Microfinance initially had a limited definition - the provision of microcredit for poor and small businesses that did not have access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) a group-based model, in which some entrepreneurs unite to apply for loans and other services as a group.
Over time, microfinance has emerged as a larger movement whose object is "a world in which everyone, especially poor and socially marginalized people and households have access to a wide range of affordable and high quality financial products and services , including not only credit but also savings, insurance, payment services and fund transfers. "Many of those promoting microfinance generally believe that access will help the poor out of poverty, including participants in the Microcredit Summit Campaign. For many people, microfinance is a way of promoting economic development, employment and growth through the support of micro-entrepreneurs and small businesses; for others it is a way for the poor to manage their finances more effectively and take advantage of economic opportunities while managing risks. These terms have evolved - from microcredit to microfinance, and now 'financial inclusion'.
Microfinance is a broad service category, including microcredit. Microcredit is only about providing credit services to poor clients; only one of the aspects of microfinance, and both are often confused. Criticism often refers to some microcredit diseases that can create debts. Due to the diverse contexts in which microfinance operates, and various microfinance services, it is also unwise to have a general view of the impact of microfinance possible. Many studies have tried to assess its impact. Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does, however, is to improve financial inclusion.
Video Microfinance
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Microfinance and poverty
In developing countries and especially in rural areas, many activities to be classified in developed countries as finance are not monetized: that is, money is not used to implement them. This often happens when people need money services that can provide but do not have the shareable funds needed for the service, forcing them to go back to other ways to get it. In their book The Poor and Their Money, Stuart Rutherford and Sukhwinder Arora cite several types of needs:
- Life Cycle Requirement : such as marriage, funerals, childbirth, education, home construction, widows and old age.
- Personal Emergency : such as illness, injury, unemployment, theft, harassment or death.
- Disasters : like bonfires, floods, whirlwinds and man-made events such as war or rounding of dwellings.
- Investment Opportunities : expand business, buy land or equipment, repair housing, secure jobs, etc.
People find creative and often collaborative ways to meet this need, especially through the creation and exchange of various forms of non-cash value. Common substitutes for cash vary from country to country but usually include livestock, grain, jewelry and precious metals. As Marguerite Robinson explains in the Microfinance Revolution, 1980 shows that "microfinance can provide huge profits on a large scale," and in the 1990s, "microfinance began to grow as an industry" (2001, p. 54). In the 2000s, the goal of the microfinance industry was to meet unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing an active commercial microfinance sector over the last few decades, some issues remain to be addressed before the industry will be able to meet the world's enormous demand. Obstacles or challenges to building a healthy commercial microfinance industry include:
- Incorrect donor subsidies
- Poor regulation and supervision of microfinance institutions (MFIs) taking deposits
- Some MFIs meet the need for savings, remittances or insurance
- Limited management capacity in MFIs
- Institutional Inefficiency
- The need for more dissemination and adoption of rural, rural microfinance methodology
- Members have no collateral to get a loan
Microfinance is an appropriate tool for reducing income inequality, allowing citizens from low socioeconomic classes to participate in the economy. Moreover, his involvement has been shown to lead to a decline in income inequality (Hermes, 2014).
The way in which the poor manages his money
Rutherford argues that the basic problem facing the poor as a money manager is to collect "very much" money. Building new homes may involve storing and protecting various building materials for years until they are available for processing. Children's schools can be funded by buying chickens and raising them for sale as needed for fees, uniforms, bribes, etc. Since all values ​​accumulate before they are needed, this money management strategy is referred to as 'saving'. (Hermes, 2014).
Often, people do not have enough money when they face a need, so they borrow. Poor families may borrow from relatives to buy land, from moneylenders to buy rice, or from microfinance institutions to buy sewing machines. Since this loan is to be repaid by saving after the expenses are incurred, Rutherford calls this 'saving'. Rutherford's point is that microcredit deals only half of the problem, and arguably the less important part: poor people borrow to help them save and accumulate assets. Microcredit institutions should fund their loans through savings accounts that help poor people manage their risks.
Most needs are met through a mix of savings and credit. A benchmark impact assessment of Grameen Bank and two other large microfinance institutions in Bangladesh found that for every $ 1 they lend to clients to finance rural microfinance micro businesses, about $ 2.50 comes from other sources, mostly their client's savings. This is parallel to the experience in the West, where family businesses are funded largely from savings, especially when starting.
Recent studies also show that informal savings methods are unsafe. For example, a study by Wright and Mutesasira in Uganda concluded that "those who have no choice but to save in the informal sector are almost certain to lose some money - maybe about a quarter of what they are saving there."
Rutherford, Wright, and others' work has led practitioners to reconsider key aspects of the microcredit paradigm: that the poor get out of poverty by borrowing, building micro businesses, and increasing their income. The new paradigm puts more attention on the efforts of the poor to reduce their many vulnerabilities by keeping more of what they produce and building up their assets. While they need a loan, they may find it useful to borrow for consumption as for micro-enterprises. A safe and flexible place to save money and withdraw it when needed is also important for managing household and family risks.
