Linkages of Microfinance and Microenterprises
September 2021
Abid Hussain, PhD
Food Security Economist &
Group Lead, Socio-economics
ICIMOD, Nepal
• Low productivity and income in mountains
• High risks (climatic, natural and financial) associated with
microenterprises in mountains
• Incentivize youth, women and vulnerable groups for productive
contribution to local economy
• For efficient use of mountain resources (i.e. land, water, forest,
minerals etc.)
• For integrated growth (within and cross sectors, i.e. value chains,
water management of agriculture, clean energy across sectors etc.)
• To tap emerging opportunities and potentials (i.e. agri. value chains,
tourism etc.)
Why financial services for microenterprises in
mountain economy?
• Financial literacy on the productive use of loans, remittances,
insurance and savings)
• Overall banking/institutional financial services
• Credit/loans (In the HKH, around 40% farm HHs borrow from
informal sources with high interest rate to cope with risks and
shocks)
• Insurance facility to cover risks induced by climatic and
natural hazards
• Facility of saving accounts (individual or collective)
• Remittance transfers (inward and outward). In HKH, 38% HHs
has out-migrants who send remittances.
• Business accounts in banks/institutions
Types of financial services required for
microenterprises
• Microcredit - Small credit line facility to targeted people having
business/enterprise or development purpose
- Associated interest rate (occasionally free of interest)
- No need for physical assets as collateral
- Disbursed against personal or group guarantee
- Socially inclusive (i.e. men, women, differently able people,
small/marginal farmers, all vulnerable groups etc.)
- Meeting short term capital needs and repayment plan
Microfinance: concept and key features
• Microfinance (credit++)- Includes range of financial services, i.e. credit, deposit, saving
and insurance
- Entrepreneurship/startups remain at the core the facility
- No need for physical assets as collateral
- Disbursed against personal or group guarantee
- Socially inclusive (i.e. men, women, differently able people,
small/marginal farmers, all vulnerable groups etc.)
- Long term objective for covering risks, improving productivity,
supporting repayment capacity and welfare.
- May include social mobilization for saving and adequate use of
financial services.
Examples: services provided by Grameen Bank (Bangladesh,
Akhuwat (Pakistan)
Contd.
• Formal
- Formal institutions like banks, cooperatives, saving centres,
NGOs and other lending agencies offer financial services
• Informal
- Financial services from relatives, friends, money lenders,
middlemen etc. In many instances, high interest rate is
involved.
- Collective fund (i.e. indigenous contribution system in
South Asia, ROSCAs in Latin America, Asia and Africa)
• ‘In-cash’ plus noncredit services
- Credit is in cash with non-credit services
• ‘In-kind’ plus non-credit services - Credit is in kind with non-credit facilities (Ehsaas programme
in Pakistan)
Types of microfinance
• Individual - Credit and other services are offered based on individual
guarantee
• Group based - Financial services are offered based on group guarantee
• Government - If public sector institutions provide financial services
• Non-government - If private and non-profit organizations provide financial
services
Contd.
• High fungibility if non-credit services and monitoring systems are
inadequate
• Likelihood on increased indebtedness if fungibility occurs or risks
are not covered by insurance.
• High interest and less control over decisions if availed from
informal sources
• Constraints to digitalization in mountains (i.e. most people in
mountains do have access to electricity, mobile communication
services, internet, and smart phones)
• Lack of awareness about clean/green microenterprises and its
weak linkage with microfinance
• High transaction cost of micro amounts
• Supply and demand gap
Challenges associated with microfinance
• No requirements for collateral (suits micro-entrepreneurs with
limited assets)
• Largely, low cost businesses in mountains which require
microfinance
• Freedom for entrepreneurs to plan and execute business models
(i.e. linked to niche products and seasonality)
• Socially inclusive (all vulnerable groups can benefit from) which
suits to vulnerable mountain people
• Coverage of climate and non-climatic risks (mountains are more
prone to risks)
• Mountain services (i.e. tourism) and ecosystems may also benefit
(non need for tangible production).
What can make microfinance more
attractive in mountain microenterprises?
Thank you