Micro Finance Device of Reducing Poverty

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Index

Sr.

No

TOPICS Page No

1 Executive Summary 3

2 Introduction 6

3 Literature Review

Bottom of Pyramid

Origin of Microfinance

Features of Microfinance Programmes

Different Models of Microfinance

There are different types of microfinance models used by different

countries

A comparative study of Microfinance models

Microfinance and Poverty Reduction

Empowerment of women through Microfinance

Women empowerment through SHGs

High Interest Rate on Microfinance

Growth of Microfinance

Benefits of Microfinance

Disadvantage of Microfinance

11

13

15

18

23

25

30

33

37

40

46

61

63

4 Analysis

Survey on Microfinance Institutions

Purpose

Methodology Used in doing this research

66

66

66







5.

Discussion

Findings of our study

Limitations of our survey

75

75

82

83

6 Conclusion 84

7 Recommendations 89

8 Bibliography 90

9 Questionnaire 94







Executive Summary

Microfinance is a useful tool of providing a short term financial supports to poor people

in a rural area. Earlier microfinance was only providing short term credit to rural people

but as demand for MFIs increases the microfinance Institutions started providing

facilities of deposits, small insurance and transferring money to poor people in the rural

area. Microfinance is a Process of providing a wide variety of financial services such as

money transfers, insurance for poor population, deposits, loans, payment request on

behalf of customer to poor people in rural areas. Microfinance is a constructive device

for Poverty reduction and empowerment of women in this society. It is helpful for poor’s

to get loans and various financial supports which were been neglected by both informal

and formal sectors of financial services. It helps women to empower themselves

through income generating activities.

Through this project we have tried to learn and appreciate the concept of microfinance

and its origins, the various models of microfinance, the advantage and constraints of

microfinance to reach poor population, the growth of microfinance. We have divided our

research work in five major parts the first part consist of Literature review, the second

part consist of analyses, the third part consist of discussion and 4th and 5th provides

details on conclusion and recommendations.

The literature review begins with an introduction of Microfinance, its origin and Features

of Microfinance Programmes, bottom of pyramid, different models of microfinance. It

also highlight on poverty reduction through Microfinance and Empowerment of women

through Microfinance, growth of Microfinance facilitates provided by Microfinance

institutions, the benefits and limitations in providing micro loans to rural population.







In the analysis part we have try to cover one survey on the performance of Microfinance

Institutions, the cost involved and their products and services. For providing a accurate

analyze for this project we have did primary research from 10 Microfinance Institutions .

the institutions were selected on the randon basis. For this survey we also prepare

questionnaire which were send to these institutions through emails. The discussion

section reflects on the findings of ours from this survey, it also highlights on the analyze

of the data which we have collected through questionnaire method of data collection.

After the analyzing data we have suggested our limitations in getting accurate data from

our survey.

We conclude with some recommendations for reducing the interest rate for poor

population and to ease the terms and conditions of microfinance. We have also

analyzed the various alternatives strategies which can help the poor people for

satisfying their financial needs.

Aims

Our main aims of doing this research are to identify the concept of microfinance;

Microfinance as a useful device of reducing poverty in the world, the growth of

microfinance and benefits and disadvantages of microfinance. The purpose of this

research is to conduct a survey and to analyze the growth, performance and outreach of

Microfinance Institutions.

Objectives

Following are some of the objectives on doing a research on the concept Microfinance

To understand the importance of Microfinance

Various models used by Microfinance Institutions to provide their financing and

banking facilities to their customers.







To analyze the benefit of Microfinance in the lives of poor population

To understand the concept of bottom of Pyramid

To evaluate the growth of microfinance facilities

To analyze the performance of Microfinance Institutions

To analyze the cost of their facilities

To analyze the different types of risks involved in providing microfinance facilities

to their poor customers.

To recommend some suggestions so as to improve further research work on the

topic of microfinance







Introduction

Microfinance is a facility to provide short terms loans to people in rural areas on easy

terms so that they can avail the benefit of Microfinance to satisfy their needs and wants

as stated by CGAP,(2010)

Today poverty and elimination of poverty have gained lots of attention as there are

number of poor people in the world who are below the poverty line and according to a

statistical data there are around 1.6 million poor people around the world who are below

the poverty line and this number is increasing rapidly due to the growth in the population

of the world. (Jammeh, 2002). As reported by ADB, (2000) huge percent of rural

populations in the region of Asia and Pacific even today have very limited facilities to

avail monetary benefits from formal financial Institutes. It implies that there is a huge

demand for microfinance for fulfilling needs of poor people in Asia-Pacific regions.

Professor Muhammad Yunus has defined Poverty as the characteristic of being without

any job, land, home, capital and food to support Livelihood of an individual and their

family. (Shil, 2009). In order eliminate poverty and to improve economic conditions of

poor people poverty reduction tools should be used. There are many various in which

poor people can be helped on of the ways can be through the use of Microfinance

services to the poor populations. (Shil, 2009).

There are various definitions given by different authors to defined Microfinance as

defined by the Professor of World Bank Joanna Ledgerwood as the provisions of

providing financial services to low income people. (Jammeh, 2002). Microfinance is a

provision of providing a very short term loans to poor’s with easy terms and conditions

generally with no collateral. Earlier Microfinance provides only microloans to poor







people in the rural areas. But as the demand for MFIs grew Microfinance started

providing various financial services like deposits, micro insurance, money transfer and

many other financial services. Microfinance typically refers to microcredit, savings,

insurance, money transfers, and other financial products targeted at poor and low-

income people. (CGAP, 2010). Microfinance helps poor by providing them short term

credit which helps them to meet their day- today expenses. Microfinance helps poor to

have a flow of income which help them in their consumptions. Microloans help poor to

have access to food, clothing and shelter and education. It provides poor population

with money in case of contingencies like theft, natural disaster. It also helps poor people

in income generating activities. (CGAP, 2010)

Zeller and Meyer, (2002) identifies 3 major objectives of Microfinance institutions which

were known as The Triangle of Microfinance. The triangle of Microfinance mainly

focuses on three objectives of Microfinance Institutions like outreach, financial

sustainability and Impact of Microfinance Institutions.







Financial Sustainability can attain by Microfinance Institutions through providing their

services to huge base of customers and fulfilling their needs for banking and financing

services. Microfinance institutions can create an impact by creating huge customer they

can also make their impact through limited outreach. The main objective of Microfinance

is to provide small loans and credit as stated by Dokulilova, (2009). It is a useful device

for empowering rural population basically women and help them to reduce or eliminate

their economic conditions. It helps poor to improve their socio-economic conditions by

providing them with a short term loans and help them to enter into income generating

activities. (Bauer, Chytilova, Morduch, 2008).Microfinance focuses to provide short term







loans at better repayment terms and charges a high cost interest rate so that it can

cover its cost of delivery. As indicated by Grameen Bank whenever financial access is

provided to poor they proves to be a better customers as their repayment rate is very

high. As stated by Grameen Bank the repayment rates of poor people is more than

94%.

The customers of Microfinance Institutions are poor population who are below the

poverty line and are unable to secure financing or banking services from financial

institutions. Microfinance on the other hand helps these people to become self-

employed by setting up of small enterprises like small retail shops, selling on streets or

they may enter into income generating activities like trading or food processing.(CGAP,

2010). Through these microenterprises poor people fulfill their socio-economic benefits.

The different methods of delivering Microfinance services are by setting up NGOs,

Credit Unions, state-owned cooperatives and post savings banks and other financial co-

operatives.

Some of the benefits of microfinance for poor people as stated by kiva are It helps poor

people to meet their basic needs, helps them to improve their economic welfare and

stability and it also helps to empower women. As reported by Kiva, a MFI that

microfinance institutions existed as banks were unable to provide loans to poor

populations. Banks find costlier to lend small loans to poor than a huge loans to middle

and upper class people. Microfinance helps poor to meet their basic requirements of

food, clothing and shelter. It helps women to support themselves and their families and

also to again social status in the society.

As reported by CGAP, (2010) the rate of interest charge by Microfinance Institutes

for providing their service are huge as compared to other financing Institutes like

a bank. The Rate of interest of microfinance institutions is higher than that of

banks because Administrative cost of providing small loans is much higher than







that of providing a large loan. It takes a lot of staff timing to issue a tiny loan than

a huge loan as it is very easy to issue a single loan of $100000 but it requires a lot

of staff time in issuing 1000 loans of $100 each. Besides poor people does not

have any collateral for their loans which requires loan officer in judging risks

involved in the loan to poor people and it also require a huge transportation cost

as poor population usually are settled in a remote area. (CGAP). Poor people face

difficulties in getting loans or credit from financial institutions because of lack of

collateral to be provided to the bank, no stable source of income. The poor people

requires small loans but banks prefer to provide large loans to middle and upper class

people because in small banks has to incur huge administrative and personnel cost.

Over the last 10 year financial institutions have realized that when poor people are

given access to credit at market determined rate they tends to repay on time and as

experience by Grameen Bank the repayment rate of poor people is 94% as compared

to other people with huge financial opportunities. There are many institutes which

believes that Micro loans prove to be profitable for borrowers as well as for lenders and

thereby making microfinance as a useful tool for effective poverty reduction. Today the

concept of Microfinance has become very famous because many institutes today have

entered in this field of providing small loans to the poor population so as to improve their

economic conditions but despite of this success today more than 2 percent of world

population does not have access to proper banking and financing facilities in their

areas. (Mayoux,1997)

In order to be successful it is important for financial providers to maintain high standards

for their products and services. They should provide access to financial services and

should have repayments on time. They should achieve substantiality. To achieve

sustainability they should reduce administrative cost which can be done through

simplification of processes and procedures like decentralized their loan procedure, and

collection procedures through group borrowings which will give borrowers

responsibilities for loan application procedures and it should broaden their area of

operation. (Mayoux,1997)







Micro insurance a innovative products of Microfinance

There are few households as reported by CGAP who have access to formal insurance

that protect them against risks such as sudden death of breadwinner, loss of crops, in

severe illness. Micro Insurance is a useful device of providing protection to poor

population against insured risks in return of regular payment in the form of premiums.

Micro- insurance life products are increasingly gaining demand. There are a huge

potential of micro insurance in rural area and therefore MFIs should work with insurance

companies to avail the benefits of micro insurance to rural people. As reported by

CGAP the greatest challenges for Micro-insurance Schemes is to value products to

rural population having a right mix of adequate protection and affordability.