Example
The "savings" microfinance project is exemplified in the slums of Vijayawada city, southeast India. This microfinance project serves as an unofficial banking system in which Jyothi, a "deposit collector", collects money from slum dwellers, mostly women, so they accumulate savings. Jyothi performs round the city, collecting Rs5 a day from people in the slums for 220 days, but not always 220 days in a row because these women do not always have the funds available to save them. They finally end up with Rs1000 at the end of the process. However, there are some issues with this micro-savings program. One of the problems is that when saving, clients actually lose part of their savings. Jyothi takes interest from each client - about 20 out of every 220 payments, or Rs100 of 1,100 or 8%. When these slum dwellers find someone they trust, they are willing to pay up to 30% to someone to collect and keep their savings safely. There is also the risk of entrusting their savings to unlicensed, unofficial, and moving collectors. However, slum dwellers are willing to accept this risk because they can not save at home, and can not use remote and unfriendly banks in their country. These microfinance projects also have many benefits, such as empowering women and giving parents the ability to save money for the education of their children. This special microfinance project is an example of the benefits and limitations of a "saving" project (Rutherford, 2009).
The "save through" microfinance project is shown in Nairobi, Kenya that includes the Association of Savings and Loans and Credit Associations or ROSCA. This is a small-scale example, but Rutherford (2009) describes a woman he met in Nairobi and studied his ROSCA. Every day 15 women will save 100 shillings so there will be 1,500 shilling lumpsum counts and every day 1 out of 15 women will receive that amount of money. This will continue for 15 days and other women in this group will receive a lump sum. At the end of 15 days, a new cycle will begin. This ROSCA initiative is different from the "save" example above because there is no interest rate affiliated with ROSCA, otherwise everyone accepts what they enter. This initiative requires trust and social capital networks to work, so often this ROSCA includes people who know each other and have reciprocity. ROSCA allows for marginalized groups to receive a number of simultaneously to pay or save for their special needs.
Maps Microfinance
Debates and microfinance challenges
There are several key debates within the limits of microfinance.
Interest rate
One of the main challenges of microfinance is providing small loans at affordable cost. Interest rates and global average costs are estimated at 37%, with rates reaching as high as 70% in some markets. The reason for high interest rates is not primarily the cost of capital. Indeed, a local microfinance organization that receives interest-free loans from an online microcredit platform, Kiva charges interest and rates on average by 35.21%. In contrast, the main reason for the high cost of microfinance loans is the high cost of traditional microfinance operations transactions compared to the size of loans.
Microfinance practitioners have long held that such high interest rates can not be avoided, because the cost of making each loan can not be reduced below a certain level while still allowing lenders to cover expenses such as office and staff salaries. For example, in Sub-Saharan Africa, credit risk for microfinance institutions is very high, as customers take years to improve their livelihoods and face many challenges during this time. Financial institutions often do not even have a system to check a person's identity. In addition they can not design new products and enlarge their business to reduce risk. The result is that the traditional approach to microfinance has only made limited progress in solving its intended problem: that the world's poorest people pay the world's highest cost of capital for small business growth. The high cost of traditional microfinance loans limits their effectiveness as a tool for poverty reduction. Offering loans at an interest rate and a cost of 37% means that unsuccessful borrowers earn at least 37% the actual rate of return could end up poorer as a result of receiving a loan.
According to a recent survey of microfinance debtors in Ghana published by the Center for Financial Participation, more than a third of borrowers surveyed reportedly struggled to repay their loans. Some take steps such as reducing their food intake or expelling children from school to pay back microfinance debts that have not proven to be profitable enough.
In recent years, the microfinance industry has shifted its focus from the goal of increasing the volume of available capital loans, to address the challenge of providing more affordable microfinance loans. Microfinance analyst David Roodman argues that, in mature markets, the average interest and interest rates charged by microfinance institutions tend to decline over time. However, the global average interest rate for microfinance loans is still well above 30%.
The answer to providing affordable microfinance services may lie in rethinking one of the underlying assumptions underlying microfinance: that microfinance borrowers require extensive monitoring and interaction with loan officers to benefit from and repay their loans. The Zidisha microlending P2P service is based on this premise, facilitating the direct interaction between individual lenders and borrowers through the internet community rather than physical offices. Zidisha has managed to bring the cost of micro loans to below 10% for the borrower, including interest paid to the lender. However, it remains to be seen whether such radical alternative models can achieve the scale required to compete with traditional microfinance programs.
Use of loan
Practitioners and donors from the microfinance charity side often argue for limiting microcredit for loans for productive purposes - such as starting or developing a micro-enterprise. The private sector responds that, since money can be exchanged, such restrictions are impossible to enforce, and in any case it should not depend on the rich to determine how the poor use their money.
Reach versus collision depth
There has been a long debate about the sharpness of trade-offs between 'outreach' and 'sustainability' (its ability to cover its operating costs - and possibly the cost of serving new clients - from operating revenues). While it is generally agreed that microfinance practitioners should try to balance these objectives to some extent, there are a variety of strategies, ranging from BancoSol minimalist orientation in Bolivia to the highly integrated not-for-profit orientation of BRAC in Bangladesh. This is true not only for individual institutions, but also for governments involved in the development of national microfinance systems. BRAC was ranked number one in the world in 2015 and 2016 by Geneva-based NGO Advisor.
