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Jump to: navigation, search Microfinance is a term for the practice of providing financial services, such as microcredit, microsavings or microinsurance to poor people. By helping them to accumulate usably large sums of money, this expands their choices and reduces the risks they face. As suggested by the name, most transactions involve small amounts of money, frequently less than US$100.
The origin of microfinance is often dated as late as the 1970s. Only then, it is often argued, did any programs pass two key tests:
to show that poor people can be relied on to repay their loans, and to show that it's possible to provide financial services to poor people through market-based enterprises without subsidy.
Recent evidence gathered by Timothy Guinnane, an economic historian at Yale, raises questions about this view. Guinnane demonstrates that the success of Friedrich Wilhelm Raiffeisen's village banking movement in Germany, which actually began in 1864 and reached 2 million rural farmers by 1901, resulted in large part from its ability to pass both these tests. Guinnane shows how the village-based bonds of association of these early credit unions gave them both the information and enforcement advantages needed to make loans to people who were both too poor and too remote to access bank loans. Raiffeisen was moved to action by the poverty of the recently freed serfs, and by the degree of exploitation they faced from local moneylenders. The caisse populaire movement founded by Alphonse Desjardins in Quebec, also met these tests. Desjardins and his wife Dorimène had strong faith in these principles, founding the first caisse in 1900 (which she managed), until 1906, when a law governing them was passed in the Quebec assembly..
Like Raiffeisen, Desjardins was concerned about poverty. But he was spurred to action by his outrage over usury. In 1897 as parliamentary reporter, he learned of "one notable [court] case in Montreal within the last few days, in which a man obtained a loan of $150, and was sued for, and was compelled to pay in interest, the sum of $5,000". In the 1970s, a new wave of microfinance initiatives introduced many new innovations into the sector. Solidarity lending emerged as a distinctive new methodology, made famous by Dr. Muhammad Yunus, the founder of Grameen Bank, who was awarded, together with Grameen Bank, the Nobel Peace Prize in 2006.
Kasmonie: In Suriname, an informal financial savings and loan system exists. It is called “kasmonie” or “cash-money”. In this system a self-selected group of trusted individuals agrees “to save a fixed amount of money on a periodical basis and each of them in turn receives the whole pool once. It is generally used by microentrepreneurs.
 Microfinance and development
Today, microfinance plays a major role in the development of many African, Asian, and Latin American nations. Its impact is substantial enough to have warranted acknowledgment by the United Nations who declared 2005 "The international year of microfinance", reminding people that millions worldwide benefit from microfinance activities.
 Development of the sector in India
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In India, microfinance traces its roots to mid 1970s when some prominent Indian NGO like Myrada & Pradan started using the Self Help Group (SHG) model. The SHG is used as a platform for social mobilization and finance is one of the various services provided to the grassroot community through this model. It was widely replicated across other developmental NGOs. It is a community driven and managed microfinance model where the NGO plays the role of a facilitator, for instance providing capacity building services to the groups and building relationships with banks. During the late 90's , the Grameen model promoted by Muhammad Younus of Grameen Bank and the ASA model promoted by the Association for Social Advancement, both from Bangladesh, found rapid acceptance amongst the newer breed of microfinance institutions in India. This was due to the models' capability for rapid scaling in terms of client outreach. Also these models are less dependent on donor funds and passes the
they do. In 2001. There are other critics in the section of critics to microcredit. however. including repayment rate.e. improved living standards for the poor. in part owing to the difficulty in monitoring and measuring this impact.actual service charge to the clients while retaining a margin for its own growth. Whereas the welfarist approach often supplements financial services with other services such as education and health. they would have fewer borrowers and more delinquencies than in fact. grant-supported organizations to for profit institutions (non-banking financial corporations) became visible in Indian microfinance sector. It is not widely known that interest rates charged to borrowers frequently range from 2.  Key debates One key debate within microfinance has been whether donors and practitioners should focus on impact.5% to a 4% a month (about 31% to 50% a year). Research on the actual effectiveness of microfinance as a tool for economic development remains slim. These models have proven to be robust revenue models. i. This is justified to pay staff salaries and technical assistance from rich countries. then government welfare could be shrunk or eliminated as inefficient. The type of interest rate charged to the borrowers is rarely disclosed by the non-government organizations which receive donations.  Questions have arisen regarding whether microfinance can ever be as important a tool for poverty alleviation as its proponents and practitioners would submit. They also point out that if their interest rates were not fair. institution-builders focus solely on financial service. collection methods and questionable accounting practices. Slowly a distinct trend of shifting from non profit. some argue that if microfinance is a successful anti-poverty program. But it is quite controversial that they charge such high interests to poor individuals. The arguments for this approach are that: . or financial sustainability. The former approach has been called 'poverty lending' or 'the welfarist approach'. Microfinance institutions argue that rates are not really high compared with those charged by local money lenders (often over 10% a month). whereas the latter is sometimes termed 'the institution-building' or 'financial system approach'. a Wall Street Journal article raised questions about the Grameen Bank. depending on the country. criticism towards microfinance institutions. with money that is often donated. On a larger scale.  Criticism There is.
