micro finance concepts

8/12/2019 Micro Finance Concepts

1/10

1. What is microfinance? 9839985037- sunny

Microfinance is often defined as financial services for poor and low-income clients offered bydifferent types of service providers. In practice, the term is often used more narrowly to refer toloans and other services from providers that identify themselves as microfinance institutions(MFIs. !hese institutions commonly tend to use new methods developed over the last "# yearsto deliver very small loans to unsalaried borrowers, ta$in% little or no collateral. !hese methodsinclude %roup lendin% and liability, pre-loan savin%s re&uirements, %radually increasin% loan si'es,and an implicit %uarantee of ready access to future loans if present loans are repaid fully andpromptly.

More broadly, microfinance refers to a movement that envisions a world in which low-incomehouseholds have permanent access to a ran%e of hi%h &uality and affordable financial servicesoffered by a ran%e of retail providers to finance income-producin% activities, build assets,

stabili'e consumption, and protect a%ainst ris$s. !hese services include savin%s, credit,insurance, remittances, and payments, and others.

end us feedbac$ on this answer or su%%est your own)

bac$ to top

2. What is the difference between microfinance and microcredit?

Microcredit refers to very small loans for unsalaried borrowers with little or no collateral, providedby le%ally re%istered institutions. *urrently, consumer credit provided to salaried wor$ers based

on automated credit scorin% is usually not included in the definition of microcredit, althou%h thismay chan%e.

Microfinance typically refers to a ran%e of financial services includin% credit, savin%s, insurance,money transfers, and other financial products provided by different service providers, tar%eted atpoor and low-income people.

end us feedbac$ on this answer or to su%%est your own)

bac$ to top

3. How is microcredit different from other tareted de!e"o#ment "endin?

In addition to the new techni&ues e+plained in$%& '1(the microcredit approach has tried toavoid the pitfalls of an earlier %eneration of tar%eted development lendin%. !he approach focuseson fosterin% better repayment discipline and char%in% interest rates that cover the costs of creditdelivery, both of which support development of sustainable institutions that can continue toe+pand their services in the future.

mailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#tophttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#1mailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionmailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#tophttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#1mailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestion


2/10

bac$ to top

). Who are microfinance c"ients?

!ypical microfinance clients are poor and low-income people that do not have access to other

formal financial institutions. Microfinance clients are often self-employed, household-basedentrepreneurs. !heir diverse microenterprises include small retail shops, street vendin%,artisanal manufacture, and service provision. In rural areas, microentrepreneurs often have smallincome-%eneratin% activities such as food processin% and trade some but far from all arefarmers.

ard data on the poverty status of clients is limited, but tends to su%%est that most microfinanceclients fall near the poverty line, both above and below. ouseholds in the poorest #/ of thepopulation, includin% the destitute, are not traditional microcredit clients because they lac$ stablecash flows to repay loans. Most clients below the poverty line are in the upper half of the poor. Itis clear, however, that some MFIs can serve clients at the hi%her end of the bottom half. 0omenoften comprise the ma1ority of clients.

2ver the past decade, some financial institutions have started developin% a ran%e of products tomeet the needs of other clients, includin% pensioners and salaried wor$ers. 3lthou%h little is$nown about the universe of potential clients, the number of households without effective accessto financial services is enormous.


bac$ to top

5. How do borrowers use microcredit "oans?

Many microcredit borrowers have microenterprises4unsalaried, informal income-%eneratin%activities. owever, microloans may not predominantly be used to start or financemicroenterprises. cattered research su%%ests that only half or less of loan proceeds are used forbusiness purposes. !he remainder supports a wide ran%e of household cash mana%ementneeds, includin% stabili'in% consumption and spreadin% out lar%e, lumpy cash needs li$eeducation fees, medical e+penses, or lifecycle events such as weddin%s and funerals.


bac$ to top

*. What +inds of institutions de"i!er microfinance?