Gender
Microfinance generally agrees that women should be the main focus of service delivery. Evidence suggests that they tend to fail in their loans rather than men. Industrial data from 2006 for 704 MFIs reached 52 million borrowers including MFIs using solidarity lending methodologies (99.3% female clients) and MFIs using individual loans (51% of female clients). The delinquency rate for solidarity loans is 0.9% after 30 days (individual loans - 3.1%), while 0.3% of the loans are written off (individual loans - 0.9%). As the operating margin becomes tighter, the smaller the loans are, the more numerous MFIs assume the lending risk to men is too high. This focus on women is sometimes questionable, but recent studies from micro-entrepreneurs from Sri Lanka published by the World Bank found that the return of capital for male-owned businesses (half of the sample) averaged 11%, while returns for women owned business is 0% or slightly negative.
The emphasis on microfinance on women-oriented loans is the subject of controversy, as it claimed that microfinance enhances women's status through poverty alleviation. It is said that by providing women with an initial capital, they will be able to support themselves regardless of men, in a way that will foster sustainable growth of the company and ultimately self-reliance. This claim has not been proven in any substantial form. In addition, the attractiveness of women as a potential investment base is precisely because they are limited by socio-cultural norms regarding such concepts of obedience, family duties, housekeeping and passivity. The result of these norms is that although micro-loans can enable women to increase their daily subsistence to a more stable pace, they will not be able to engage in market-oriented business practices beyond the scope of limited, low-income, low-income, informal jobs. Part of this is a lack of permissiveness in society; is a reflection of the additional burden of women's own shoulder housekeeping as a result of microfinance empowerment; and part lack of training and education around gender economic concepts. In particular, the shift of norms in such a way that women continue to be responsible for all domestic private employment as well as doing public economic support for their families, not relying on increased male assistance rather than reducing the burden on the already limited people.
If there is an exchange of labor, or if the income of women is additional than essential for domestic maintenance, there may be some truth to the claims of building a long-term business; However when it is so restricted it is impossible for women to do more than pay the current loan just to take another in a cyclical pattern that is beneficial to the financiers but hardly to the borrower. This gender focus is intersected from institutionalized lenders such as Grameen Bank into direct interpersonal loans through fund raising operations of charity, such as Kiva. Recently, the popularity of global nonprofit online lending has grown, suggesting that compensation for gender norms may be institutionalized through individual selection initiated by the process of these programs, but the reality is uncertain. Research has noted that the likelihood of lending to women, individually or in groups, is 38% higher than rates of lending to men.
This is also because of the general tendency for interpersonal microfinance relationships to be done on the basis of similarity and internal/external recognition: lenders want to see something familiar, something that supports potential borrowers, so that the emphasis on family, educational and health goals, and commitment to society all achieved positive results from prospective financiers. Unfortunately, these labels disproportionately align with women than men, especially in developing countries. The result is that microfinance continues to rely on restrictive gender norms rather than trying to subvert them through economic improvement in terms of foundation change: training, business management and financial education are all elements that may be included in loan parameters aimed at women and up to they are the fundamental reality of women as part of disadvantaged communities in developing countries will be untested.
Benefits and limitations
Microfinance generates many benefits for poor and low-income households. One of the benefits is very easily accessible. The Bank does not currently lend to those with little or no assets, and is generally not involved in small size loans typically associated with microfinance. Through microfinance, small loans are generated and accessible. Microfinance is based on the philosophy that even a small amount of credit can help end the cycle of poverty. Another benefit resulting from microfinance initiatives is that it provides opportunities, such as expanding education and employment. Families that receive microfinance tend not to withdraw their children from school for economic reasons. In addition, in relation to work, people are more likely to open small businesses that will help the creation of new jobs. Overall, the benefits illustrate that microfinance initiatives are set to improve living standards among the poor (Rutherford, 2009).
There are many social and financial challenges to microfinance initiatives. For example, more clever and wealthy community members can deceive poorer or less well-educated neighbors. This can happen intentionally or unintentionally through loosely run organizations. As a result, many microfinance initiatives require large amounts of social capital or trust to work effectively. The ability of the poor to save can also fluctuate over time as unexpected costs can be a priority that can result in them being able to save little or nothing for several weeks. The inflation rate can cause the fund to lose its value, thus financially harming savers and unfavorable collectors (Rutherford, 2009).
History of microfinance
For centuries past, practical visionaries, from Franciscan monks who established a community-oriented pawnshop in the fifteenth century to founders of the European credit union movement of the nineteenth century (such as Friedrich Wilhelm Raiffeisen) and founders of the microcredit movement in the year The 1970s (such as Muhammad Yunus and Al Whittaker), have tested practices and built institutions designed to bring the kind of opportunities and risk management tools that financial services can deliver to the doorstep of the poor. While the success of Grameen Bank (which now serves more than 7 million poor Bangladeshi women) has inspired the world, it has proved difficult to replicate this success. In countries with lower population densities, meeting the cost of operating a retail branch by serving nearby customers has proven to be much more challenging. Hans Dieter Seibel, board member of the European Microfinance Platform, supports the group model. This particular model (used by many microfinance institutions) makes financial sense, he says, because it reduces transaction costs. The microfinance program also needs to be based on local funds.