BRI Unit Desa. A new microfinance paradigm is taking shape. http://www. They will offer savings. As urban-rural income inequities continue to rise in the developing world. to help clients grow their assets while increasing their incomes.but lose much of their savings because home is a risky place to save. this result is increasingly viewed with dissatisfaction. These banks will be able to support their clients' efforts to control family risks as well as capitalize on business opportunities. This approach is exemplified by the transformations at Grameen Bank (referred to as 'Grameen II') since 2000 and has been championed by practitioners such as Stuart Rutherford.microfinancegateway. it has failed to reach the majority of poor people. Graham Wright. This requires access to safe. resulting in fast economic development. stimulate local economic growth and hire their less entrepreneurial neighbours. donors are best to direct subsidies to other services like education and health through separate non-profit organizations. flexible small-balance savings accounts. One view is that the most important form of microfinance is credit targeted to poor people who are also talented entrepreneurs. they will expand their businesses. 850 million lived in rural areas. The World Bank estimates that of approximately 1. and Freedom From Hunger. non-farm income. Another key debate centers on the appropriate target group for microfinance services. and personal and business loans. The Consultative Group to Assist the Poor (CGAP) has also published extensively on the new microfinance. While this approach has had significant results in the cities of the developing world. insurance. Examples of the welfarist approach are FINCA International. If these people gain access to credit. Madeleine Hirschland and Marguerite Robinson. who are rural subsistence farmers with little. What is microfinance? . disease and natural disaster.1. with the goal of developing full-service for-profit banks for all poor people. and Women's World Banking.org/section/faq Frequently Asked Questions 1. if poor people are willing to pay to use the institution. Examples of the institution-building approach are ACCION International. only by ensuring financial sustainability can the huge demand be met 3.2 billion people who subsisted on less than US$1 a day in 2003. it must be offering them value 2. There is increasing recognition that poor people can and do save informally at home -. remittance services. if any. There is also recognition that before rural farmers will have the confidence to start businesses. they must be able to gain more control over other household risks such as hunger.
Who are the clients of microfinance? 4. Aren't the poor too poor to save? 8. Thus. The important difference of microcredit was that it avoided the pitfalls of an earlier generation of targeted development lending. Why do MFIs charge such high interest rates to poor people? 7. Are commercial banks involved in microfinance? 11. microfinance was focused on providing a very standardized credit product. just like anyone else. Can microfinance be profitable? 10. What is the role of the financial regulator in supporting the development of microfinance? 13. we see a broadening of the concept of microfinance--our current challenge is to find efficient and reliable ways of providing a richer menu of microfinance products. insurance. Traditionally. Are there training courses that would enable me to get more in-depth exposure to microfinance? .) as we have come to realize that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products. Emphasis shifted from rapid disbursement of subsidized loans to prop up targeted sectors towards the building up of local. need a diverse range of financial instruments to be able to build assets. savings. and by focusing on client groups whose alternative source of credit was the informal sector. stabilize consumption and protect themselves against risks. The poor. What is the difference between microfinance and microcredit? 3. Microcredit came to prominence in the 1980s. Click here Back to top to send us feedback on this answer or to suggest your own answer! 2. and as a consequence. transfer services and other financial products targeted at low-income clients. Microcredit refers to a small loan to a client . although early experiments date back 30 years in Bangladesh. What is the government’s role in supporting microfinance? 12. What is a Microfinance Institution (MFI)? 9. Brazil and a few other countries. insurance. by insisting on repayment.2. microfinance has come to include a broader range of services (credit. savings. sustainable institutions to serve the poor. etc. Over time. How does microfinance help the poor? 5. has outperformed virtually all other forms of development lending. Microcredit has largely been a private (non-profit) sector initiative that avoided becoming overtly political. microfinance means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. What is the difference between microfinance and microcredit? Microfinance refers to loans. by charging interest rates that could cover the costs of credit delivery. What is microfinance? To most. When is microfinance NOT an appropriate tool? 6.