One of the examples of Micro insurance Group: Grameen Kalyan

Grameen Kalyan is a insurer and a member of Grameen Bank which was registered as

NGO in the year 1996. Grameen Bank had helped Grameen Kalyan by giving them their

10 health centers and a fund of US $ 42. It operates in 8 districts through 28 health

centers. In the year 2004 it had 24000 policyholder in its Bank. It is opened for members

of Grameen Bank. In the year 2004 it had collected annual premiums of US $ 2.04 from

Grameen Members and 2.56 US $ to non-members of Grameen Bank. The followings

are some of the benefis provded by Grameen Kalyan (Garand et al, 2005)

Medical counseling provided by Grameen Kalyan to their clients

Retail discounts of about 25% on basic Medicines

Discounts on various tests like pathology tests

Up to US$34.08 for pregnancy related costs (Garand et al, 2005)

Literature Review

Bottom of Pyramid







The distribution of wealth and capacities to generate incomes in the world (Prahalad,

2005) can be shown in the form of economic pyramid. From the below diagram we can

say that at the top of pyramid are wealthy people with huge opportunities of generating

high levels of income and with high spending power. At the bottom of pyramid there are

4 billion of people living on less than $2 per day. It is very important part of economic

pyramid which is known as bottom of pyramid.(Prahalad, 2005)

The bottom of pyramid consists of 4 billion poor people in the world living on less than

$2 per day. Serving these 4 billion people will require a collectively efforts on the part of

government, NGOs, companies to use innovative products in fulfilling the basic needs of

these people.







Microfinance is the result of innovative product by Muhammed Yunus in the year 1976

of providing small loans and other financial services to very poor people of Bangladesh.

In 2007, more than 100 million of the world’s poorest families received a microloan

(Harris, 2009) which shows the outreach of microfinance in the world.

Origin of Microfinance







“Microfinance services as opposed to traditional financial services and in general is

retail financial services that are relatively small in relation to the income of a typical

individual.”(Microfinance Information Exchange, 2010) Microfinance basically refers to a

various financial services for poor population in rural areas especially women. Since the

people who tend to use microfinance institution have very less income as well as a very

limited access to other financial services. (Microfinance Information Exchange, 2010).

These services include various types of financial benefits such as providing loan,

savings, insurance and remittance. Micro loans are also provided for developing small

enterprise. The services offered here also reflect to the fact of the financial need of

individual, household, enterprise and just because of these they also use other non

traditional methods such as group lending as such.

Microfinance is not a new concept it is a very old concept and has its long history. The

concept of Microfinance is very old and can be traced back centuries where savings and

credit groups which operated in the name of ”susus” in Ghana, “chit funds” in India,

“tandas” in Mexico and “cheetu” in Sri Lanka are also found in other various parts of the

world. (Mercy Corps, 2009) Microfinance existed for many years in the form of money

lenders or in the form of formal financial Institutions like village banks, credit unions,

cooperatives governmental banks and so on. Different countries have different history

of Microfinance. Many associated the origin of Microfinance in Bangladesh. In Europe

Microfinance started in the 18th century with Money lenders providing small tem loans to

their customers in informal ways like through informal savings clubs. In Europe poverty

was at a high level during 16th century and to reduce poverty people started taking small

loans from Money lenders. In Ireland Microfinance borrowings started in the year 1720

within a group where money was lenders in a group for free from donations. And In

Germany microfinance gained importance in the year 1778 with the savings and credit

cooperatives and in the 18th century community banking started gaining importance

(Seibel, 2003)







During the year 1720 the author and nationalist Jonathan Swift founded the Irish Loan

Fund System which is considered to be the early and long lived micro credit

organization. This Idea of Swift foundation gained a huge attention around 1840 which

created a huge amount of funds all over Ireland in the year 1840 (Mercy Corps, 2009).

During the year 1847 in Germany a credit cooperative was introduced by Friedich

Wilhelm Raiffeisen to address poverty which gave a huge figure of more than 9million

poor people joined in this credit cooperatives by the year 1946. (Raiffeisen, 1866)

Between the year 1950 and 1970, government mainly concentrated on making available

agricultural credit to poor population especially farmers so that they can increase their

productivity and income but these schemes did not prove successful as well as bank

suffered massive loss due to subsidised lending rate. (Mercy Corps. 2009)

Starting from the year 1970 experimental programs were introduced in Bangladesh,

Brazil and few other countries by providing small loans to poor women to invest in

Micro business such as SEWA Bank in India which was established in India focussed

on Women. (Mercy Corps, 2009)

At present there is around 7000 microfinance Institutes all over the world who have till

now offered their support to around 16 million poor people as stated by World Bank

against the goal of a Micro credit summit in Washington D.C who aimed to provide the

facilities of Microfinance to be available to around 100 million world’s poorest population

( Microfinance and Microcredit, 2010).







Features of Microfinance Programmes

Microfinance is a useful tool for providing financial services to poor people in the rural

areas. Some of the fetures of Microfinance Programmes are as follows

Microloans are usually short term in nature for the period of less than 12 months

and it is used as a fulfilling the working capital requirements by many small

entrepreneurs.

Microfinance does not require collateral from poor people and therefore are in

great demand among the poor people.

It helps poor people to have a continuous flow of incomes so that they can fulfill

their basic necessities and can also save funds for emergency.

Loan application and loan disbursement procedures are designed in such a

ways so that they can easily be understood by poor people.

Microfinance is easily accessible.

The clients for microfinance can be low income people who do not have access

to any kind of financial services.

As stated by Kiva.org, the interest rate of microfinance is higher than the

commercial banking borrowings.

Microfinance helps in empowering women through proving loans and helping

them to take up income generating activities like trading, cultivating and poultry.

Microfinance may be inappropriate where poor people face challenges in loan

repayment. Challenges could be that they are geographically dispersed and have

a severity of some disease.(kiva.org, 2005)

The repayment rate of loan by poor people is high as compared to upper middle

class population with sufficient financial services available to them.

It helps poor people to achieve socio-economic benefits

Grameen Bank

Grameen bank is a microfinance institution started in the year 1970 by

Muhammad Yunus. Grameen bank provides small loans to poorest of poor

people in Bangladesh without any collateral. Grameen Bank provides credit to







poor people in order to eliminate their poverty and to help them to improve their

socio-economic conditions. (Grameen-info,2010)

As of June, 2010 Grameen bank had covered 97% of the total villages in

Bangladesh. In 2008 it had 8.28 millions of borrowers out of which 97 percent are

women. The Objectives of Grameen Bank are to provide their Micrfoinance

Facilities to poor population, to reduce the exploitation of rural population by the

Money lenders, to create employment opportunities to the rural people of

Bangladesh and to help women to empower themselves through engaging in

income generating activities. (Grameen-info,2010)

The grameen Bank was established in the year 1976. This Bank is a result of

Muhammad Yunus research work. The research of Muhammad Yunus aimed to

analyse the credit delivery system for poor people in Bangladesh. Grameen bank

project was born in the village of Jobra, Bangladesh, in 1976. It ws transformed

into bank through special law passed. It is owned by borrowers of the bank who

are mostly women. The owner of the bank own 95% of the total equity of the

bank, remaining 5 % of the equity is owned by the governments. (Grameen-

info,2010)

Grameen bank provides loans to poor people without any collateral. It does not

want borrowers to sign any legal document. Members should form group of 5.

Repayment is done on individual basis by the member. There are no joint liability

i.e. group member are not responsible to pay on behalf of a defaulting member.

(Grameen-info,2010)

Low interest rates charged by Grameen bank to their poor clients who are not in

the position to pay huge interest rate of bank.

Government of Bangladesh has fixed interest rate for all government run

microcredit i.e 11%. But Grameen bank charges a lower interest rate than that of

government.there are 4 interest rates for loans by grameen Bank i.e 20% for

income generating loans, 8% for housing loans, 5% for student loans, and 0%

(interest-free) loans for Struggling Members(Grameen-info,2010)







Deposit rates of grameen are very attractive. Minimum rate offered is 8.5 and

maximum rate offered is 12 %(Grameen-info,2010)







Different models of microfinance

According to Grameen bank there are various types of credit lending models used by

MFIs which are as follows

Associations

Associations are a group of people who have come together to initiate micro financing

activities like savings. The group of people can be a formed among youth or women or it

could have been formed for cultural, social or political reasons.(Grameen-info,2010)

Example

Cambodia Microfinance Association (CMA) is an example of association which was

formed in January 2004 by 7 MFIs to ensure the sustainability of Microfinance in

Cambodia. It plays an important role for creating local and international networks,

seeking equity and loan funds, improving technology and resolving conflicts in MFIs.

(Cma-network.org, n.d)

Bank Guarantees

Bank guarantees are usually obtained to get loans from commercial bank. These

guarantees can obtained internally through members savings or guarantees can

obtained externally through donor or through government agencies. Guarantees

are obtained to ensure loan recovery or for getting insurance claims. (Grameen-

info,2010)

Example

The guaranteed fund was first extended by The ACCION Latin America Bridge

Fund (LABF) in the year 1984. These guaranteed funds were used by ACCION for

their International programs. They used to take loans from their investors and

they used to provide guarantees to local banks (ACCION, 2007)







Community Banking

Community banking is a useful tool for enhancing one community. In community

banking one community is considered as one unit amongst them semi-formal or

formal Institutes are build up to provide micro financing benefits. (Grameen-

info,2010)

Example

MuCoBa is an example of community banking. It was established in the Mufindi

district of Tanzania to provide financial services to the low and medium income

earner in their district. The main objective of Mucoba was to be a leading

community banking provider in Tanzania to provide benefits to all its

stakeholders. (mucobatz.org,n.d)

Co-operatives

Co-operatives are a group of people who voluntarily come together to achieve

their common economic, social and cultural needs. (Grameen-info,2010)

Example

The Cooperative Rural Bank of Bulacan (CRBB) was set up in May 1975 by

primary co-operatives in bulacan with the objectives of providing credit to all

types of co-operatives and their members. (crbbulacan,2008)

Credit union

Credit unions is a form of self help organization wherein a group of members comes

together belonging to same organization who have agree to save their money together

and to provide loans to each other at a reasonable rates of interest. The group of people

may belong to same organization, or a labor union or a church. (Grameen-info,2010).







These Unions are owned by their members and are controlled through their set of

regulations. Profits are generally reinvested or shared among their group members.

