfinance Bank Ltd. (POMFB)
Rozgar Microfinance Bank Ltd. (RMFB)
Tameer Microfinance Bank Ltd. (TMFB)
The First MicroFinanceBank Ltd. (FMFB
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Why Microfinance Is Needed?
The main purpose or basic aim of
microfinance is to give loans to low income
people.
Provide an opportunity to become self-
sufficient by providing means of saving money,
borrowing money and insurance.
These services are not limited to credit, but
include savings, insurance, and money
transfers.
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Why Dont The Clients Go
Directly To Banks?Administrative cost of supplying loans to
the poor population is extremely high.
Poor do not have any assets to use as
collateral.
Microfinance is an expensive enterprise
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The Incidence Of High
Interest RatesMFIs need to cover three types of costs
1. Cost of the money that it lends
2. Cost of loan defaults
3. Transaction costs
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WHEN IS MICROFINANCE NOT
AN APPROPRIATE POVERTY
PREVENTION TOOLMicrocredit may be inappropriate where
conditions pose severe challenges to
standard microcredit methodologies.1. Populations that are geographically
dispersed
2. Microfinance may not be appropriate forpopulations with a high incidence of
debilitating illnesses
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Continued
3. Dependence on a single economic activity or
single agricultural crops.
4. Reliance on barter rather than cash
transactions
5. Hyperinflation or absence of law
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ALTERNATIVE STRATEGIES
Savings
Financial entitlements
Safety-net grants
Grants
Employment programmes
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ROLE OF STATE BANK IN
MICROFINANCE SECTOR State Bank Pakistan support to microfinance
commercialization
The State Bank of Pakistan has encouraged
the entry of private sector institutions. licensing, regulation and supervision of
Microfinance Banks (MFBs).
SBP is the implementing agency for
strengthening supervision and regulationMFIs.
SBP is also in charge of special funds ofmore than US$70 million.
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ROLE OF COMMERCIAL BANKS
IN MICROFINANCE SECTOR A commercial bank is a financial institution
that offers a broad range of deposit accounts,
including checking, savings, and timedeposits, and extends loans to individuals and
businesses
In Pakistan it is estimated that as many as 5.6million households need microfinance
services but these services reach only to less
than 1 percent
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Continued
Poor person just need to visit his local
commercial bank to get access to
microfinance benefits
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Advantages Of Microfinance
Loans are provided based on Group lending.
Micro credit enables substitution of physical
collateral.
The repeated nature of interaction and threat
to cut off loan in case of default is used to
overcome asymmetric information problem
and improve efficiency of loaning.
The cost of borrowing is lower for the clients.
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Disadvantages of Microfinance
It does not cater to the poorest of the poor.
UNDP Report of 2000 states: The hard-core
poor, having few assets, are reluctant to take
on the risks of credit, and when they do, it is
usually for emergencies and consumption not
for production.
Micro finance schemes are highly subsidized.
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Pakistans Experience With Micro
Financing
Poor Targeting,
Dependency on the Donors,
Low Coverage of the Poorest In the Society, Potential for Growth in the Economy.
NRSP is one of the largest lending NGO for
micro financing in the country its totalcoverage of the poor in the country is just 0.22
percent of the total poor in the country.
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Microfinance focusing Women
Women in households with an income below
the absolute or relative threshold of poverty
remain poorer than men of the same
households because of:
Inequities in education,
Levels of skill,
Social constraints on their mobility,
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The attitudinal and institutional barriers to
which their behaviour is subjected.
Women spend nearly all their income on
children, and the welfare of the home.
Prioritising women in micro finance schemes
hence, is expected to have positive
implications for taking the household out of
poverty.
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However, the essence of the need to
concentrate on women is misunderstood by
the UPAP. The Project emphasis is on
boosting the household economy, rather
than the empowerment of women.
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Effects of Microfinance
There are two impacts of microfinance
Positive impact
Negative impact
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Positive effects
1. On women
Empowerment
Wages
Nutrition
Credit with education.
2. Poverty reduction.
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Negative effects
An increase in child labor
On gender
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Can Microfinance Be
Profitable?Many feel that once microfinancebecomes mainstreamed, massive growth in
the numbers of clients can be achieved.
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When is microfinance NOT an
appropriate tool? Microfinance is particularly inappropriate for
the destitute, who may need grants or other
public resources to improve their economic
situation
Governments and development agencies
often use microfinance as a tool to address
socio-economic problems such as relocationof refugees from civil strife, generating
employment among demilitarized soldiers, or
assistance following a natural disaster.
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Case study of Microfinance
50 aid organisations and 7 banks provide
microcredit
Kashf Foundation: first microcredit provider
Its aim: better the economic position of low
income households
Achievements so far:
Has disbursed loans of US $ 202 million
Has supported more than 300,000 families.
Network ranges from shoemakers to poultry
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Beneficiary of Kashf
Parveen bibi has become a restaurant owner
Khwaja Ghareeb Nawaz- seats 8 to 10 clients
Improvement in lifestyle:
Able to send her children to schoolBrought peace to her marital life
Have access to greater amenities of life
Loan was of Rs.6000 with 1.5 percent insurancecosts and 20 percent service costs.
Has many sources of income now
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Need For Microfinance In Light
Of The Recent Flood Crisis
Wide scale devastation and displaced 20
million people
Faster resumption of economic activitythrough microcredit
Management and proper use ensured
Preserves self esteem and createsindependent individuals
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Conclusion
Microfinancing may not be the best way to
help the poorest
It can not be the sole instrument of poverty
reduction
Strong macroeconomic policies creating high
and equitable growth can reduce poverty
Microfinance can only supplement the process
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Your questions are
welcome!