On the other hand. By providing access to financial services. often household-based entrepreneurs. transacting with formal institutions can also build confidence and empowerment. artisans. would like a safer place to save the proceeds from their harvest as these are consumed over several months by the requirements of daily living. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income. income generation from a business helps not only the business activity expand but also contributes to household income and its attendant benefits on food security. but rather. they are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade. and various insurance products. to an individual or through group lending. are secluded from public space. the potential market of microfinance clients also expands. a more diversified range of financial services which includes various types of savings products. etc. Microcredit can be offered. in many contexts. is directly related to income: the poorer you are. Moreover. often without collateral. and reduce their vulnerability to external shocks. In rural areas. . As we broaden the notion of the types of services microfinance encompasses. the less likely that you have access.made by a bank or other institution. build viable businesses. Click here to send us feedback on this answer or to suggest your own answer! Back to top 4. microfinance activities are more diverse and include shopkeepers. to become economic agents of change. For example. For instance. In urban areas. for many reasons. for women. Individuals in this excluded and under-served market segment are the clients of microfinance. the poorer you are. especially women. informal arrangements may not suitably meet certain financial service needs or may exclude you anyway. the more expensive or onerous informal financial arrangements. children's education. Click here to send us feedback on this answer or to suggest your own answer! Back to top 3. Poverty is multi-dimensional. many very poor farmers may not really wish to borrow. Access to conventional formal financial institutions. Moreover. microfinance plays an important role in the fight against the many aspects of poverty. the chances are that. etc. Microfinance clients are typically self-employed. street vendors. microcredit might have a far more limited market scope than. who. It can also be a powerful instrument for self-empowerment by enabling the poor. For instance. payment and remittance services. say. Who are the clients of microfinance? The typical microfinance clients are low-income persons that do not have access to formal financial institutions. service providers. How does microfinance help the poor? Experience shows that microfinance can help the poor to increase income.
or other such events. At some level. clients exclude themselves from microcredit as it is currently designed. it may also face months of no income. that in most people's mind. and other products. the very cause of poverty is the lack of a sustained. As currently designed. These extremely poor people at the bottom percentiles of those living below the poverty line need safety net programs that can help them with basic needs. thereby reducing its ability to enter into the type of commitment demanded today by most MFIs. weather. "microfinance" still refers to microcredit. can drive a family so much deeper into poverty that it can take years to recover. remittances from abroad. But the fact of the matter is. as they will only be pushed further into debt and poverty by loans that they cannot repay. some of these are working to incorporate plans to help “graduate” recipients to microfinance programs. Microcredit serves best those who have identified an economic opportunity and who are . As we are finding out. This means that 98% of recent vocational school graduates or returning refugees would need to be successful in establishing a microenterprise for repayment rates to be high enough to allow for a program's overall sustainability. a great number of poor. regular. Often times governments and aid agencies wish to use microfinance as a tool to compensate for some other social problem such as flooding. When is microfinance NOT an appropiate tool? Microfinance increasingly refers to a host of financial services—savings. It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn't be designed and made useful. relocation of refugees from civil strife. These shocks produce a huge claim on the limited financial resources of the family unit. and. Even though a family may have a significant income for extended periods. Microcredit programs directed at these types of situations rarely work. and especially extremely poor. Running a program with substantial default rates undermines the very notion of credit and destroys credit discipline among those who could repay promptly but who look foolish given that many do not. it is often expected to respond to these situations where whole classes of individuals have been “made poor”. regular. Credit requires a 98% “hit” rate to be successful. Since microcredit has been sold as a poverty reduction tool. and redundant workers who have been laid off. microcredit requires sustained.Recent research has revealed the extent to which individuals around the poverty line are vulnerable to shocks such as illness of a wage earner. and often significant payments from poor families. loans. absent effective financial services. Microcredit is only useful in certain situations. and significant income. or have incomes that are too undependable to enter into today's loan products. and with certain types of clients. theft. insurance. This is simply unrealistic. Click here to send us feedback on this answer or to suggest your own answer! Back to top 5. Some people are just too poor. recent graduates from vocational training. Extremely poor people who do not have any stable income—such as the very destitute and the homeless—should not be microfinance clients.