The history of microfinance can be traced back to the mid-1800s, when theorist Lysander Spooner wrote about the small credit benefits for entrepreneurs and farmers as a way to get people out of poverty. Spooner independently, Friedrich Wilhelm Raiffeisen founded the first cooperative loan bank to support farmers in rural Germany.
The modern usage of the phrase "microfinancing" was rooted in the 1970s when organizations, such as Grameen Bank Bangladesh with pioneer microfinance Muhammad Yunus, embarked on and shaped the modern microfinance industry. Another pioneer in this sector is Akhtar Hameed Khan.
Microfinance standards and principles
Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfer through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It can be said that the government orders state banks to open savings accounts for poor consumers, or loan sharks involved in usury, or charities that manage pools of heifer involved in microfinance. Ensuring financial services for the poor is best done by expanding the number of financial institutions available to them, and by strengthening the capacity of these institutions. In recent years, there has been an increasing emphasis on the expansion of institutional diversity, as different institutions serve different needs.
Some principles that sum up a century and a half of development practices were summarized in 2004 by CGAP and endorsed by the Group of Eight leaders at the G8 Summit on 10 June 2004:
- Poor people need not only loans but also savings, insurance and money transfer services.
- Microfinance should be useful for poor households: helping them increase their income, build assets and/or protect themselves from external shocks.
- "Microfinance can pay for itself." Donor and government subsidies are so rare and uncertain that, in order to reach large numbers of poor people, microfinance must pay for itself.
- Microfinance means building a permanent local institution.
- Microfinance also means integrating the financial needs of the poor into the country's main financial system.
- "The government's job is to enable financial services, not to provide them."
- "Donor funds should supplement personal capital, not compete with it."
- "The main obstacle is the lack of strong institutions and managers." Donors should focus on capacity building.
- The interest rate limit harms the poor by preventing microfinance institutions from covering their costs, which hampers credit supply.
- Microfinance institutions should measure and disclose their performance - both financially and socially.
Microfinance is regarded as a tool for socio-economic development, and can be clearly distinguished from charity. Poor families, or very poor they may not be able to generate the cash flow needed to repay the loan, must be charitable recipients. Others are best served by financial institutions.
Microfinance operations scale
There is no systematic effort to map out the distribution of microfinance that has been done. The benchmark was set up by an analysis of 'alternative financial institutions' in developing countries in 2004. The authors counted some 665 million client accounts in more than 3,000 agencies serving the poorer than served by commercial banks. Of these accounts, 120 million are with institutions normally understood to practice microfinance. Reflecting the diverse historical roots of the movement, however, they also include postal savings banks (318 million accounts), agricultural and state development banks (172 million accounts), financial cooperatives and credit unions (35 million accounts) and special rural banks (19 million accounts).
Regionally, the highest concentration of these accounts is in India (188 million accounts represent 18% of the total national population). The lowest concentration is in Latin America and the Caribbean (14 million accounts represent 3% of the total population) and Africa (27 million accounts represent 4% of the total population, with the highest penetration rate in West Africa, and the highest growth rates in East and South Africa). Given that most bank clients in developed countries need some active accounts to keep their business organized, these figures show that the task set by the microfinance movement itself is still far from over.
Under this type of service, "savings accounts in alternative financial institutions outweigh the loans by about four to one, this is a worldwide pattern that does not vary much by region."
An important source of detailed data on selected microfinance institutions is the MicroBanking Bulletin , published by the Microfinance Information Exchange. At the end of 2009, he tracked 1,084 MFIs serving 74 million borrowers ($ 38 billion in loans) and 67 million savers ($ 23 billion in deposits).
Another source of information on the microfinance environment is the Global Microscope on Microfinance Business Environment, prepared by the Economist Intelligence Unit (EIU), Inter-American Development Bank, and others. The 2011 report contains information on the microfinance environment in 55 countries between the two categories, the Framework for Regulations and the Framework for Supporting Institutions. This publication, also known as the Microscope, was first developed in 2007, focusing only on Latin America and the Caribbean, but in 2009, this report has become a global study.
Until now no studies have shown the scale or distribution of 'informal' microfinance organizations such as the ROSCA and informal associations that help people manage costs such as weddings, funerals, and illnesses. A number of case studies have been published, however, indicating that these organizations, which are generally designed and managed by the poor themselves with little outside help, operate in most countries in the developing world.
Assistance can come in the form of more and more qualified staff, so higher education is required for microfinance institutions. It has already started in several universities, as Oliver Schmidt explains. Think of management loopholes
Microfinance in the United States and Canada
In Canada and the US, microfinance organizations target marginalized populations that can not access mainstream bank financing. Nearly 8% of Americans do not have bank accounts, which means about 9 million have no bank accounts or formal financial services. Most of these institutions are structured as non-profit organizations. Microcredit in the US context is defined as a credit extension of up to $ 50,000. In Canada, CRA guidelines restrict microfinance loans up to a maximum of $ 25,000. The size of the average microfinance loan in the US is US $ 9,732, ten times greater than the average microfinance loan in developing countries (US $ 973).
