A Microfinance is the provision of financial services to low-income clients, including consumers and the self-employed, who

traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers. Microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are usually self-employed, householdbased entrepreneurs. Their diverse “micro enterprises” include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, micro entrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers. Need Most poor people manage to mobilize resources to develop their enterprises and their dwellings slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. However, conventional finance institutions seldom lend down-market to serve the needs of low-income families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself The lack of access to credit for the poor is attributable to practical difficulties arising from the discrepancy between

the mode of operation followed by financial institutions and the economic characteristics and financing needs of low-incomehouseholds. For example, commercial lending institutions require that borrowershave a stable source of income out of which principal and interest can be paid backaccording to the agreed terms. However, the income of many self employedhouseholds is not stable, regardless of its size. A large number of small loans areneeded to serve the poor, but lenders prefer dealing with large loans in small numbersto minimize administration costs. They also look for collateral with a clear title : - which many low-income households do not have. History In 1974, famine struck Bangladesh. At the time, Dr. Muhammad Yunus was a professor of economics at the University of Chittagong. Disillusioned by the elegant theories of economics that could not explain the thousands of poor people dying of starvation on the streets, he was determined to find a practical way to help the poor. During a visit to the nearby village of Jorba, he was astounded to find that a sum of $27 could radically change the lives of 42 people in the village. This was the sum of money they collectively needed to buy bamboo to make the stools they sold to make a living. He took $27 from his pocket and made 42 loans to the stool makers in this tiny village. They were able to pay him back with interest and take a step towards lifting themselves out of poverty. This simple idea that the poor could use credit to lift themselves out of poverty, led Dr. Yunus to create The Grameen Rural Bank in 1983. Since its inception, it has made over $983 million in loans to over seven million borrowers.¹ Its methodologies have become the cornerstone of the microfinance industry. In 2006, The Grameen Bank and Dr. Yunus were awarded the Nobel Peace Prize. Microfinance goes Mainstream In the early years of microfinance, most organizations lending to the poor were funded by private or government grants. In the1990s, it became apparent that microfinance institutions would be unable to sustain their rapid growth rates if they depended solely on

grants for funding. Many microfinance institutions started to restructure their operations to make themselves attractive to investors. In recent years, many institutional and high net worth investors have begun to invest in microfinance. Attracted by the high growth rates, funds focused on lending to microfinance institutions were created. Today, major banks such as Morgan Stanley, Deutsche Bank and Citigroup have begun to offer products and services that enable investments in microfinance. With MicroPlace, investment in microfinance truly goes mainstream. Everyday people now have the opportunity to participate in this new industry by purchasing investments that earn a financial return while making a positive social impact on the world. Microfinance help the poor The impact of microcredit has been studied more than the impact of other forms of microfinance. Microcredit can provide a range of benefits that poor households highly value including long-term increases in income and consumption. A harsh aspect of poverty is that income is often irregular and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost. Credit can make it easier to manage shocks like sickness of a wage earner, theft, or natural disasters. The poor use credit to build assets such as buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment. Empirical studies on the impact of credit are difficult and expensive to conduct and pose special methodological problems. Most impact studies to date have found significant benefits from micro credit. However, only a few studies have made serious efforts to compensate for the methodological challenges. In fact, many studies would not be regarded as meaningful by most professional econometricians. A new wave of randomized trial studies is now in process, which should yield a more definitive picture.

Even so, there is a strong indication from borrowers that micro credit improves their lives. They faithfully repay their loans even when the only compelling reason is to ensure continued access to the service in the future. Other microfinance services like savings, insurance, and money transfers have developed more recently, and there is less empirical research on their impact. Client demand indicates that poor people value such services. MFIs that offer good voluntary savings services typically attract far more savers than borrowers.