(Zeller and Johannsen, 2006). Their main objective is to earn profit and they have

weaker membership of their clients.

Grameen Model

Balasubramanian, 2010, Grameen Bank model of microfinance is well known and has

been replicated in many countries. The Grameen model was started by Mohammed

Yunus in Bangladesh. In this model a group of poor people come together by

guaranteeing each other loans with their compulsory savings. (Grameen-info,

2010)

Group Model

The group model came into existence to overcome weaknesses and shortcomings at

the individual level and to provide collective responsibilities and securities to a group of

people. These groups are formed for fulfilling various needs of members like educating

people, bring awareness, collective bargaining power, peer pressure etc. (Grameen-

info,2010)

Individual Model

Individual model of microfinance provides microloans directly to the borrowers. It does

not require forming of group to ensure repayment. It is basically for proving facilities like

education, skill development and so on. (Grameen-info,2010)

Intermediatories

Intermediatories are people assisting both lenders and borrowers of the funds. They

play an important role of creating awareness and educating borrowers about the various







financial benefits available to them. The main objective of Intermediatories is to raise

the credit worthiness of borrowers so that they can avail the benefits provided to them

by various lenders. Intermediaries could be individual lenders, NGOs, microenterprise

and commercial banks. Lenders could be government agencies, commercial banks,

international donors, etc. (Grameen-info,2010)

Non-Governmental Organizations

NGOs play an important role in creating awareness about the importance of microcredit

within the community, and for various international and national donors’ agencies. They

create awareness by various publications, workshops and training programmes.

(Grameen-info,2010)

Example

Kiva is an NGO. The main objective of kiva is to lend money to poor people in order to

alleviate poverty. (kiva.org, 2005)

Peer Pressure:

Peer Pressure is a method of ensuring proper linkages between borrowers and other

members in group. The main objective of this method is to ensure that the borrower

makes repayment in time otherwise other members in his group won’t get any loans. To

make borrower to fulfill his repayment pressure is created in the from of frequent visit to

borrower place, identifying his name in the defaulters list in member meetings.

(Grameen-info,2010)

Rotating Savings and Credit Associations

ROSCs consist of a group of individuals who come together and make regular cyclical

contributions to a common fund, which is given as a lump sum to one of the group

member. (Grameen-info,2010)







Small Business

Small and medium enterprises play an important role for generating of employment, for

raising income level of poor people and for proving services which a poor people lacks

behind,(Grameen-info,2010)

Village Banking

Village banking is a community based form of micro financing. It consists of 25-50 poor

people who want to raise their standard of living through self-employment. They are

owned by their members but their ownership are generally not registered. (Zeller and

Johannsen, 2006). Village banking requires initial loan capital to be financed by a group

of people who wants to run village banking after that they choose their members, elect

their own officers, establish their own by-laws, distribute loans to individuals, and collect

payments and savings. (Grameen-info, 2010)







There are different types of microfinance models used by different countries

Grameen Model

In Countries like Bangladesh, Nepal and Philippines grameen model of microfinance

are used for financing to poor people. This model was developed in Bangladesh by

Mohammed Yunus. In this model group of 5 poor people can come together by

guaranteeing loans of each others and with compulsory deposits. (ADB, 2010)

But today In Bangladesh this model is not stable and has been modified. Like one of

the microfinance Institute in Bangladesh the Association for Social Advancement

(ASA) has introduced group guaranteeing to this model

Grameen Model is a cost-effective weapon to fight poverty. (Grameen-info, 2010)

Grameen bank is an example of Grameend model of Microfinance. Grameen bank

provides credit to the rurl people with no collateral in Bangladesh. Grameen Bank

has helped in over all development of poor people in Bangladesh. Professor

Muhammad Yunus is the founder and Managing director of Grameen Bank in

Bangladesh. As of June, 2010 Grameen Bank has 8.28 miillion borrowers 97 % of

them were women. It has 2564 Branches proviing funds to 97% of the totl villages in

Bangalesh.







SHGs

In india the most important model of microfinance is SHGs. It consists of larger

groups than grameen model. It is a group of around 20 members whose primary

task is to provide funds to from their member’s savings and also from external

borrowings. This model of microfinance is also used by countries like Nepal,

Pakistan and Srilanka. (ADB, 2010)

Example:

Voluntary Health, Education and Rural Development Society (VHERDS) are a non-

profit organization work for uplift of poor in Tamil Nadu, Orissa and Gujarat. The

mission of VHERDS is to enhance the knowledge and skill of poor women and

provide them with social and economic benefits. This organization have formed

more than 1000 SHGs in Kancheepuram and Tiruvallur districts to help women to

market their products (Thehindu, 2004)

Regulated financial Institutions

In Indonesia regulated financial institutions provide financial services to rural people.

One of the largest financial Institutions named as Bank Rakyat Indonesia (BRI)

provides financial services to rural people by establishing various village units.

These units provide basic deposit and loan facilities through the use of highly

decentralized and cost-effective operations. This model is also used by Philippines.

(ADB, 2010)

Example

Bank Rakyat Indonesia (BRI) is a state-owned bank in Indonesia, who main

objective is to achieve customer satisfaction. It has various branch networks to cover

the entire Indonesia. it has more than 4000 retail outlets known as Unit Desa. Unit







Desas provides small and microloans to rural people. This bank also offers voluntary

savings products, fund transfer services as well as training services. (CGAP, 2010)

Credit Co-operative societies

In Sri lanka Credit co-operatives Societies are important method of microfinance.

These Societies operate at village or local level for providing financial services to

poor people. Besides Srilanka this model of microfinance is not successful in

providing finance to poor and low income people in other countries. (ADB, 2010)

"Sanasa” is a Credit Co-Operative society in Sri Lanka. It has its membership with

people belonging to different races and religion. (Sanasafe,n.d)

A comparative study of Microfinance models

In rural area formal finance was not accessible by poor people and informal source of

finance was too costly to fulfill the needs of poor people. To serve the needs of poor

people innovative financial product was needed by poor people. Over the decades

various financial institutes, governmental organization and various NGOs came together

to develop a product which will fulfill with financial needs of poor people.

Microfinance is a provision of providing financial services to the poor people who have

been excluded by the banks. In 1970 SEWA bank in India started offering Micro

financial services, but it had gained momentum in the year 1990. In India two models

were very useful. (barman et al. n.d)

Self Help Group (SGH) Bank Linkage Model

The self Help group is a group of 10 to 20 members who come together pool all their

savings and lends those money within their members. This model of microfinance was







first used by two NGOs like MYRADA and PRADAN during 1980. Banks in this model

provide loan to the group as 4 times the savings made by their members and as the

group matures on the basis of their group performance it can provide more loans to their

members. Borrowed and saved funds are rotated through lending within the group. The

members are free to decide the interest rate to borrow but member usually borrow at

24% rate of interest. (barman et al. n.d)

Grameen Model

Grameen Model consists of group of 5 members who guaranteed each others loans

which are provided by financial institutes. It had its origin in Bangladesh to provide a

short term loans to poor people. Grameen bank provides loans to small entrepreneurs

who want to invest their money in various small scall businesses such as trade, poultry,

milking cows. Grameen bank now also provides remittances services because it plays a

crucial role in poor people lives. Many people migrate outside to earn money for their

families and would like to transfer their money to their families and therefore remittance

has become crucial in microfinance services. (barman et al. n.d)

In order to analyze the two different models a survey was conducted among 59

households of 12 villages of Varanasi district of UP. The choice of households was such

that they should represent both categories of respondents. The main objectives of this

survey was to analyze the two different models in terms of the clients differential, the

level of indebtedness to moneylenders and the level of indebtedness to non-

institutional sources of finance. Out of 59 respondents,

34 respondents were members of self help groups and







25 respondents were members of Grameen model (barman et al. n.d)

SURVEY FINDINGS AND DISCUSSION

The findings are related to client’s characteristics of these 2 models

Level of Literacy: The heads of the households interviewed were illiterate with 42 %

had never been to school. The average completed years of education was 4.9 years for

the SHG clients and 4 years for MFI clients. From the above data we ca say that clients

of SHG were more literate than that of MFI’s clients. (barman et al. n.d)

Landholdings and Sources of Income: The average landholdings size per household

is low as compared to SHG clients. The reason for this could be 62.5 % of SHG clients

depend on agriculture for their source of income. MFIs were not engaged in agricultural

activities but were self employed in dairy activities, tailoring and all (barman et al. n.d)

Targeting Efficiency of Microfinance Programmes: On an average only 22.8 percent

of the sample households were found below the poverty line. 25 % of SHG and 20 % of

MFI were below the poverty line. (barman et al. n.d)

Income and Consumption Expenditure: Average per capita monthly consumption

expenditure fro SHG clients were lower than that of MFI clients. (barman et al. n.d)

Household Indebtedness: House indebted is defined as one having some cash loans

outstanding as on 31.3.2009. all the houses are indebted to formal or informal source

of credit only 19 percent of the sample households were indebted to institutional







agencies 44 % are indebted to informal source of credit and 37 %r reported to be

indebted to both source of finance. (barman et al. n.d)

All the clients of SHG and MFI on the date of survey have some from of loan

outstanding.







From the above figure we can say that MFI clients are indebted more too informal

institutions whereas SHG are indebted to formal source of finance. Moreover MFI

clients are not allowed to accept deposits from the institutions and can dropout from the

group if they require any new loans. . Where SHG clients have their savings in the

Organization and they will not live their group. (barman et al. n.d)

From the above survey we can conclude that MFI and SHGs are two important

innovative financial products helping the people to gain access to finance to meet up

their financial needs. From the above study we can sya that MFI clients are more

indebted to Informal sources of finance i.e. to money lenders which shows that MFIs

clients are in trouble when they will require a new loans or they may be find difficulties in

repayment.

This studies shows that the reach of MFI has been limited because of which many

people in villages prefer moneylenders to finance their financial needs. Moneylenders

lend to charge huge interest rate of interest in absence of financial services available in

rural areas. MFI on the other hand have to see that they should evaluate credit

worthiness of their borrower before lending them money so that MFIs does not incur any

losses.







Poverty reduction through Microfinance

In the year 2005 as reported by ILO, from over 2.8 billion workers around the globe

nearly 1.4 billion even today are able to earn less than US $ 2 and cannot lift their

families and themselves above the poverty line. Even Developed nation like USA are

facing the same problem.