Impact
While all microfinance institutions aim to increase income and employment, in developing countries women's empowerment, nutrition improvement and educational improvement of borrowing children are often the goals of microfinance institutions. In the US and Canada, microfinance goals include graduation of welfare program beneficiaries and improvement of their credit rating. In the US, microfinance has created direct and indirect employment, since 60% of borrowers can hire someone else. According to reports, each domestic microfinance loan creates 2.4 jobs. This employer provides wages that are, on average, 25% higher than the minimum wage. Small business loans eventually allow small business owners to make their business the primary source of income, with 67% of borrowers showing a significant increase in their income as a result of their participation in certain micro-loan programs. In addition, owners of these businesses can improve their housing situation, 70% indicate that their housing has improved. In the end, many small business owners who use social funding can graduate from government funding.
United States
In the late 1980s, microfinance institutions were developed in the United States. They serve low-income and marginalized minority communities. In 2007, there were 500 microfinance organizations operating in the US with 200 loanable capital.
There are three key factors driving growth in domestic microfinance:
- Changes in social welfare policies and focus on economic development and employment creation at the macro level.
- Encouragement, including entrepreneurship, as a strategy to improve the lives of the poor.
- Increased proportion of Latin American and Asian immigrants from communities where micro-enterprises are prevalent.
These factors encourage public and private support for microlending activities in the United States.
Canada
Microfinance in Canada is formed through the development of credit unions. The credit union provides financial services to Canadians who can not gain access to traditional financial means. Two branches of credit unions developed in Canada to serve marginalized segments of the population financially. Alphonse Desjardins introduced the creation of savings and credit services in late 1900 to Quebec with no financial access. About 30 years later, Father Moses Coady introduced a credit union to Nova Scotia. These are the models of modern institutions that still exist in Canada today.
Attempts to transfer certain microfinance innovations such as solidarity loans from developing countries to Canada have met with little success.
Selected microfinance institutions in Canada are:
- Asset Development Improvement
Founded by Sandra Rotman in 2009, Rise is a Rotman and CAMH initiative that provides small business loans, leases, and credit lines for entrepreneurs with mental health and/or addiction challenges.
- Alternative Savings
Formed in 2005 through the incorporation of the Civil Savings and Loan Society and the Metro Credit Union, Alterna is a financial alternative for Canadians. Their banking policy is based on cooperative values ​​and expert financial advisers.
- Community Capital Fund Access
Based in Toronto, Ontario, ACCESS is a Canadian charity that helps unsecured entrepreneurs or credit histories find affordable small loans.
- Montreal Community Loan Fund
Created to help eradicate poverty, the Montreal Community Loan Fund provides accessible credit and technical support to low income or credit entrepreneurs to start or expand organizations that can not access traditional forms of credit.
- Momentum
Using the community's economic development approach, Momentum offers opportunities for people living in poverty in Calgary. Momentum gives individuals and families who want to better their financial situation controlling finances, being computer literate, securing jobs, borrowing and paying for business loans, and buying a home.
- Vancity
Founded in 1946, Vancity is now the largest English-language credit union in Canada.
Limitations
Specific complications for Canada include the need for loans of substantial size compared to those typically seen in many international microfinance initiatives. Microfinance is also limited by the rules and restrictions on borrowing money. For example, the Canadian Revenue Agency limits loans made in such transactions to a maximum of $ 25,000. As a result, many people are looking for banks to provide these loans. Also, microfinance in Canada is driven by profit which, as a result, fails to advance the social development of community members. In marginalized or poor Canadian communities, banks may not be easily accessible to deposit or withdraw funds. These banks that will be charged little or no interest in a small amount of cash replaced by lending companies. Here, these firms can charge enormous interest to marginalized members of society, increasing the cycle of poverty and taking advantage of the loss of others (Rutherford, 2009).
In Canada, microfinance competes with payday loan institutions that take advantage of marginalized and low-income individuals by wearing very high predatory interest rates. Communities with low social capital often have no network to implement and support microfinance initiatives, leading to the proliferation of payday loan institutions. Paying daily loan companies is unlike traditional microfinance as they do not encourage collectivism and social capital development in low-income communities, but only for profit.
Microfinance in Indian subcontinent
Loans for the poor by banks have many limitations including lack of security and high operational costs. As a result, microfinance was developed as an alternative to lending to the poor with the aim of creating financial inclusion and equity.
Ela Bhatt has started her own SEWA Bank Cooperative in 1974 in Ahmedabad, Gujarat, perhaps one of the first modern microfinance institutions of its kind. Muhammad Yunus , a Nobel Prize winner, has introduced the concept of Microcredit in Bangladesh in the form of "Grameen Bank". The National Bank for Agriculture and Rural Development (NABARD) looks at some models for offering financial services to those who do not have bank accounts, especially women, and decided to experiment with very different models, now known as Mandiri Group (SHGs). In this approach, a small group of women (and men) can form their own small mini banks, self-managed and managed, and create relationships with SHG banks (self-help groups), NGOs and banks. SHGs are often established and maintained by NGOs and only after reaching a certain level of maturity in terms of internal savings and credit operations, they can save, and also seek credit from banks. Often there is the involvement of NGOs, or government agencies during the initial training and even after the SHG-Bank linkage. The SHG-Bank linkage program, which has existed since 1992 in India, has a savings account of 7.9 million SHG, with 4.6 million SHG having outstanding loans, with approximately $ 2 billion in savings with banks, and $ 8.9 billion is unpaid loans, making this one of the largest microfinance programs in the world (March 2016). It involves commercial banks, regional rural banks (RRBs) and cooperative banks in their operations.
