Micro Finance-Prime Motto

Outreach and sustainability are two critical objectives for microfinance institutions (MFIs).

Outreach is also an indicator of the institution’s social mission—to scale up and provide services to as many people as possible.

Sustainability, in contrast, requires operating at a level of profitability that allows sustained service delivery without dependence on subsidized inputs

This represents the institution’s commercial strategy. For MFIs, managing growth is the process of balancing the objectives of outreach (social mission) and sustainability (commercial strategy).

History of Microfinance

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

Today, the use of the expression micro financing has its roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Mohammad Yunus, were starting and shaping the modern industry of micro financing. The main reason why microfinance is dated to the 1970s is that the programs could show that people can be relied on to repay their loans and that it´s possible to provide financial services to poor people through market based enterprises without subsidy. Shore bank was the first microfinance and community development bank founded 1974 in Chicago.

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

Another organization, the caisse populaire movement grounded by Alphone and Dorimène Desjardins in Quebec, was also concerned about the poverty, and passed those two tests.

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

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

The International year of Microcredit consists of five goals:

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

MFIs are there to appreciate that every single individual on earth has both the potential and the right to live a decent life. Across cultures and civilizations, Yunus and Grameen Bank have shown that even the poorest of the poor can work to bring about their own development.
Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions. Economic growth and political democracy cannot achieve their full potential unless the female half of humanity participates on an equal footing with the male.
Yunus’s long-term vision is to eliminate poverty in the world. That vision cannot be realised by means of micro-credit alone. But, in the continuing efforts to achieve it, micro-credit can play a major part.”

The definition/objective of Microfinance

“Microcredit, or microfinance, is banking the unbanked, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral.

“(Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized and it is definitely not the lack of skills which make poor people poor, but the sufficient financial support at the needy hours.

Microcredit belongs to the group of financial service innovations under the term of microfinance, other services according to microfinance is micro savings, money transfer vehicles and micro insurance. Microcredit is an innovation for the developing countries. Microcredit is a service for poor people that are unemployed, entrepreneurs or farmers who are not bankable. The reason why they are not bankable is the lack of collateral, steady employment, income and a verifiable credit history, because of this reasons they can´t even meet the minimal qualifications for a ordinary credit. By helping people with microcredits it gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business generating or sustain an income and often begin to build up wealth and exit poverty. The amount of money that´s lent out seldom exceeds USD 200 or its equivalent.

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

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

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

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

Architectures of Micro Finance Companies

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Types of services offered by MIFOS

Micro savings – A possibility to save money with no minimum balance in their savings account. Allows people to retain money for future use or for unforeseen expenses. In SHG’s (Self Help Group) the members save small amounts of money, a month in a group fund. Members may borrow from the group fund for a variety of purposes ranging from household emergencies to school fees. As SHG’s prove it’s capability of managing their funds well, they may borrow from a local bank to invest in small business or farm activities.

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

Micro leasing – For entrepreneurs or small businesses who can´t afford to buy paying full cost, this provides an opportunity to lease equipment, agricultural machinery or vehicles.

To be contd.,