In the year 2005 as reported by ILO, of over 2.8 billion workers in the world nearly 1.4

billion still did not earn to lift their families and themselves above the poverty line and

earn less than US $2 , even the developed nation like USA have not been able to

benefit the life of their citizens. (Bakhtiari, 2006)

Microfinance is a useful tool in reduction of poverty. The poor people especially women

when receive funds they not even improve their lives but also lives of their families, their

communities and their nations (Bakhtiari, 2006). For the rural population the only source

of finance used to be informal moneylenders who charge very high interest rates but

with the growth of microfinance rural people are getting small loans for setting up their

own enterprise and earning money to satisfy their day to-day expense.







Microfinance is a useful tool for poverty elimination for poor people. As reported by ADB

there are many developing countries in the region of Asia –Pacific that have used

Microfinance to reduce poverty in their regions. Microfinance can also helps in reducing

the depth of poverty like the clients of Grameen bank has benefited from reduced of

poverty from 33% to 10%. As stated by Harris, (2009) in the year 2007 there were 100

millions of poor people who have received microloan from MFIs.

Microcredit summit campaign report 2009 shows the following interesting facts about

microfinance.

Source: Microcredit Summit Campaign Report 2009

The table above shows the data regarding 861 numbers of MFIs as on 31st December,

2007. These 861 MFIs consists of 86% of the poorest clients reported. Microcredit in the







year 2007 has reached to 154,825,825 clients out of which 106,584,679 are poorest

people. Out of poorest clients 88,726,893 are women

Poverty reduction through the leading providers of Microfinace in Bangladesh

Grameen Bank:

The concept of Microcredit was introduced by professor Muhamad Yunus in the year

1970s. The main objective of Grameen bank was to provide financial services to poor

people especially people below the poverty line. Grameen Bank provides loans to

poorest of poor people in rural area with no collateral and 94% of its loans are provided

to women. (Grameen-info, 2010)

Bank Rakyat Indonesia (BRI)

BRI is responsible for helping many poor to improve their standard of living over the

past decade. BRI has helped poor in Bangladesh to increase their net incomes and to

increase the employment in Bangladesh. BRI helped poor to increase their socio-

economic conditions like children’s education, availability of food and women

participation.( ADB, 2000)

Example : Success of IFAD in empowering of poor people

The International Fund for Agriculture Development (IFAD) is an international financial

institution established in the year 1977. Its goal is to empower people in developing

countries to improve their lives and security. (IFAD,2009)

IFAD in 2008 have provided loans to 21 million borrowers out of which 87% were

women and have acquired 4 million savers. IFAD serves rural population with a wide







range of partners like credit associations, rural banks, and financial co-operatives.

(IFAD,2009)

IFAD also works through self-help groups, in Indonesia they have extablished over

58000 self-help groups, 1,900 self-help group associations,. 200 microfinance

institutions, and 35 cooperatives, benefiting more than 800,000 households.

(IFAD,2009)

The warehouse receipt system in Tanzania

Maimuna Omary Ikanga is a farmer in the Babati district of Tanzania. For may years

she have to sell her crops like maize, beans, peas and sunflowers immediately after

harvest season at a lower prices as she does not have warehouse to store her crops.

With the help of warehouse receipt system by IFAD she can now store her goods in a

warehouse against a receipt which she can as collateral for raising of loans. She can

also sell her crops whenever prices of crops raises it may be after 6 months or a year.

(IFAD, 2009)

EMPOWERING WOMEN THROUGH MICROFINANCE

“At first, my family members did not count me worthy to be called when there was a

problem or decision making, but now through SAT I’m numbered among human

beings.” (Margaret Asare, a microfinance client of Sinapi Aba Trust in Ghana cited in

Cheston and Kuhn, n.d)

Microfinance is considered to be a proven strategy for reaching poor women. According

to Cheston and Kuhn,(n.d) the Micro credit Summit Campaign reports that 14.2million

of poor women in the world have easy access to financial service because of micro

finance services.

“Empowerment refers to increasing the spiritual, political, social or economic strength of

individual and communities.”







Microfinance is basically considered to be a key strategy for addressing both poverty

allevation and women ‘s empowerment. (Mayoux, 1997)

Some of the positive impacts caused by the Microfinance on Women’s Empowerment

are:

Women’s income level increase as well as it gives a control over income giving

economic independence.

It gives a woman an easy access to various networks and markets giving a

broader experience outside the home as well as gives an access to information

and opportunities existing in other social and political role.

It also increases women’s contribution to household income as well as family

welfare thus increasing the women’s participation in decision making regarding

expense and other issues.

Overall gives an general improvement in attitude of women role in household

and communities.

There are negative impacts as well which is given below:

Financial loan given to the women are taken up by the male to set up a business

over which women has no control as well as in some cases they have been

employed as unpaid family worker with little benefit. (Box1 of Edith Kagino in

Uganda cited in Mayoux, 1997) easily shows that.

Some other negative impacts includes increased work load because of the

expand of business and participate in Microfinance meeting whereas some other

have been reported as ill health and exhaustion. (Cheston and Kuhn, n.d)

For removing these negative aspect we should see to it that empowering of women is

done through microfinance and is it directly affecting women?







As all these information is hard to come by there are number of programmatic practice

such as business training, investing in women’s general education and literacy ,giving

guidance in balancing family and work responsibilities, providing a forum for social and

political issues such as women’s rights and problems, giving experience in decision

making and promoting ownership. (Cheston and Kuhn,n.d)

Some other reason for the lack of attention women’s empowerment through micro

finance is the fear that it will threaten the financial sustainability ratios and limit the

access to the funds from major donor agency came. Most of the donor agency mainly

focuses institutional, sustainability and do not reward programs that are able to show

greater sustainable impact on the clients. (Cheston and Kuhn,n.d)

Micro Finance has the potential to have a powerful impact on women’ empowerment but

it is not always empowering but most women do experience some degree of

empowerment. A s empowerment is a complex process it varies from women to women

as in some cases assisting with finance to single women can bring her with a high

empowerment but in other cases it is the social and values in a society that empowers

her.

“At first, my family members did not count me worthy to be called when there was a

problem or decision making, but now through SAT I’m numbered among human

beings.” (Margaret Asare, a microfinance client of Sinapi Aba Trust in Ghana cited in

Cheston and Kuhn, n.d)

Microfinance is considered to be a proven strategy for reaching poor women. According

to Cheston and Kuhn,(n.d) the Micro credit Summit Campaign reports that 14.2million

of poor women in the world have easy access to financial service because of micro

finance services.

“Empowerment refers to increasing the spiritual, political, social or economic strength of

individual and communities.”







Microfinance is basically considered to be a key strategy for addressing both poverty

allevation and women ‘s empowerment. (Mayoux, 1997)

Some of the positive impacts caused by the Microfinance on Women’s Empowerment

are:

Women’s income level increase as well as it gives a control over income giving

economic independence.

It gives a woman an easy access to various networks and markets giving a

broader experience outside the home as well as gives an access to information

and opportunities existing in other social and political role.

It also increases women’s contribution to household income as well as family

welfare thus increasing the women’s participation in decision making regarding

expense and other issues.

Overall gives an general improvement in attitude of women role in household

and communities.

There are negative impacts as well which is given below:

Financial loan given to the women are taken up by the male to set up a business

over which women has no control as well as in some cases they have been

employed as unpaid family worker with little benefit. (Box1 of Edith Kagino in

Uganda cited in Mayoux, 1997) easily shows that.

Some other negative impacts includes increased work load because of the

expand of business and participate in Microfinance meeting whereas some other

have been reported as ill health and exhaustion. (Cheston and Kuhn, n.d)

For removing these negative aspect we should see to it that empowering of women is

done through microfinance and is it directly affecting women?







As all these information is hard to come by there are number of programmatic practice

such as business training, investing in women’s general education and literacy ,giving

guidance in balancing family and work responsibilities, providing a forum for social and

political issues such as women’s rights and problems, giving experience in decision

making and promoting ownership. (Cheston and Kuhn,n.d)

Some other reason for the lack of attention women’s empowerment through micro

finance is the fear that it will threaten the financial sustainability ratios and limit the

access to the funds from major donor agency came. Most of the donor agency mainly

focuses institutional, sustainability and do not reward programs that are able to show

greater sustainable impact on the clients. (Cheston and Kuhn,n.d)

Micro Finance has the potential to have a powerful impact on women’ empowerment but

it is not always empowering but most women do experience some degree of

empowerment. A s empowerment is a complex process it varies from women to women

as in some cases assisting with finance to single women can bring her with a high

empowerment but in other cases it is the social and values in a society that empowers

her.

Women empowerment through SHGs

Microfinance has achieved success through self help groups. Self help group is a small

group of women consists of 10 to 20 women and which requires compulsory savings by

members to provide loans to their members. (Manak, 2005)

Earlier NGOs played a crucial role in innovating SHG model but in the year1980 policy

makers with bankers and many financial organizations started promoting SHG. With the

growth of SHGs, federations of SHGs started building up. SHG federations are more

sophisticated form of organization that involves several SHGs forming into village







organization. SHG federations are formal institutions while SHGs are informal. (Manak,

2005)

A SHG is a group of about 10 to 20 women from a similar class or region who come

together to form credit and savings organization. These members bring their financial

resources to provide interest bearing loans to their members. (Manak, 2005)

SHG Federation

SHGs Federation consists of various clusters of SHGs. 15 to 20 SHGs makes a Cluster

with one or 2 representatives. Several clusters come together to form SHG Federation

Financial Management







The financial management of SHGs has been found to be average because the internal

controls at SHGs and SHG federations are lacking. Internal controls deal with the roles

and responsibilities, transaction flow, managing the staff. The systems and processes

have been poorly executed by the members. The flows of money is also not been

managed properly in SHGs. It had been noted that in SHGs finance are borrowed from

external borrowers and lend to their members who doesn’t repay loans on time and

therefore cash management in SHGs are poorly managed (Manak, 2005)

Human Resources

The SHGs are formed by women members which have shown a remarkable success on

the part of membership but there are many things which SHGs lack behind is poor

accounting process, poor organization structure and poor governance in handling their

operations. (Manak, 2005)

SHGs - A MOVEMENT IN ANDHRA PRADESH

There are about 4.36 lakhs women SHGs in Andhra Pradesh covering nearly 58.29

lakhs poor women. The main objective of SHGs is to empower women in the state of

Andhra Pradesh. (Ramalakshmi, 2003)







Microcredit submit conducted in 1997 in Washington aims to reach around 100 million

poor women around till 2005. In Andhra Pradesh itself 5.2 million of women were

covered under SHG schemes. From the year 1997 to 2003 banks has extended a loan

of Rs 900 crores to SHGS and the recovery of loans is more than 95%. Recently

commercial banks have reduced interest rate on the loans extended to SHGs from 12 %

to 9.5% (Ramalakshmi, 2003)

All the villages in Andhra Pradesh have at least one SHG and 75% of villages in Andhra

Pradesh have 15 to 20 groups. (Ramalakshmi, 2003)

IMPACT OF SHG MOVEMENT in Andhra Pradesh

98% of the member makes savings regularly as per prescribed norm.