In 2013, Grameen Capital India was able to lend $ 144 million to microfinance groups. In addition to Grameen Bank, Equitas has become another microfinance organization in Tamil Nadu. South and West countries are the countries most attracting microfinance loans.
Microfinance is defined as, financial services such as savings accounts, insurance and credit funds provided to poor and low-income clients that help them increase their income, thereby improving their living standards.
In this context the main features of microfinance are:
- Loans are granted without security
- Loans for people living below the poverty line
- SHG members can benefit from microfinance
- The maximum limit of loans under microfinance is Rs.25.000/-
- The terms and conditions offered to the poor were decided by the NGO
- Microfinance differs from Micro Credit - under microcredit, small loans are given to borrowers but under microfinance along with many other financial services including savings and insurance accounts. Therefore, microfinance has a broader concept than microcredit.
In June 2014, CRISIL released the latest report on India's Microfinance Sector titled "25 MFIs Leading India". This list is the most comprehensive and up-to-date overview of the microfinance sector in India and various microfinance institutions operating in the sub-continent.
Many loan officers in India create an emotional connection with the borrower before the loan reaches maturity by mentioning details about the personal life and family of the borrower and also showing affection in various ways as a strategy to generate pressure during recovery.
Network and Microfinance Association
There are several professional networks of microfinance institutions, and organizations that support microfinance and financial inclusion.
Microfinance Network
The Microfinance Network is a network of 20-25 largest microfinance institutions in the world, spread across Asia, Africa, the Middle East, Europe and Latin America. Founded in 1993, the Microfinance Network provides support to members who help direct many industry leaders to sustainability, and profitability in many of their largest markets. Today as the sector enters a new transition period, with the advent of digital financial technology increasingly in competition with traditional microfinance institutions, the Microfinance Network provides space to address the opportunities and challenges arising from emerging technological innovations in inclusive finance. The Microfinance Network meets once a year. Members include Al Majmoua, BRAC, BancoSol, Gentera, Kamurj, LAPO, and SOGESOL.
Partnership for Responsible Financial Inclusion
The Partnership for Responsible Finance, formerly known as the Microfinance CEO Working Group, is a collaborative effort of leading international organizations and their active CEOs in microfinance and inclusive financial space, including direct microfinance practitioners, and microfinance funders. It consists of 10 members, including Accion, Aga Khan Micro Finance Agency, BRAC, CARE USA, FINCA Financial Impact, Grameen Foundation, International Opportunity, Pro Mujer, International Vision Fund and World Banking Women. Leveraging the strengths of their CEOs and senior managers, PRFI advocates responsible financial services and seeks catalytic opportunities to accelerate financial access to unserved ones. As part of this focus, PRFI is responsible for setting up Smart Campaigns, in response to negative microfinance practices that indicate client abuse in a particular market. This network consists of a working group of CEOs, who meet with sub-committee and quarterly working groups dedicated to communication, social performance, digital financial services, and legal and human resource issues.
European Microfinance Network
The European Microfinance Network was established in response to many of the legal and political barriers affecting the microfinance sector in Europe. The network engages in advocacy on issues related to microfinance, micro-enterprises, social and financial exclusion, entrepreneurship and employment creation. Its main activity is the holding of its annual conference, which has been taking place every year since 2004. EMN has a vast network of more than 100 members.
African Microfinance Network (AFMIN)
Africa Microfinance Network (AFMIN) is an association of microfinance networks in Africa resulting from initiatives led by African microfinance practitioners to create and/or strengthen state-level microfinance networks for the purpose of setting common performance standards, institutional capacity and policy changes. AFMIN was officially launched in November 2000 and has established its Secretariat in Abidjan (Republic of CÃÆ'Â'te d'Ivoire), where AFMIN is legally recognized as an international Non-Governmental Organization under the laws of Cote d'Ivoire. Due to political unrest at CÃÆ'Â'te d'Ivoire, AFMIN temporarily moved its offices to Cotonou in Benin.
Inclusive financial system
The microcredit movement that began in 1970 has emerged and turned into a 'financial system' approach to creating universal financial inclusion. While Grameen's model of providing small credits reaches many things, especially in urban and near-urban areas and with entrepreneurial families, its progress in providing financial services in rural areas is less densely populated; creating the need for many and many models to emerge around the world. This term has evolved from Microcredit, into Microfinance, and is now Financial Inclusion. Specialized microfinance institutions (MFIs) continue to expand their services, collaborate and compete with banks, credit unions, mobile money, and other formal and informal members.
The new pragmatic financial system approach recognizes the richness of centuries of microfinance history and the enormous diversity of institutions that serve the poor in developing and developed countries today. It is also rooted in the growing awareness of the diversity of financial services needs of the world's poorest people, and the diverse arrangements in which they live and work. He also recognizes that the quality and anger of financial services is also important for the banking system to achieve a more complete and more in-depth financial inclusion, for all. Central banks and major banks are now more closely involved in the financial inclusion agenda than ever before, though that is a long way, with more than 35-40% of the world's remaining adults outside of the formal banking system, and many more remaining ' under-bank '. The emergence of mobile money-based management and digital finance changed the scenario quickly; although the 'social distance' between the poor/social economy is marginalized and the banking system remains large, unfortunately.