Functions of microfinance banks Microfinance institutions provide many functions for some of the poorest people on the planet. At the most basic level, they provide access to cheap capital. The cheap capital can be used to start a business, expand a business or buy in bulk, allowing entrepreneurs to enjoy improved margins and higher profitability. Microfinance institutions don't only provide access to cheap capital, they also look to improve communities. Group Lending 1. No collateral and low interest rates seem like the way to high delinquency rates, but most microfinance institutions actually have lower default rates than major commercial banks. To help ensure repayment, many microfinance institutions require borrowers to form groups. These groups provide a support network for each other, and each member guarantees the debt for every other member. Doing so allows the microfinance institution to achieve two things: It creates an instant support group for when a borrower has a problem and it creates efficiencies for the bank when collecting the weekly payments. Providing Education 2. In addition to lending to groups, microfinance institutions also provide basic education on running a business and managing money . Quite often they will

mandate that borrowing groups must complete the education before they are eligible for loans. Emphasizing Women 3. A lot of research has gone into the effects of lending to women. The research shows that lending to women is better for the broader community. It was observed that the profits a woman made as a result of the loan were more frequently invested back into her family. Women were more likely than men to use the proceeds to pay for an education for her kids, make improvements to the home or buy better quality food for the family. The other benefit to lending to women experienced by microfinance institutions around the world is the empowerment and the strides toward gender equality that have been achieved in the household and the local community. Connecting the World 4. Microfinance institutions were originally founded to alleviate poverty and improve local communities. That mission hasn't changed, but due to the everpresent need for money to fund the microloans, some organizations have figured out a way to connect ordinary donors in the developed world with microcredit borrowers in the Third World. Kiva.org was one of the leading pioneers; it has created a platform that allows anyone to lend $25 to an individual or group in need of capital. Lenders don't earn interest, but they do get progress updates along with the repayment of their money. For most people, knowing they helped change a life is worth forgoing the interest they could have earned elsewhere. Not Just Credit 5. Microfinance organizations don't only provide money, they also provide access to ideas, technology and new business ventures for their members. One of the best examples is the introduction of cell phones to rural villages in Bangladesh. Communication between families in different villages and among suppliers and markets in different areas were very difficult. Days were often wasted traveling back and forth to get information. To fill the need, Yunus's Grameen Bank leased a cell phone to one

woman in each village. the women made money by charging a small fee for use of the phone. This allowed the women to make a living and made communication easier among villages. Introducing cell phones is just one of many examples of non-lending efforts made by microfinance institutions to improve the lives of their community's impoverished citizens. Microfinance institutions A microfinance institution is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services. A great scale of organizations is regarded as microfinance institutes. They are those that offer credits and other financial services to the representatives of poor strata of population (except for extremely poor strata). Microfinance is increasingly being considered as one of the most effective tools of reducing poverty. Microfinance has a significant role in bridging the gap between the formal financial institutions and the rural poor. The Micro Finance Institutions (MFIs) accesses financial resources from the Banks and other mainstream Financial Institutions and provide financial and support services to the poor. MFIs are the pivotal overseas organizations in each country that make individual microcredit loans directly to villagers, microentrepreneurs, impoverished women and poor families. An overseas MFI is like a small bank with the same challenges and capital needs confronting any expanding small venture but with the added responsibility of serving economically-marginalized populations. Many MFIs are creditworthy and wellrun with proven records of success, many are operationally self-sufficient. Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Non-governmental Organizations), cooperatives, and sectors of government banks. The emergence of “for-profit” MFIs is growing. In India , these ‘for-profit’ MFIs are referred to as Non-Banking Financial Companies (NBFC). NGOs mainly work in remote rural areas thereby providing financial services to the persons with no access to banking services. The term “transformation,” or commercialization, of a microfinance institution (MFI) refers to a change in legal status from an unregulated nonprofit or non-governmental