80% of SHG members have access to financial services from banks and their

repayment rate if 98%

Members are engaged in 450 varieties of income generating activates

SHGs help women to increase in their self confidence and self esteem

Increased in awareness about community and societal problems (Ramalakshmi, 2003)

High rate of interest by MFIs

MFIs charge a high rate of interest to many poor populations. Nirmal Fernando in the

article understanding and dealing with high interest rates on microcredit said that “The







nominal interest rate charged by MFIs is around 30 to 70 percent”. The rate of interest

sometimes is even higher because of commission and fees charged by MFIs,

compulsory deposits for obtaining a loan and frequency of repayments.

High rates of interest by MFIs have been criticized in Bangladesh, Cambodia, India,

Pakistan, and Srilanka. At a microcredit submit in Dhaka in 2004(Fernando, 2006) the

minister of finance described microfinance interest rates in Bangladesh as

“extortionate”. The Prime Minster of Combodia has asked their lending agencies to

consider reducing rate of interest on microfinance. The government of srilanka has

introduced ceilings on Microfinance schemes. (Fernando, 2006)

The main objective of MFIs is to provide small loans to poor populations at affordable

cost. As the interests earned are the only sources of income for MFIs they charge high

rates of interest than a bank.

Four key factors determine these rates: the cost of funds, the MFI's operating expenses,

loan losses, and profits needed to expand their capital base and fund expected future

growth.

The costs of funds are high of MFIs

Despite getting concessional funds micro lenders charge interest on market determined

rates because concessional funds are not stable and to maintain its business

sustainability it charges a huge rates of interest. Besides, this inflation adds up to high

cost of interest. For micro lenders there are two types of operating expenses:

administrative expenses and personnel expense. Administrative costs consist of rent,

utility charges, transportation and fixed asset depreciation. As Microfinance is a labor

intensive industry it requires huge personnel expenses. (Fernando, 2006)







Inappropriate Comparisons

Microfinance interest rates are often compared with those charged by both commercial

banks and subsidized lending organizations. But such comparisons are invalid because

commercial banks most often deal with large loans and their transaction costs are lower

than those of MFIs on a per unit basis. Subsidized lending of financial institutes

charges lower rates of interest because it has been funded by government at a lower

rates. (Fernando, 2006)

Rate Ceilings: Not the Answer

Lower rates of interest on Microfinance will help to reach poor people but impossible

rate ceilings are not the answer. Setting Rate ceilings below the level required to

recover cost it will discourages MFIs to lend money and will also affect their operations

expansion. These will reduce the credit worthiness of MFIs and will discourages lenders

to lend their funds to MFIs (Fernando, 2006)

Risks involved in MFIs are same as risks faced by many financial institutions which

include credit risk, liquidity risk, market or pricing risk, operational risk, compliance and

legal risk, and strategic risk. These risks can be grouped under three categories i.e.

financial risks, operational risks and strategic risks. (FSDBS, 2000)







I. Financial Risks

The business of any financial institutions is to manage their financial risks like credit

risk, transaction risk, and market risk and so on. The microfinance institutes should be

able to reduce their financial risks by carefully handling the individual credit risk and by

managing a quality portfolio. (FSDBS, 2000)

1. Credit risk

Credit risk is the risk which generally arises on non-payment of loan or late repayment

of loan by borrowers. Credit risk includes both transaction risk and portfolio risk.

Transaction risk refers to the risk within individual loans. So it is important for

MFIs to give loans to a credit worthy borrowers. It should mitigate the transaction

risk through screening of borrowers, making use of underwriters and using good

monitoring and collection techniques.

Portfolio risk is the risk involved in the overall composition of loan portfolio. To

overcome Portfolio risk MFIs should diversify their loan disbursement, type of

loans to be disbursed to which individual.







2. Liquidity risk

Liquidity risk is the risk involved in lack of liquid funds in the organization to meet the

current expenses of the organization. Liquidity risk can arise because of management

inabilities to plan for their activities. MFIs require cash in hand to meet the client

withdrawals, disburse loans and fund unexpected cash shortages in the organization.

(FSDBS, 2000)

3. Market risk

Market risk includes interest rate risk, foreign currency risk, and investment portfolio

risk.

Interest rate risk

Interest rate risk arises because of the possible changes in the value of assets and

liabilities in response to current market interest rates. (FSDBS, 2000)

Foreign exchange risk

Foreign exchange risk is the risk of loss of earnings on capital resulting from fluctuation

of currency. This usually arises when MFIs take loans in foreign currency. So to mitigate

this risk the MFIs should borrow or mobilize saving in one currency. (FSDBS, 2000)

Investment portfolio risk

Investment portfolio is a source of funds for reserves, for meeting operating

expenses, for future loans. Investment portfolio risk belongs to risk on long term

investment rather than short term investment. To mitigate Investment portfolio risk

MFIs should invest in profitable avenues. (FSDBS, 2000)







II. Operational Risks

Operational risk arises from human or computer error in delivery of products and

services. This risk may arise due to insufficient human resources, inadequate

technology. It is internal risk and consists of two types of transaction risk and fraud

risk.

Transaction risk

Transactional risk exists in all goods and services. Since MFIs issue small loans to

majority of people there are no professional people to cross check the loan

requirements and that is why they can be fraud and error while delivery of MFIs

services.

Fraud risk

Fraud risk is a risk of loss of earnings due to intentional deception by an employee.

The common type of fraud risk in MFIs is theft of funds by the loans officers or

branch staff. Effective internal control can help to mitigate fraud risk. (FSDBS, 2000)

III. Strategic Risks

Strategic risks arises from adverse business decisions or improper implementation of

those decisions, poor leadership or governance in an organization or through external

risks such as changes in business environment, or government policies. It focuses on

three strategic risks: Governance Risk, Business Environment Risk, and Regulatory and

Legal Compliance Risk. (FSDBS, 2000)

Governance risk

Governance risk arises because of poor governance in a an organization.







Reputation Risk

Reputation risk leads to risk in earning due to poor public opinin that affect MFIs selling

of goods and services and it also affect its access to funds from the market.

External business environment risk

Business environment risk is inherent in MFIs so MFIs should makes changes in its

institutes due to changes in competition, technology and try to upgrade with new

services.







GROWTH OF MICROFINANCE

Micro finance in today’s world have a huge growth as well is facing lots of challenges.

When Microfinance started it involved just small loans with double and triple digit

figures. Now after so many years the same institution have become a more complex

structure and the market is much more crowded. (testfund.com, 2010)

Reports also suggest that around 1200 microfinance institution with over 64million

borrower and 33.5 million savers as well the number is increasing at 25% year on year.

(testfund.com, 2010)

The above reports can also be supported by the article (gilles,2009)where microfinance

in India have outreach among the poor as well as low income household across the

country and the report also shows a figure of about US $665million was disbursed

during the year 2004-05 amounting to over 43% of the cumulative disbursement of US

$1533million till date. The database also recovers that Microfinance Institution portfolio

in India has increased by 146% over the past two years. (gilles,2009)

The argument that the growth in Microfinance is based on the mass poverty as well as

the fact that the Microfinance has proven to be one of the few antipoverty approaches

that is effective is supported by the article from Counts, Zafar and Connor,(2006).says

that some of the factors that contribute to the growth of Microfinance are Strong

Entrepreneurial Leadership, Adequate financing, Some degree of regulatory support,

Strong focus on Microfinance, Sustainability and effectively serving a particular niche, a

large unserved market, Ability to attract, harness and retain talent at all levels and







effective management system and financial control are some of the ways from which

microfinance institution are rapidly growing and established in various countries.

Some of the main challenges that a Microfinance Institution in today’s world are facing

is playing out is Human Resource Department of these institutions.

These can be supported from the article (testfund.com, 2010)which shows that as the

number of profit microfinance institutions enter the market more established

Microfinance Institutions start worrying of the best employees been attracted towards

the profit Microfinance Institutions for example a bank going to a retail micro finance

usually end poaching field officers from the Microfinance Institution as they have critical

experience on the ground operations.

The above article can easily be supported by the article given by Reille,(2010) where he

has given an example of Morocco which is considered to be having world’s best

performing Microfinance Institution with 40% of clients outreach in the Arab World but

Morocco Microfinance sector confronted crisis like exuberant growth, at the cost of

asset quality, spurring write offs and falling returns.

Example Growth of microfinance in india

Microfinance in India has shown a massive growth over the past five years. In order to

analyze the presence of Microfinance in India CMS has conducted a survey collecting

district wise data. CMS collected data on the number of active borrowers, number of

active women borrowers and total loans outstanding for the past 3 years from India’s

largest MFIs. (Johnson, 2008)

REGIONAL DISTRIBUTION OF MICROFINANCE SERVICES: THE SOUTH STILL

DOMINATES







From the above chart we can say that Andhra Pradesh dominates in terms of MFI

presences in India.







In addition to the southern states, Maharashtra, West Bengal and Orissa also displayed

relatively high levels of penetration. Maharashtra in particular witnessed phenomenal

growth in overall MFI penetration over the previous year, especially in those districts

bordering AP.

The Asia Microfinance Analysis and Benchmarking report 2008 provides with data of

313 MFIs. The data cover 16 countries across South Asia and East Asia and the Pacific

(EAP): Afghanistan, Bangladesh, India, Nepal, Pakistan and Sri Lanka from South Asia

and Cambodia, China, East Timor, Indonesia, Laos, Papua New Guinea, Philippines,

Samoa, Thailand and Vietnam from EAP. (MIX, 2009)

Table 1

Tabe1 shows that 313 MFIs in South Asia and EAP serve more than 47 million

borrowers with more than 10 billion USD loans sourcing from more than 7 billion USD of

deposits.