Most MFIs started as not-for-profit or%ani'ations li$e 562s (non-%overnmental or%ani'ations,credit unions and other financial cooperatives, and state-owned development and postal savin%sban$s. 3n increasin% number of MFIs are now or%ani'ed as for-profit entities, often because it isa re&uirement to obtainin% a license from ban$in% authorities to offer savin%s services. For-profitMFIs may be or%ani'ed as non-ban$ financial institutions (57FIs, commercial ban$s thatspeciali'e in microfinance, or microfinance departments of full-service ban$s.
http://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#tophttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#top


3/10


bac$ to top

7. ,o $s do other thins besides financia" ser!ices for "ow-income #eo#"e?

ome MFIs provide non-financial products, such as business development or health services.*ommercial and %overnment-owned ban$s that offer microfinance services are fre&uentlyreferred to as MFIs, even thou%h only a portion of their assets may be committed to financialservices to the poor.


bac$ to top

8.How does microfinance he"# the #oor?

!he impact of microcredit has been studied more than the impact of other forms of microfinance.Microcredit can provide a ran%e of benefits that poor households hi%hly value includin% lon%-termincreases in income and consumption. 3 harsh aspect of poverty is that income is often irre%ularand undependable. 3ccess to credit helps the poor to smooth cash flows and avoid periodswhere access to food, clothin%, shelter, or education is lost. *redit can ma$e it easier to mana%eshoc$s li$e sic$ness of a wa%e earner, theft, or natural disasters. !he poor use credit to buildassets such as buyin% land, which %ives them future security. 0omen participants in microcreditpro%rams often e+perience important self-empowerment.

8mpirical studies on the impact of credit are difficult and e+pensive to conduct and pose specialmethodolo%ical problems. Most impact studies to date have found si%nificant benefits from

microcredit. owever, only a few studies have made serious efforts to compensate for themethodolo%ical challen%es. In fact, many studies would not be re%arded as meanin%ful by mostprofessional econometricians. 3 new wave of randomi'ed control trials are now in process, whichshould yield a more definitive picture.

8ven so, there is a stron% indication from borrowers that microcredit improves their lives. !heyfaithfully repay their loans even when the only compellin% reason is to ensure continued access tothe service in the future.

2ther microfinance services li$e savin%s, insurance, and money transfers have developed morerecently, and there is less empirical research on their impact. *lient demand indicates that poorpeople value such services. MFIs that offer %ood voluntary savin%s services typically attract farmore savers than borrowers.


bac$ to top

9. When is microfinance / an a##ro#riate too"?
mailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#top


4/10

Financial services, particularly credit, are not appropriate for all people at all times. For loans thatwill be used for business purposes, microcredit best serves those who have identified aneconomic opportunity and can capitali'e on it if they have access to a small amount of readycash. 9e%ardless of how loans are used, MFIs can provide lon%-term, stable credit access onlywhen clients have both the willin%ness and ability to meet scheduled loan repayments.

Microfinance is particularly inappropriate for the destitute, who may need %rants or other publicresources to improve their economic situation. 6rants are a more efficient way to transferresources to the destitute than are loans that many will not be unable to repay. !oo much ris$ isplaced on the MFI and client, when the only way a client can repay a loan is by startin% asuccessful business. 7asic re&uirements li$e food, shelter, and employment are often moreur%ently needed than financial services and should be appropriately funded by %overnment anddonor subsidies.

6overnments and development a%encies often use microfinance as a tool to address socio-economic problems such as relocation of refu%ees from civil strife, %eneratin% employmentamon% demilitari'ed soldiers, or assistance followin% a natural disaster. Microfinance may or maynot be able to respond to these situations effectively, and certainly not as a stand-aloneintervention. Implementin% a successful microfinance pro%ram to address these types ofsituations depends upon a number of factors, the most important of which is a client base capableof ma$in% re%ular repayments.


bac$ to top

10. Why do $s chare hih interest rates to #oor #eo#"e?

*oncerns often arise as to why microcredit interest rates are hi%her than the ban$ interest rates

that wealthier people pay. !he issue is cost: the administrative cost of ma$in% tiny loans is muchhi%her in percenta%e terms than the cost of ma$in% a lar%e loan. It ta$es a lot less staff time toma$e a sin%le loan of ;##,### than ,### loans of ;## each. 7esides loan si'e, other factorscan ma$e microcredit more e+pensive to deliver. *redit decisions for borrowers who have neithercollateral nor a salary cannot be based on automated scorin%. !hese decisions re&uiresubstantial intervention of a loan officer in 1ud%in% the ris$ of each loan. MFIs may operate inareas that are remote or have low population density, ma$in% lendin% more e+pensive. !his isoften why traditional ban$s tend to stay away from such areas. If an MFI wants to operatesustainably, it has to price its loans hi%h enou%h to cover all its costs.