- Informal financial service provider
- These include loan sharks, pawnshops, savings collectors, money keepers, ROSCA, ASCA, and input supply stores. This continues their service because they know each other well and live in the same community, they understand their financial situation and can offer a very flexible, convenient and fast service. This service can also be expensive and the choice of financial products is limited and very short term. Informal services involving savings are also at risk; many people lose their money.
- Organization owned by members
- These include self-help groups, Savings and Loan Associations Villages (VSLAs), Credit Union, CVECA and various other members owned and governed by informal or formal financial institutions. Informal groups, like their traditional cousins, are generally small and local, which means they have access to good knowledge of their individual financial circumstances and can offer ease and flexibility. Because they are managed by the poor, their operating costs are low. Often, they do not need regulation and supervision, unless they grow on a scale and formalize themselves by jointly forming a level II or III federation. If not properly prepared, they can be 'captured' by some influential leaders, and run the risk of losing members' savings. Experience shows that these informal but highly disciplined groups are highly sustainable, and continue to exist even after 20-25 years. Formalization, as a Credit Union Cooperative, can help create relationships with the banking system for more sophisticated financial products and additional capital for loans; but requires strong leadership and systems. These models are very popular in many rural areas in countries in Asia, Africa, and Latin America; and platforms to create deeper financial inclusion.
- NGO
- The Microcredit Summit Campaign counted 3,316 MFIs and the NGO lent to approximately 133 million clients by the end of 2006. Led by Grameen Bank and BRAC in Bangladesh, Prodem in Bolivia, International Opportunities and FINCA International, headquartered in Washington, DC , These NGOs have spread throughout the developing world in the past three decades; others, such as the Gamelan Council, speak in a wider area. They have proven to be highly innovative, pioneering banking techniques such as solidarity loans, rural banking and mobile banking that have overcome barriers to serving the poor. However, with councils that do not represent their capital or their customers, their governance structures can be fragile, and they can become too dependent on external donors.
- Formal financial institution
- In addition to commercial banks, these include state banks, agricultural development banks, savings banks, rural banks and non-bank financial institutions. They are governed and supervised, offering wider range of financial services, and controlling branch networks that can be expanded across the country and internationally. However, they have proven reluctant to adopt a social mission, and because of the high cost of their operations, are often unable to provide services to the poor or remote. The increasing use of alternative data in credit scoring, such as trade credit, has increased the interest of commercial banks in microfinance.
With proper regulatory and supervision, each of these institutional types can have an effect on solving microfinance problems. For example, efforts are being made to link self-help groups with commercial banks, to joint member organizations' networks to achieve economies of scale and scope, and to support efforts by commercial banks to 'down-scale' by integrating mobile banking and e- payment into their extensive branch network.
Brigit Helms in his book 'Access for All: Building Inclusive Financial Systems', distinguishes between four general categories of microfinance providers, and argues for a proactive engagement strategy with all of them to help them achieve the goals of the microfinance movement.
Micro and Web Credits
Due to the unbalanced emphasis on credit at the expense of microsavings, as well as the desire to connect Western investors with this sector, the peer-to-peer platform has been developed to expand the availability of microcredit through individual lenders in the developed world. New platforms connecting lenders to micro entrepreneurs appear on the Web ( peer-to-peer sponsors ), such as MYC4, Kiva, Zidisha, myELEN, International Opportunities, and the Microloan Foundation. Another United Prosperity Web-based microlender uses variations on the usual microlending model; with United Prosperity, micro lenders provide guarantees to local banks that then re-lend twice that amount to micro-entrepreneurs. In 2009, the US-based nonprofit Zidisha became the first peer-to-peer micro loan platform to link lenders and borrowers directly across international borders without local intermediaries.
The volume channeled through Kiva's peer-to-peer platform is about $ 100 million as of November 2009 (Kiva facilitates about $ 5 million in loans each month). In comparison, microcredit needs are estimated at around 250 billion US dollars by the end of 2006. Most experts agree that these funds should be sourced locally in countries derived from microcredit, to reduce transaction costs and exchange rate risk.
There is a problem with disclosure on peer-to-peer sites, with some reporting borrowing rates using a flat rate methodology instead of the familiar Annual Bank Percentage Level. The use of fixed tariffs, which have been banned among regulated financial institutions in developed countries, may confuse individual lenders to believe that their borrowers are paying lower interest rates than, in fact, theirs. In the summer of 2017, within the framework of a joint project of Bank of Russia and Yandex, a special tick (a green circle with a check mark and a '???????' (List of MFO Country) text boxes) appears in the Yandex system search, know consumers that the company's financial services are offered on a flagged website, which has microfinance organization status.
Currently there are several social interventions that have been combined with microfinance to raise awareness of HIV/AIDS. Such interventions include "Interventions with Microfinance for AIDS and Gender Equality" (IMAGE) that incorporate microfinance with Participative Program "The Sisters-for-Life" programs that educate on multiple roles of gender, gender-based violence, and HIV/AIDS infections to strengthen women's communication and leadership skills The "Sisters-for-Life" program has two phases in which phase one consists of ten one-hour training programs with a two-phase facilitator consisting of identifying a leader among the group, training them further. , and allows them to apply the Action Plan to their respective centers.