Outreach and Scale

The above figure shows growth in loan portfolio in the year 2007. Over the period,

the Gross loan portfolio (GLP) in Asia grew at more than 60%. In the above the

growth of MFIs varies significantly by country. The growth rate of Indonesia,

Bangladesh and Nepal is less than the average growth rate of region. The growth

rate of Bangladesh is slow even despite having many leading MGIs in Bangladesh.

The growth rate of Indonesia and Nepal are slow because of restricted area of

operations. On the other hand Vietnam, India and Cambodia earned more than 50%

of average regional growth rate. India and Cambodia earn huge commercial

borrowings for their substantiality while Vietnam growth rate relied of concessional

funds and grants.







Figure 1 shows the share of loan Portfolio for South Asia by country

From the above figure we can see that from various countries only growth rate of

India have been increased from 31% in 2006 to 41% in 2007. The growth rate of

loan portfolio only of other countries is showing decreased or a constant growth rate.







Figure 2 shows the share of loan portfolio for East Asia/ Pacific by country

The above figure shows the share portfolio for East Asia/ Pacific. From the figures

we can see that growth rate of loan portfolio of 2 countries Philippines and

Cambodia have increase.







The table 3 shows top 10 MFIs by number of active borrowers in the year 2007.

The top 10 MFIs in Asia by number of active borrowers include banks, non banking

financial intermediaries (NBFI) and NGOs. From the above figure Grameen Bank in

Bangladesh topped the list of top 10 MFIs. These top 10 MFIs account to serve 70%

of borrowers.







Top 5 countries by total Savings Mobilized in the year 2007

The above figure shows savings done by MFIs clients.

Out of the total 7 billion USD of deposits acquired in Asia 815 alone is been

accumulated by BRI in Indonesia. Deposits per clients are highest in Cambodia at

1180 USD, which shows that MFIs in Cambodia is most preferred for savings and

loans.







20 largest microfinance institutions with Number of borrowers of 2007

Fig 3.2 Source: themix.org

Fig 3.2 shows the 20 largest Microfinance Institutions of 2007. It shows the number

of borrowers from these 20 largest Microfinance Institutions of the world. From the

above figure we can see that the huge number of borrowers is from Bangladesh and







Indonesia. And in the year 2008 the number of borrowers has been increased. The

least number of borrowers are from India with only 1000 borrowers. This figure

shows that the popularity of Microfinance is huge in countries like Bangladesh and

Indonesia.

Number of savers, 20 largest microfinance institutions of 2007

Fig 3.3 Source: themix.org







Fig 3.3 shows number of savers from 20 largest microfinance Institutions of 2007.

The above figure shows that 100 millions of people saved their money with large

Microfinance Institutions of India, Mexico, South Africa, Bangladesh and Indonesia.

These savers in the year 2008 show a decline in their savings because of financial

crises.

Fig 3.4 Source: Microfinance Statistics, Volume 18, December 2005

The Fig 3.4 shows growth in savings Portfolio in Microfinance Institutions. The above

highlight that the number of savings have been increased over a period of time in

microfinance Institutions. The fig shows that the number of savings Portfolio in the

year 2001 was 10 billion and it had increased to 20 billion in the year 2005.








The figure 3.5 shows the growth in the number of branches of Microfinance. The

number of branches have incresaed from 5000 in the year 2001 to around 8000 in the

year 2004. This shows that there were a great demand for Microfinance for satisfying

the financial needs of people.








Fig 3.6 shows the share of microcredit in total domestic credit in Bangladesh. This fig

shows that microfinance are very useful form of credit for borrowers in Bangladesh. As

compared to Microcredit the others forms of financial institutes shows a decline with

lowest demand for administrative divisions







Fig 3.7 Source: Bangladesh Microfinance Statistics 2007

The above figure shows the demand for Microfinance loans on urban and rural

basis. The demand in both the areas has increased for microfinance loans.







Benefits of Microfinance

Microfinance is a useful tool for 900 million poor people who live in rural areas of

developing nations. Most of the poor people lack basic financial services that would help

poor people to manage their expenses and savings. Poor people with no collateral or

with less income faced many problems while taking loans from banks or any from any

financial Institutions. (Bage, 1995)

Microfinance has shown a rapid growth over the last two decades because various

NGOs, bilateral donor agencies, developed and developing county governments all

support the development of microfinance. Microfinance is very useful for various

reasons which are as follows (ADB, 2000)

Poverty Reduction

Microfinance is a way to fight against poverty in rural areas where the world’s poor

people lives. It provides with poor people with facilities like savings, credit, insurance

and money transfers. (Bage, 1995). Increased access and efficient facilities of

microfinance will help poor to smoothen their consumption, build their assets, enhanced

their earning capacity and they will enjoy an happy life.

Changed in perception







Many financial providers in earlier years felt that poor people fail to repay their loans

and as they are not creditworthy. But studies have shown that poor people have high

repayment rates. In Grameen Bank the repayment rates are as high as 94% (Bage,

1995)

Huge savers

Around 1990s it had been realized that poor not only want credit but they also want to

save their money.

For example, the Unit Desai of Bank Rakyat Indonesia, which has been successful

financial providers in Indonesia, stated that they have more savers than their borrowers.

In their banks there were 28 millions of savers as compared to 3 million borrowers.

(Bage, 1995)

Economic growth and development

Microfinance will helps to use a better technology, it will help in improvement of

resource allocation and will help to promotes markets and thus leads to overall

economic growth and development (ADB, 2000)

Empowerment of women

As reported by Microcredit Summit Campaign in the year 2001 microfinance has

reached to 55 million individuals out which more than 21 million of those clients were

women. (Bage, 1995). It can provide an effective way to assist and empower poor

women and thereby help them to gain a social status and self respect in a society.

Overall development of financial system

Microfinance can lead to overall development of the financial system by integrating

various financial systems together. (ADB, 2000)







Disadvantage of Microfinance

Borrower Unfriendly Products and Procedures

Microfinance targets rural people who are illiterate and uneducated. Many MFIs

products require huge documentation and collateral from poor people that is why Micro

financial products are not reaching in rural areas. (basix, 2003).

Inflexibility and Delay

The systems and procedures of Micro financial products are very rigid which require a

lot of time for the borrower and demotivate them to take further loans from microfinance

institutions. (basix, 2003)

High interest rates: the interest rate of microloans are higher than commercial banking

loans which make it difficult for the poor to repay the loan and that is why poorest of

poor are unable to avail the benefits of microfinance.

High Transaction Costs, both Legitimate and Illegal

Microfinance targets rural population whose stay in the depth of rural areas even though

the interest rate offered to borrowers is regulated but the transportation cost involved in







reaching the poor population is huge. Thus making microfinance less attractive to rural

people (basix, 2003)

Lack of training:

Microfinance provides poor with the availability of funds so that they can set up their

own enterprise but these institutes do not provide training facilities to their members.

Despites all these above reasons Microfinance have proved to be a useful for poor

population.

The World Bank reports that the most of the societies discriminate on the basis of

gender and because of which all these societies have a high increase in poverty,

reduced growth of economy, weak governance and a very low standard of living.

(Lalnunmawaia, 2008). Thus it is very important for every country to resist this gender

quality and give importance to women’s empowerment.

The Human Resource Development article taken from Lalnunmawaia,(2008) reports

that the women still exists in the 70% of the world’s poor and two third of the World’s

illiterate and in a job sector only 14% of women occupy managerial jobs whereas the

others like 10% in Parliamentary seats and 6% in cabinet position. The report also says

that the 70% of the 1.3billion people who are getting less than $1 a day are women.

“Women are essential agents of political and economic change.” (Human Development

Report, 1995). Thus Microfinance in today’s world are the tools that can assist in

reducing poverty as well as empowering women thus giving them economic

independence, increased self esteem and a better life.

The article from Lalnunmawia, (2008) gives an example of a project undertaken in

Nepal for women empowerment where the figure showed 68% of increase in decision







making ability in women, in areas of family planning marriage of children, property

investment as well as children sending to schools.

The mixture of education and credits had helped women to get in to a stronger position

in the society, as well as showed increased ability in managing household funds as well

as managing enterprise funds.

The article from Jha(2009) reports that the repayment rates among poor and women

are very good as the poor people are ready to bear the interest, despites of getting high

interest rates of around 17 to 32%. Micro finance defaults are zero compared to the

better of people who gets the loan easily and still they are in defaults.

Over the past few years or to be clear from the late 1950’s the increased entry of

women into workforce had showed a drastic change in the companies society, family

and economy.

The example of Africa, Asia, Latin America where around 80%, 60% and 40% of women

produce and prepare food but also sell it outside which gives them a better knowledge

of customer and local market. The report also suggest that in Africa where women

consist of more than 60% in the rural, urban force giving a contribution of 80% in

production of food but after this also they receive a very less income i.e less than 10%

which is usually provided to farmers.

Women should balance all the demands equally between their work, as well as family

role. As time is very much important as whole livelihood depends on the ability to meet

both of these demands. Even after all these women participation is just considered as

an extra penny for family livelihood as well as micro enterprises owned and operated

by these women are considered to meet the basic needs instead of a profitable income.

As said earlier about the Human Development Report of women living on less than $1 a

day in the world easily shows that women are not considered to be equal as man in

some part of many countries because of which they are paid a very low salary as well

as high working hours. The best example for this is the case of Cameron women who







works for at least 10 hours a day and the income they get at every month is much less

than Cameron’s minimum wage which is 60USD.

The reality of this exploitation as well as fight against this adverse environment in some

situation make some women to be happy with non financial benefits such as satisfaction

from social contacts.

All these articles and reports easily shows that Micro finance is a way to reduce poverty

and empower women for economic independence as well as to give them a better life.

Microfinance helps women as well as the poor people to get income in their hands

which lead to extensive recognition, increased self esteem, and helps them to become

financially independent and thereby help them to contribute financially to the family as

well as the society and the communities.

Analysis

Survey on Microfinance Institutions

A Research was undertaken in order to analyze the performance of Microfinance

Institutions in providing a short term loans to people who are staying in a rural areas

where formal institutes like Bank fails to provide their banking services to these rural

people.

Purpose

The motive behind conducting this survey is to identify the performance of Microfinance

Institutions, the number of clients they have offered their services, the cost involved by

them to provide short term loans and credit to rural people, the interest arte charged by

them to provide loan and accept deposit from them and their area of operations.