3lthou%h microcredit interest rates can be le%itimately hi%h, inefficient operations can ma$e themhi%her than necessary. 3s the microcredit mar$et matures in a %iven country, administrative costsusually drop as mana%ers learn from e+perience and in some cases because competition forces

lower pricin% and %reater efficiency.


bac$ to top
mailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#top


5/10

11. Why does the microfinance industry #"ace so much em#hasis on sustainabi"ity?

From a development perspective, financial sustainability is not an end in itself. 9ather, it is a toolfor reachin% the ma+imum number of clients. MFIs may only operate for a limited time, reach alimited number of clients, or be driven more by political %oals than by client needs if services arenot priced at sustainable levels.


6/10

13. ,o o!ernments do a ood ob of de"i!erin microcredit?

!here are several hi%hly successful %overnment MFIs, such as 7an$ 9a$yat IndonesiaCsmicrofinance department. owever, the vast ma1ority %overnment microfinance pro%rams do apoor 1ob of deliverin% retail credit. uch pro%rams are usually sub1ect to political influence, hi%hdefault, continuin% drain on national treasuries, and sometimes lendin% based more on the

borrowersC influence than their actual &ualifications. 3mon% %overnment pro%rams reportin% tointernational databases, only AD of clients are bein% served sustainably. !here are structuraldynamics that ma$e it hard for %overnments to deliver %ood retail credit. ound creditadministration re&uires screenin% out borrowers who are not li$ely to repay, char%in% interestrates hi%h enou%h to cover costs, and respondin% vi%orously to late payments. !hesere&uirements usually run counter to the practical incentives and imperatives of even the sincerestwor$in% politician. !he %overnment-run MFIs that deliver %ood microcredit tend to be insulatedfrom politics, mana%ed by technocrats, and stron%ly and e+plicitly focus on sustainability.

It is important to remember that these incentive problems for %overnment providers pertain moreto credit than to other services. For instance, %ood %overnment savin%s ban$s are considerablyeasier to find than %ood %overnment retail loan pro%rams.


bac$ to top

1). What is the o!ernments ro"e in su##ortin microfinance?

6overnmentCs most important role is not provision of retail credit services, for reasons mentionedin$%& '12. 6overnment can contribute most effectively by:

ettin% sound macroeconomic policy that provides stability and low inflation

3voidin% interest rate ceilin%s - when %overnments set interest rate limits, political factorsusually result in limits that are too low to permit sustainable delivery of credit that involveshi%h administrative costs4such as tiny loans for poor people. uch ceilin%s often havethe announced intention of protectin% the poor, but are more li$ely to cho$e off the supplyof credit

3d1ustin% ban$ re%ulation to facilitate deposit ta$in% by solid MFIs, once the country has

e+perience with sustainable microfinance delivery, *reatin% %overnment wholesale funds to support retail MFIs if funds can be insulated

from politics, and they can hire and protect stron% technical mana%ement and avoiddisbursement pressure that force fund to support unpromisin% MFIs.


bac$ to top

15. How do sa!ins ser!ices he"# #oor #eo#"e?

avin%s has been called the for%otten half of microfinance. Most poor people now use informalmechanisms to save because they lac$ access to %ood formal deposit services,. !hey may tuc$cash under the mattress, buy animals or 1ewelry that can be sold off later, or stoc$pile inventory
mailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#tophttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#12http://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#12mailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=%22What%20is%20Microfinance%3F%22%20Feedback/Suggestionhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#tophttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#12mailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#top


7/10

or buildin% materials. !hese savin%s methods tend to be ris$y4cash can be stolen, animals can%et sic$, and nei%hbors can run off. 2ften they are illi&uid as well E one cannot sell 1ust the cowCsle% when one needs a small amount of cash. oor people want secure, convenient depositservices that allow for small balances and easy access to funds. MFIs that offer %ood savin%sservices usually attract far more savers than borrowers.


bac$ to top

1*. What is the microfinance industry doin to ensure that the #oor do not fa"" #rey to

#redatory "enders?