organization (NGO) into a regulated, for-profit institution. Regulated, transformed organizations differ from nonprofits in that they are held to performance and capital adequacy standards and are supervised by a financial authority, typically the central bank of the country where they are registered. A transformed MFI also attracts equity investors. The equity investors want to ensure that the values of their investments are maintained or enhanced and elect Board members who share a common vision for the new for-profit institution. Among transformed MFIs, varying classifications of regulated institutions exist, the strictest being banks — rural banks and thrift banks — followed by non-bank financial institutions. Different countries have varied names for these regulated MFIs. The microfinance sector consistently focuses on understanding the needs of the poor and on devising better ways of delivering services in line with their requirements, developing the most efficient and effective mechanisms to deliver finance to the poor. Continuous efforts towards automation of operations is steady improving in efficiency. The automated systems have also helped accelerate the growth rate of the microfinance sector. The goal for MFIs should be: • To improve the quality of life of the poor by providing access to financial and support services; • To be a viable financial institution developing sustainable communities; • To mobilize resources in order to provide financial and support services to the poor, particularly women, for viable productive income generation enterprises enabling them to reduce their poverty; • Learn and evaluate what helps people to move out of poverty faster; • To create opportunities for selfemployment for the underprivileged; • To train rural poor in simple skills and enable them to utilize the available resources and contribute to employment and income generation in rural areas. Many institutions practice microfinance, or raise funds for microfinance, including the following: Various kind of Microfinance Institutions

1. Informal financial service providers These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs, ASCAs and input supply shops. Because they know each other well and live in the same community, they understand each other’s financial circumstances and can offer very flexible, convenient and fast services. These services can also be costly and the choice of financial products limited and very short-term. Informal services that involve savings are also risky; many people lose their money. 2. Member-owned organizations These include self-help groups, credit unions, and a variety of hybrid organizations like 'financial service associations' and CVECAs. Like their informal cousins, they are generally small and local, which means they have access to good knowledge about each others' financial circumstances and can offer convenience and flexibility. Since they are managed by poor people, their costs of operation are low. However, these providers may have little financial skill and can run into trouble when the economy turns down or their operations become too complex. Unless they are effectively regulated and supervised, they can be 'captured' by one or two influential leaders, and the members can lose their money.

Self help groups: self-help group (SHG) is a village-based financial intermediary usually composed of between 10-15 local women. Most self-help groups are located in India, though SHGs can also be found in other countries, especially in South Asia and Southeast Asia. Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds may then be lent back to the members or to others in the village for any purpose. In India, many SHGs are 'linked' to banks for the delivery of microcredit. CVECA: Is is a self-reliant village savings and credit bank (from the French Caisse Villageoise d'Epargne et de Crédit Autogérée). CVECAs are designed to operate in rural areas with clients who are primarily subsistence farmers, with minimal non-farm

income. While most banks have less than 250 members, they achieve service flexibility and economies of scale through networking together into regional federations. "Each bank is managed by 2 part-time local staff and a board composed of members, all of whom have minimal education." CVECAs are member-based microfinance intermediaries inspired by external technical support. Structurally they lie between informal financial market actors like moneylenders, collectors, and ROSCAs on the one hand, and formal actors like microfinance institutions and banks on the other. Other organizations in this transitional zone in financial market development include self help groups, ASCAs, rural credit co-operatives, village banks and financial service associations. 3. NGOs The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to about 133 million clients by the end of 2006.[23] Led by Grameen Bank and BRAC in Bangladesh, Prodem in Bolivia, and FINCA International, headquartered in Washington, DC, these NGOs have spread around the developing world in the past three decades; others, like the Gamelan Council, address larger regions. They have proven very innovative, pioneering banking techniques like solidarity lending, village banking and mobile banking that have overcome barriers to serving poor populations. However, with boards that don’t necessarily represent either their capital or their customers, their governance structures can be fragile, and they can become overly dependent on external donors. Grameen Bank : The Grameen Bank is a microfinance organization and community development bank started in Bangladesh that makes small loans (known as microcredit or "grameencredit") to the impoverished without requiring collateral. The word "Grameen", derived from the word "gram" or "village", means "of the village". The system of this bank is based on the idea that the poor have skills that are under-utilized. A group-based credit approach is applied which utilizes the peer-pressure within the group to ensure the borrowers follow through and use caution in conducting their financial affairs with strict discipline, ensuring repayment eventually and allowing the borrowers to develop good credit standing. The bank also accepts deposits, provides other services, and runs several