Participants and the Sample Size of a Survey

The participants of our survey consist of 10 Microfinance Institutes. I have selected

these institutes on the random basis.

Methodology Used in doing this research

The methods used in this survey were primary method of research. The survey was

done with the help of questionnaire to collect data for these Microfinance Institutions.

The data from these institutions were collected by contacted key personnel like

manager of the Institutes and Human resource managers. The questionnaire was send

to these institutes through mail. From this survey questionnaires were sent to 10

Microfinance Institutions. The names of these institutions are as follows.

1. Cambodia Microfinance Association

2. Grameen bank

3. ACCION

4. Mucoba

5. Cooperative Rural Bank of Bulacon

6. Voluntary health education and rural development society

7. Bank Rakyat of Indonesia

8. IFAD

9. KIVA

10.Vanity

The Questionnaire consists on some of the important information which were needed in

our research study like country in which these Microfinance Institutions are established,

the legal status of these institutes, number of borrowers and savers served by these

institutes, the interest rate charged by these institutes and the institutes total

outstanding loan amount in the year 2009. The questionnaire was divided in three parts

which consist of general information of MFIs, Products and services of MFIs and

financial performance of MFIs. The general information regarding MFIs provide details

regarding establishment year of MFIs, the number of active borrowers in these MFIs,







number of active savers in MFIs, the lending methods used by these MFIs, the legal

status of MFIs. The second part of questionnaire consist of information regarding

products and services of these MFIs and the interest rates charged by them to provide

loans and accept deposits from their clients. The third part of questionnaire consists of

information relating to financial performance of MFIs like outstanding loan amount of

MFIs and total assets of these MFIs.

Analysis of data

From the 10 Microfinance Institutes 70% of institutes responded to our questionnaire.

They are the ones who have completed the questionnaire and send their responses to

us through mails. After collecting questionnaires from these Microfinance Institutions

through mail we tried to evaluate questionnaire’s information. As a researcher form this

survey we have tried to evaluate data on various aspects like performance of these

Institutes, their growth rate, their products details.

Results and discussion

In this result and discussion I have tried to depict the results of our survey research.

Here we have tried to capture data regarding functioning of Microfinance institutes, their

performance, their objectives and their profitability. The questionnaire consist of three

parts like identification part of MFIs, the products and services part of MFIs and financial

performance parts of MFIs







I. Identifications of the Microfinance Institutions

Country of Operations of Microfinance Institutions

Country of Operations Number of Institutions

Bangalesh 3

America 1

Bulacan 1

Tanzania 1

Cambodia 1







Country of Operations

Bangalesh AmericaBulacanTanzaniaCambodia

From the above diagram we can say that the numbers of microfinance institutes we

have surveyed are located in the Bangladesh, followed by America(1), Bulacan (1),

Tanzania (1), Cambodia(1). This shows that the awareness about microfinance is more

in Bangladesh and people are benefiting from these Microfinance Institutions in

Bangladesh. Microfinance helps poor people especially rural people to avail the

facilities of loans and deposits and benefit from these facilitates. Microfinance helps

people to enhance their economic conditions and thereby help country to achieve their

economic objective.

Establishment year of MFIs

Establishment Years of

Microfinance Institute

Number of Institutions

below 1970 1

1970- 1980 3

1980-1990 1

1990-2000 1







beyond 2000 1

below 1970

1970- 1980

1980-1990

1990-2000

beyond 2000

0%10%20%30%40%50%60%70%80%90%

100%

Establishment years of MFIs

Number of Institutions

From the above data we can say that the awareness regarding microloans and

microfinance was started early but the level of awareness increased from the year 1980

where number of institutes started providing microloans and microcredit to rural people

in rural areas.

Total Number of active borrowers

Number of active

Borrowers

Number of MFIs

Less than million 3

More than Million 4







Number of active Borrowers

Less than million More than Million

Today there are many people who benefit from Microfinance. Our study has shown that

the number of people using microfinance facilities have increased rapidly due to the

awareness created by many institutions, due to many players entering into these market

to help poor people and to earn more profit.

Number of active Savers

Number of

active savers

Number of Microfinance Institutes

Less than million 3

More than Million 4







Number of Active Savers

Less than million More than Million

The above figure shows that there are more than millions of people who would like to

save their money with microfinance Institutes. This could be because of reasons like

rural people have only one option to save their money or due to the reliability provided

by Microfinance institutes in providing banking facilitates to rural poor people.

Lending Methods used by Microfinance Institutions

Lending Methods Number Of Microfinance

Institutions

Individual 0

Group 0







Both 5

Village Banking 2

Individual

Group

Both

Village Banking

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Lending methods of MFIs

Number Of Microfinance Institutions

Many Microfinance institutes prefer to provide both individual and group borrowing and

lending facilities to their clients.

Status of MFIs

Status of MFIs Number of MFIs







Registered as Profit

Organization

2

Registered as Non- profit

organization

7

Status of MFIs

Registered as Profit OrgnisationRegistered as Non- profit orgnisation

Many of the microfinance institutes are registered as non profit organizations because

their main objective is to serve their society rather than making profit. Microfinance

institutes help poor people in rural areas by providing short term loans to them, by

accepting their deposits and by providing an opportunity to rural people to run their own

small enterprise.

Legal Status of MFIs

Legal Form of MFIs Number of MFIs







NGO 2

Cooperative 3

Bank 2

NGO Cooperative Bank0

0.5

1

1.5

2

2.5

3

3.5

Legal status of MFIs

Number of MFIs

Microfinance Institutes provide their services through forming a NGO or a cooperative

societies or a bank.

II. Products and Services







The second part of our questionnaire provides details on the products and services of

MFIs and the rates of interest charged by MFIs surveyed by us.

How many different types of loan product do the MFIs provide?

Loan Products Number of MFIs

Two 0

More than 2 7

Two More than 20

1

2

3

4

5

6

7

8

Loan products provided by MFIs

Number of MFIs

From the above diagram we can say that today MFIs provide their facilitates through

various products and services and thereby enhancing their product lines by satisfying

different needs of their customers.







What is the effective interest rate of the main loan Product?

Interest Rates Number of MFIs

10% - 20% 1

20% - 30% 2

30% - 40% 4

40% - 50% 0

10% - 20% 20% - 30% 30% - 40% 40% - 50%0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Interest Rates of MFIs

Number of MFIs

In our study we have mention that Microfinance Institutes charge higher rate of interest

to their clients and from this diagram we can say that around 30 to 40% rate of interest

is charged by the MFIs surveyed by us.







III. Financial Performance

The third part of our survey deals with providing information regarding financial

performance of MFIs by analyzing their Gross loan portfolio and total assets of MFIs.

Gross Loan Portfolio

Gross Loan Portfolio (in Millions

US $)

Number of MFIs

1 to 3 2

3 to 6 3

6 to 9 2

1 to 3 3 to 6 6 to 9 0

0.5

1

1.5

2

2.5

3

3.5

Gross Loan Portfolio (in Millions US$)

Number of MFIs

The above diagram shows that majority of MFIs survey by us has a loan portfolio of

around 6 million US $ which shows that there are vast number of people lacking

banking facilities and they are preferring Microfinance Institutes for their loan

requirements. And thus demand for Microfinance Institutes is increasing day by day.







Total Assets (In US $)

Total Assets (in US $) Number of MFIs

less than Millions 2

More than Millions 5

Total Assets (in US $)

less than Millions More than Millions

Total assets of MFIs consist of customer deposits, and their financial and human

resources. The above diagram shows that the total number of MFIs are having total

assets of more than billion US $ which shows that they have a huge assets to pay back

against their customer deposits and towards any loan taken by them for their

operations.







Discussion

In our research we have done one survey for collecting primary data on Microfinance

Institutions. The main objective of our survey was to identify various Microfinance

Institutions, their product and services for providing short tem loans to their clients, their

financial performance in serving their customers and the profitability achieved by these

Institutions. In order to conduct our survey we selected questionnaire method of data

collection for collecting data from Microfinance institutions. For doing this survey 10

microfinance Institutes were selected on the random basis and were contacted so that

they can give their valuable time to us for filling up the questionnaire send by us to them

through emails. Questionnaires were distributed through emails to 10 Microfinance

institutions but out of 10 we got 7 completed questionnaires. Following are some of the

institutes contacted by us for this survey

1. Cambodia Microfinance Association

2. Grameen bank

3. ACCION

4. Mucoba

5. Cooperative Rural Bank of Bulacon

6. Voluntary health education and rural development society

7. Bank Rakyat of Indonesia

8. IFAD

9. KIVA

10.Vanity

The questionnaire consists of three parts. The first part consists of Identification of

Microfinance Institutions which deals with questions like establishment year, objective of







the institute, the number of borrowers and savers in their Institutes. The second part

consists of information regarding products and services of the Microfinance Institute like

how many loan products they offer to their customers, interest rate charged by them.

The third part consists of information regarding financial performance of Microfinance

Institutes like outstanding loan portfolio and the total asset of Microfinance Institutions to

repay their creditors.

From the 7 Microfinance institutions surveyed by us many institutes were established in

Bangladesh followed by America, Bulacan, Tanzania and Cambodia. The existence of

many Institutions in Bangladesh shows that there is a huge awareness and that is why

huge rural population of Bangladesh are benefiting from the Microfinance services

The establishment year of Microfinance Institutions shows that from the year 1980 the

concept of Microfinance gained it’s momentum and therefore out of 7 three institutes

was established in the year 1980.

Our survey shows that there is large number of active borrowers of Microfinance

Institutions and therefore rural people are encouraged to use the facilities provided by

Microfinance Institutions. The number of savers or depositors is also more than million

which show that rural people are finding Microfinance Institutions as a reliable source to

deposit their savings. From our survey we can say that many microfinance Institutions

used group lending method to lend their money to rural people as there is a huge cost

involved in reaching a rural population group lending found to be suitable way by many

institutions to lend money to rural population. Many Microfinance Institutions registered

themselves as non profit organizations whose main objective is to provide money to

poor people usually rural population and enhance their economic conditions.

The second part o questionnaire deals with products and services of Microfinance

institutions. From these questions we can say that majority of Institutions provide more

than 2 products to satisfy unique needs of rural people. The microfinance charges a







high interest rate of around 30 to 40 % which is more than financial institutions like a

bank.