Microfinance has also been combined with business education and with other health intervention packages. A project conducted in Peru by the Innovations for Poverty Action found that randomly selected borrowers to receive financial training as part of their group meeting of borrowers had higher profits, although there was no reduction in "proportions reporting problems in their business". Pro Mujer, a non-governmental organization (NGO) with operations in five Latin American countries, combines microfinance and health care. This approach shows that microfinance can not only help businesses prosper; it can also encourage human development and social security. Pro Mujer uses the "one-stop shop" approach, which means that in one building, clients find financial services, business training, empowerment advice, and health services combined.
According to technology analyst David Garrity, Microfinance and Mobile Financial Services (MFS) has provided a marginal population with access to basic financial services, including savings programs and insurance policies.
Impact and criticism
Much of the criticism of microfinance is actually a critique of microcredit. Criticism focuses on the impact on poverty, interest rates, high profits, too much debt and suicide. Other criticisms include the role of foreign donors and working conditions in companies affiliated with microfinance institutions, particularly in Bangladesh.
Impact
The impact of microcredit is the subject of much controversy. Proponents claim that it reduces poverty through higher employment and higher incomes. It is expected to improve nutrition and improve the education of the borrower's children. Some argue that microcredit empowers women. In the US and Canada, it is said that microcredit helps recipients to graduate from welfare programs.
Critics say that microcredit does not increase revenues, but has pushed poor households into debt traps, in some cases even leading to suicide. They added that money from loans is often used for consumption goods or consumption that is durable rather than used for productive investment, which fails to empower women, and that it does not improve health or education. In addition, as access to micro-loans extends, borrowers tend to obtain multiple loans from different companies, making it virtually impossible to repay debt. As a result of such tragic events, microfinance institutions in India have agreed to set a 15 percent interest rate limit. This is important because recipients of microfinance loans have a higher level of security in repaying loans and lower risk levels for failing to repay them.
Existing evidence suggests that in many cases microcredit has facilitated the creation and growth of businesses. This often results in entrepreneurship, but may not necessarily increase revenue after interest payments. In some cases, this has pushed borrowers into debt traps. There is no evidence that microcredit has empowered women. In short, microcredit has achieved less than what its supporters say, but its negative impact is not as drastic as some critics have pointed out. Microcredit is just one factor affecting the success of a small business, whose success is affected by a much greater degree of how much a particular economy or market grows. For example, local competition in the lack of a domestic market for certain goods can affect how successful small businesses receive microcredit.
Unintended consequences of microfinance include informal intermediation: That is, some entrepreneurial borrowers mediate informally between microfinance initiatives and poorer micro-entrepreneurs. Those who are more easily eligible to divide microcredit into smaller credits even to poorer borrowers. Informal intermediations range from ordinary intermediaries at the end of a good or benign spectrum to 'loan sharks' at the end of the professional and sometimes criminal spectrum.
Missions drift in microfinance
Mission shifting refers to a phenomenon in which MFIs or microfinance institutions are increasingly trying to serve better customers than their original customers, especially poor families. Roy Mersland and R. ÃÆ'ËÅ"ystein StrÃÆ'¸m in their research on mission shifts indicate that this selection bias can come not only through an increase in average loan size, allowing financially more robust individuals to get loans, but also through the Methodology of loans specifically MFIs, key operating markets, or even gender bias as a further mission shift. And as it may follow, this selective funding will lead to lower risk and lower costs for the company.
However, economists Beatriz ArmendÃÆ'¡riz and Ariane Szafarz stated that this phenomenon is not driven by cost minimization alone. He suggested that it occurs because of the interaction between corporate missions, the cost difference between rich and poor clients who do not have bank accounts and the special characteristics of the region relating to the heterogeneity of their clients. But in any way, this selective funding issue leads to an ethical tradeoff where on the one hand there is an economic reason for a company to limit its lending to only those who meet the standard requirements, and on the other hand there is an ethical responsibility. to help the poor get out of poverty through the provision of capital.
The role of foreign donors
The role of donors has also been questioned. CGAP has recently commented that "most of the money they spend is ineffective, either because it is hampered by failing and often complicated funding mechanisms (eg, central government facilities), or going to partners who are not responsible for performance. , a poorly understood program has impeded the development of an inclusive financial system by distorting markets and displacing domestic commercial initiatives with cheap or free money. "
Working conditions in companies affiliated with MFIs
There is also criticism of microcredit providers for not taking greater responsibility for the working conditions of poor households, especially when the borrower becomes the original worker, selling crafts or agricultural produce through an organization controlled by the MFI. The desire of MFIs to help their borrowers diversify and increase their incomes has sparked this kind of relationship in some countries, especially Bangladesh, where hundreds of thousands of borrowers work effectively as hired workers for marketing subsidiaries Grameen Bank or BRAC. Critics argue that there are some if there are rules or standards in this regard that regulate working hours, holidays, working conditions, safety or child labor, and some checking regimes to correct violations. Some of these concerns have been taken by socially responsible trade unions and supporters.
Abuse
Source of the article : Wikipedia
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