development-oriented businesses including fabric, telephone and energy companies. Another distinctive feature of the bank's credit program is that a significant majority of its borrowers are women. BRAC: BRAC , based in Bangladesh, is currently (June 2009) the world's largest nongovernmental development organization.Established by Fazle Hasan Abed in 1972 soon after the liberation of Bangladesh, BRAC is currently present in all 64 districts of Bangladesh, with over 7 million micro-finance group members, 37,500 non-formal primary schools and more than 70,000 health volunteers. BRAC is the largest NGO by number of staff employing over 120,000 people, the majority of whom are women. BRAC operates various programs such as those in microfinance and education in over nine countries across Asia and Africa, reaching more than 110 million people. The organization is 80% self-funded through a number of commercial enterprises that include a dairy and food project and a chain of retail handicraft stores called ‘Aarong’. BRAC maintains offices in 14 countries throughout the world, including BRAC USA and BRAC UK. BRAC is a few years into their initiative to operate in ten African countries in the next ten years 4. Formal financial institutions In addition to commercial banks, these include state banks, agricultural development banks, savings banks, rural banks and non-bank financial institutions. They are regulated and supervised, offer a wider range of financial services, and control a branch network that can extend across the country and internationally. However, they have proved reluctant to adopt social missions, and due to their high costs of operation, often can't deliver services to poor or remote populations. The increasing use of alternative data in credit scoring, such as trade credit is increasing commercial banks' interest in microfinance.With appropriate regulation and supervision, each of these institutional types can bring leverage to solving the microfinance problem. For example, efforts are being made to link self-help groups to commercial banks, to network member-owned organizations together to achieve economies of scale and scope, and to support efforts by commercial banks to 'down-scale' by integrating mobile banking and e-payment technologies into their extensive branch networks.

NABARD: National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India. It has been accredited with "matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India". It was established by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of the premeire agency to provide credit in rural areas. PRIVATE FINANCING COMPANIES Microfinance companies are the financial institutions that offer small-scale financial services in both the forms – credit and savings, especially to the poor in rural, semi-urban and urban areas. These financial services are meant to help them in undertaking economic activities, mitigating vulnerabilities to income shocks, smoothening consumption, increasing savings and supporting selfempowerment. There are a number of microfinance companies in India, which play some pivotal roles to the development of India. Eg SKS Microfinance Companies Explosive Growth In the 1970s and 80s, inspired by Grameen’s success, social innovators and organizations around the world began to experiment with different programs to bring financial services to the poor. Microfinance institutions proved that it was actually possible to build viable businesses through lending to the poor. The number of microfinance institutions increased rapidly. The 2006 Microfinance Summit Campaign Report estimates that there are now more than 3,000 microfinance institutions, serving more than 100 million poor people in developing countries. The total cash turnover of these institutions world-wide is estimated at $2.5 billion and the potential for new growth is outstanding.

India microfinance records 30% growth: State of the Sector report
Microfinance Focus, Oct. 26, 2009: India’s Microfinance institutions reached 76.6 million against last year’s 59 million, according to the “State of the Sector Report” released on Monday in New Delhi. Compiled by N. Srinivasan, the report was released as part of the annual Microfinance India Summit 2009 at Hotel Taj on Monday morning. Some quick highlights of the report are: * MFI’s have recorded about 8.5 million clients during the year 2008-09, a growth of 60% over the previous year. * More than 50 percent of low income households are covered by some form of microfinance product * The total outstanding microfinance loans posted a growth rate of 30% or 359.39 billion over the last year’s level of Rs 229.54 billion. * The overall coverage of the sector is estimated to have reached 76.6 million against 59 Million last year. The SHG loan outstanding has increased by Rs. 71.5 billion with an addition of 6.9 million clients. * At the current growth rates, MFIs might outstrip the SBLP in portfolio volumes soon. * Some parts in Karnataka faced entrenched default constituting a portfolio share of less than 0.5%. * MFIs so far reached 234 of the 331 poorest districts identified by the government. * SBLP regstered a decline of number of women SHGs from 82.5% in March 2007 to 80.4% in March 2008. * The microfinance penetration index shows especially in Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh compared to extraordinary levels reached in Andhra Prades, Karnatana and Tamil Nadu.

While last year’s report focused on the increased risk in the sector, this years’ report takes stock of the uninterrupted growth rate of the sector despite several internal and external adversities.

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