The third part of questionnaire provides information regarding financial performance of

Microfinance institutions and from our survey we can say that the total outstanding

loans distributed by Microfinance Institutions are around 3 to 6 million US $ which

shows the reliability of Microfinance Institutions in gaining customers. From the Total

Assets of MFIs we can say that majority of Institutions are having total asset of more

than one billion US $ which shows that a huge potential of microfinance Institutions to

repay their debts.

Findings of our study

Our study has depicted the following conclusions

There are many Microfinance Institutes proving their facilities to their poor people in

the rural areas. The awareness about microfinance loans and deposits are more in

Bangladesh as compare to other countries as shown in our research

The Microfinance gained its popularity after the year 1980 and thereby expanding

the concept of microfinance in many countries.

Today microfinance Institutions consist of millions of borrowers and savers due to

the awareness created by many institutions, due to many players entering into these

market to help poor people and to earn more profit.

Microfinance institutes today use group method to provide their facilitates to group of

people.

The main objective of many Microfinance institutes is to provide benefits to their

society rather than earning profit.

The microfinance institutes can be established in many forms like as cooperative

societies, or Ngo or as a bank.

There are different types of loans and deposits available to rural people for availing

the facilities of Microfinance







Microfinance institutions charge a high rate of interest of around 30 to 40 %.

The total assets and the loan portfolio available with microfinance s huge today

because of increased demand for their facilitates by poor rural people.

Limitations of our survey

In our survey we have found some limitations while doing this survey.

In this survey we have surveyed around 10 Microfinance Institutions but 3 of

them have not completed the questionnaire properly.

The scope of our survey is less as we have surveyed only 10 microfinance

institutions if we would have included more institutions we would have got

accurate or general data.

The questionnaire method was time consuming because there were some

institutions that refused to fill the questionnaire; if all the institutes have

participated efficiently the result of our survey would have been more accurate.







Conclusion

Microfinance is a financial service for people poor in rural areas. It is a provision of

providing microloans to poor with out any collateral. With the increased outreach and

demand for microfinance, MFIs have started providing various financial services

besides loans like deposits, money transfer, insurance and microcredit.

In the first section we have started our report by introducing about microfinance by

highlighting important features of microfinance.

Microfinance plays an important role in reduction or poverty and empowerment of poor

people. It help them to enhance their socio-economic conditions through income

generating activities by giving them an opportunities to become a small entrepreneur

and mange their own business.

Even today many rural areas do not have sufficient formal financial support to fulfill their

needs and therefore microfinance has great potential of growth in such areas.

As Reported by Grameen Bank poor when provided with sufficient financial services like

loans they tends to have high repayment rate as compared to other people with high

financial support. The repayment rate as reported by Gameen bank was 94%.







In the second part i.e. in literature review we have studied the concept of microfinance

by giving the origin of microfinance. Microfinance is not a new concept it had prevailed

many years ago with different names like of ”susus” in Ghana, “chit funds” in India,

“tandas” in Mexico and “cheetu” in Sri Lanka.

Informal financial institutions emerge in the 15th century in Nigeria to extend money to

poverty in Europe. Then in 1970 Irish loan fund system started and further in 1980 credit

cooperatives were in started in Germany. A great increase in financial services evolved

in 1970 with huge number of financial institution providing funds to poor people.

Bottom of Pyramid

Bottom of pyramid is a concept introduced by C K prahalad. The main focus of bottom

of pyramid was to provide goods ands services for the people who are in bottom of

pyramid. As stated earlier bottom of pyramid consist of very poor people who’s per day

income is less than 2$ and there are 4 billion poor people in this bottom who wants

innovative products to fulfill their needs. Microfinance is one of the products which have

been introduced for poor to fulfill their financial needs through short loans and deposits.

Different models of microfinance

To satisfy the needs of poor there have been various methods used to provide financial

services to poor people in a rural area. The various methods been used were

Associations, Bank Guarantees, community banking, cooperative societies, Grameen

model, SHGs and many more which have been stated earlier.

Poverty reduction through Microfinance

Microfinance is a useful tool of poverty reduction. Microfinance helps poor people to

improve their lives especially women. There have been many institutions which have

helped to improve the lives of poor people. It have been experienced that poor if

provided with loans are in better positions to repay in time and therefore for MFIs the







repayment rate is very high. Various Institutes like Grameen Bank and Bank Rakyat

Indonesia (BRI) in Bangladesh helped many poor people to improve their socio-

economic lives.

Empowering women through microfinance

Microfinance is a tool for empowering women. Microfinance provides funds to women to

improve their lives. It helps women to establish their own enterprise and to improve their

socio-economic conditions.

It helps women to actively participate in micro financing activities and at the same time

manage her families. Microfinance motivates women to maintain their self respect

through entering in income generating activities.

In the Analysis part I have tried to find the outreach of Microfinance in Asian-Pacific

region and the benefit of microfinance provided to these region. The growth rate of

microfinance services in Asia Pacific region are around 60%. The Gross loan portfolio of

Indonesia, Bangladesh and Nepal have shown a less than average growth rate and

countries like India Philippines and Cambodia have shown 50 % growth above the

average growth rate of Asia-Pacific region. From the 20 largest MFIs Bangladesh and

Indonesia have shown a huge number of borrowers. From the above MFIs people

would like to save their money with MFIs of India, Mexico, South Africa, Bangladesh

and Indonesia. The analysis shows that there have being increased in the number of

branches of MFIs and Bangladesh is the huge providers of Microfinance to both urban

and rural people.

In the discussion part I have tried to analysis the growth of microfinance, the benefits of

Microfinance in the lives of poor, limitations of Microfinance Institutions in reaching the

poor people.







Microfinance today have achieved a huge growth in reaching the poor people and it has

started to providing various financial services besides credit like money transfer,

deposits and insurance due to the demand for Micro financial products. . We have also

analyzed that poor people gives more important to savings than to borrowings. The

growth of microfinance is possible through the support from governmental Institutions,

various NGOs and various Credit cooperatives towards Micro financial products for

improving poor financial conditions. To explain the growth of microfinance we have tried

to give example of a regional distribution of microfinance in India. From this research we

have came to know that Microfinance services are dominating in southern part of India.

States like Andhra Pradesh performing well through existence of huge number of MFIs

in Andhra Pradesh.

Microfinace is useful tool for 900 million poor people in the world. It provides financial

support to poor people in rural area where formal and informal sources of financial

institutions failed to provide benefits to rural people.

Microfinance helps to change the perception of financial institutes who believe that poor

people are not creditworthiness and they fail to repay their loans. But as experienced by

Grameen Bank poor people are in better position to repay their loans and the

repayment rate of poor people is around94%. It helped to empower poor especially

women, reduces poverty, helps to gain a social status in the society.

Many MFIs take collateral from poor people and provides loans to them through huge

procedures. Many MFIs failed to reach in the depth of rural area. The procedures for

getting loans are very long which de-motivate rural people to take a loan from MFIs.

There is a huge transaction cost involved by MFIs.

SHGs are a useful method for women empowerment. The main objectives of SHGs is to

help their members by lending money to them. SHGs are very famous in Andhra

Pradesh as there are many women working in a SHGs to improve their lives. In Andhra







Pradesh there are around 15 to 20 groups. SHGs provide women a platform to work for

their own self. In Andhra Pradesh there are many women who are doing marketing of

products in depth of rural areas and also managing her family life.

The microloans provided by MFIs have a high interest rate as compared to commercial

bank. There are many reasons to support the high cost of funds of MFIs like interest are

the only source of income for MFIs. They incur huge operating expenses like

administrative expenses and personnel expenses as Microfinance is a labor intensive

product it requires a huge number of people to be employed. They also incur huge

transportation cost by reaching to poor people in the depth of the rural area.

To explain the concept of Microfinance I have also studied one bank in my project that

is Grameen Bank of Bangladesh. Grameen bank is MFIs which was started in the year

1970. Grameen is the first bank who started giving loans to poor people without any

collateral. The aim objective of Grameen bank was to benefits poor people of

Bangladesh.







Recommendations

Form our survey we have found that there are around 1.6 million rural populations in the

world who are still below the poverty line. And therefore it is important to develop a

useful device for rural poor people so that they can avail the benefit of banking and

financing facilities in their areas. Microfinance is one of the useful tool of eliminating

world’s poverty. Microfinance is a facility of providing a short term loans and advances

to poor population in rural areas.

Besides microfinance to uplift poor people there can be various strategies like grants,

employment programs by government, non financial facilities. Grants by various

organizations can help to overcome various problems like social isolation, lack of skills,

low self esteems. Grants help poor in educating them and make them self-sufficient. A

new project of government like building of roads, bridges provides opportunities for rural

people to generate income for their livelihood. Employment programs prepare the poor

for self-employment. Non-financial services like literacy class and business

development opportunities help poor to improve their lives.







As reported earlier Microfinance charges a high interest rate to poor people as

compared to commercial banks. This high rate of interest charge by MFIs de-motivate

many poor not to avail the benefit of Microfinance services and therefore it is very

important for MFIs to reduce the rate of interest so as to reach huge number of rural

poor populations which have been neglected by formal and informal sector of finance.

From collecting primary data we have done survey through questionnaire as mentioned

earlier. During our research and during the time of data we have experienced some

difficulties which we would to share and we would also like to provide some

recommendations so that it will help for further research.

More institutions should have been involved in our study so that the results would be

more generalized in nature.

Further research on this topic will help Microfinance Institutions to improve their

service effective and help poor people more effectively.

Bibliography

ADB, 2010, Development of Microfinance: A Report from the Microfinance

Information Exchange, Inc. and Intellecap March 2009

Balasubramanian, 2010, the Hindu Business Line, Microfinance, a success story.

Båge, 1995, Microfinance: Macro benefits, savings-the unforgettable half of

microfinance

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Sanasafe.lk

CGAP, 2010

Questionnaire

I. Identifications of the Microfinance Institutions

Name of the Microfinance Institution

Country of operations







Establishment year of Microfinance Institute

Total Number of active borrowers

Number of active savers

Lending Methods

Individual____ Group _____ Village Banking___

Both Individual & Group___

Status

Registered as Profit Organization___

Registered as Non-profit organization___

Legal Form

NGO____ Credit Union____ Bank____

NBFI____ Rural Bank____







II. Products and Services

How many different types of loan product does the MFI provide?

One or Two____ more than two____

What is the effective interest rate of the main loan Product?

10%____ 10% - 20%____ 30% - 40%_____ 40% – 50%________

III. Financial Performance

Gross Loan Portfolio (in US $)______

Total Assets (in US $)_____


















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