Many countries are concerned about the impact of e+cessive interest rates, abusive lendin%practices, and over-indebtedness on poor borrowers. Guite a few players in the industry are nowfocusin% on consumer protection issues. !ypical consumer protection measures includedisclosure re&uirements, rules and prohibitions related to lendin% practices, mechanisms for

handlin% complaints or disputes, and consumer education.

!he 3**I25 InternationalA MicroFinance 5etwor$ ro-*onsumer led%e, FI5*3Cs *onsumer-2riented 8thical tatement and Freedom from un%erCs tatement on 8thical !reatment of*lients are e+amples of networ$ or%ani'ations articulatin% pro-consumer principles. !he 885etwor$, throu%h its ro-*lient 0or$in% 6roup, has resources on the sub1ect.

8ven in countries where consumer abuse is not yet a problem, promotin% voluntary consumerprotection codes and practices may reduce future pressure to over-re%ulate. 3n increasin%number of individual MFIs are adoptin% voluntary pled%es or codes that promote effectiveconsumer protection and a consumer-oriented culture. For instance, the 7osnian MFI ri'ma haswor$ed with Freedom from un%er to articulate 2ur *ommitment to *lients.

Investors are in the process of si%nin% on to *63Hs Investor Initiative for *lient rotection inMicrofinance. Finally, the slow but steady inroads of social performance measurement andmana%ement (F3G B into the field of microfinance is focusin% more attention on protection andtransparency dimensions, as well as potential unintended ne%ative conse&uences for clients.


bac$ to top

17. What is socia" #erformance measurement and why is it im#ortant for financia"

institutions?

!he ocial erformance !as$ Force defines social performance as: J!he effective translation ofan institutionHs social mission into practice in line with accepted social values that relate to servin%lar%er numbers of poor and e+cluded people improvin% the &uality and appropriateness offinancial services creatin% benefits for clients and improvin% social responsibility of an MFI.J

Most MFIs have a social mission that they see as more basic than their financial ob1ective, or atleast co-e&ual with it. !here is a %reat deal of truth in the ada%e that institutions mana%e what
mailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#topmailto:[email protected]?subject=What%20is%20Microfinance%3F%20Feedbackhttp://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/#top


8/10

they measure. ocial performance measurement helps MFIs and their sta$eholders focus on theirsocial %oals and 1ud%e how well they are meetin% them. ocial indicators are often lessstrai%htforward to measure, and less commonly used than financial indicators that have beendeveloped over centuries. !odayCs increasin% use of social measures reflects an awareness that%ood financial performance by an MFI does not automatically %uarantee client interests are bein%appropriately advanced.


bac$ to top

18. Where can find financia" #erformance data on $s wor"dwide?

Increasin% numbers of MFIs report their performance to international databases each year.!he MI@ Mar$etis the primary source for this information, containin% financial and otherperformance data from almost =,### MFIs collected and processed by the MicrofinanceInformation e@chan%e (MI@.


9/10

)eres how it wor"s*

+y helping a mother buy a sewing machine to start a tailoring business or a

father buy seeds to plant a vegetable garden, small loans enable people in

poverty to earn an income and provide for their families. As each business

grows, loans are paid bac" and lent out again. With of loans repaid, the

cycle continues, year after year. /ach successful business feeds a family,

employs more people and eventually helps empower a whole community.

Microfinance plus

As well as microfinance, we provide people living in poverty with non-financial

0community development1 services to strengthen their businesses and develop

their communities.

Our partners

Opportunity wor"s through local, socially focused microfinance institutions in

developing countries. 'his ensures we understand the needs of people living in

poverty in the area and allows us to serve them effectively.


10/10

micro finance concepts

Documents