in a position to capitalize on that opportunity if they are provided with a small amount of ready cash. can be reduced. A long series of studies has shown that many programs that charge subsidized interest rates end up using rationing mechanisms to distribute credit in response to excess demand. especially in relation to the size of the transactions involved. Loan officers must visit the client's home or place of work. evaluate creditworthiness on the basis of interviews with the client's family and references. and seldom grow significantly. However. A $100 dollar loan. Click here to send us feedback on this answer or to suggest your own answer! Back to top 6. follow through with visits to reinforce the repayment culture. They recognize that their alternatives—even higher interest rates in the informal finance sector (moneylenders. and access to liquidity and capital can enable the poor to obtain higher returns. Subsidy-dependent programs are always fighting to maintain their levels of activity against budget cuts. and in many cases. Moreover. Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. who have demonstrated an ability to undertake the proposed activities in an entrepreneurial manner. and force the institution to charge a “high” rate of interest to cover its cost of loan administration.) or simply no access to credit— are much less attractive for them. While that might not seem unreasonable in absolute terms. These . requires the same personnel and resources as a $2. The universe of potential clients expands exponentially however. are the best candidates for microcredit. Many do. This is one of the most important reasons why banks don't make small loans. Thus. those poor who work in stable or growing economies. for example. Why do MFIs charge such high interest rates to poor people? Providing financial services to poor people is quite expensive. etc. the institution then depends on permanent subsidy. it might represent 25% of the value of the loan amount. Interest rates in the informal sector can be as high as 20 percent per day among some urban market vendors. the interest rate is only a small part of their overall transaction cost of credit. and who have demonstrated a commitment to repay their debts (instead of feeling that the credit represents some form of social re-vindication). They simply aren't sustainable. paperwork. It can easily cost US$25 to make a microloan. The microfinance institution could subsidize the loans to make the credit more "affordable" to the poor. and if microfinance institutions offer credit on a more accessible basis. thus benefiting the poor.000 one thus increasing per unit transaction costs. travel. Many of the economic activities in which the poor engage are relatively low return on labor. or to take advantage of economic opportunities. substantial costs in terms of time. etc. once we take into account the broader concept of “microfinance”. The return received on such investments may well be many times greater than the interest rate charged. especially if other microcredit operations have shown that they can provide credit and grow on the basis of “high” rates of interest—and along the way serve far greater numbers of clients.
the term microfinance institution has come to refer to a wide range of organizations dedicated to providing these services: NGOs. What is a Microfinance Institution (MFI)? Quite simply. This will bring down the cost of providing loans. The poor need savings that are both safe and liquid. to maximize the savings propensity of the poor. However. while increased access to credit for the poor on a long term and sustainable basis can bring significant benefits. Thus. Aren't the poor too poor to save? The poor already save in ways that we may not consider as "normal" savings--. and to increase scale. and the benefits transferred to the poor in terms improving loan products. Or. building materials. and lower borrowing costs. . MFIs must continue to work to improve efficiency levels. a microfinance institution is an organization that offers financial services to low income populations. which takes away the advantage to the borrower of the interest rate subsidy. these transactions costs are frequently higher than the interest costs. better access to loans. Most often. These savings services must be adapted to meet the poor’s particular demand and their cash flow cycle. these may not be readily available when the woman needs them. credit unions. school fees. institutions must provide flexible opportunities--. Almost all of these offer microcredit and only take back small amounts of savings from their own borrowers. for example.mechanisms cause the borrower to have to “jump through hoops”. since they are not used to saving in financial instruments and they place such a high premium on having savings readily available to meet emergency needs and accumulate assets. increasing the time and money s/he must put out to get the loan. the poor not only have low income. if a poor woman has loaned her "saved" funds to a family member in order to keep them safe from theft (since the alternative would be to keep the funds stored under her mattress). Click here to send us feedback on this answer or to suggest your own answer! Back to top 8. This represents an important challenge for the microfinance industry that has not yet made a concerted attempt to profitably capture tiny deposits.).both in terms of amounts deposited and the frequency of pay ins and pay outs. private commercial banks and non-bank financial institutions (some that have transformed from NGOs into regulated institutions) and parts of state-owned banks. they face the same series of sudden demands for cash we all face: illness. but also irregular income flows. In fact. that can be easily exchanged to cash in the future (gold jewelry. not from the general public. burial. After all. These informal ways that people save are not without their problems. It is hard to cut off one leg of a goat that represents a family's savings mechanism when the sudden need for a small amount of cash arises. need to expand the dwelling.investing in assets. They care less about the interest rates that they can earn on the savings. Within the microfinance industry. for example. weddings. etc. 7. domestic animals. cooperatives.
in most cases microcredit NGOs are not allowed to capture savings deposits from the general public. we call them MFIs. This may happen. ones that employ the newest lending techniques to generate efficient outreach that permit them to reach down far into poor sectors of the economy on a sustainable basis. and vulnerable non-poor who are not reached by the banking sector. after all. from an industry perspective. that consider themselves to be in the business of microfinance and that will certainly play a role in a reshaped and deepened financial sector.5% of total assets. the world over. Most of these constitute a group that is commonly referred to as "best practice" organizations. Some are membership based such as credit unions and cooperative housing societies. but many poor people do have some access to these types of institutions. It is interesting to note that while the programs that reach out to the poorest clients perform less well as a group than those who reach out to a somewhat better-off client . This compares favorably with returns in the commercial banking sector and gives credence to the hope of many that microfinance can be sufficiently attractive to mainstream into the retail banking sector. they are referring only to that part of the institution that offers microfinance. This is the “crowding out” effect. do many other nonfinancial development activities and would bristle at the suggestion that they are essentially financial institutions. Click here to send us feedback on this answer or to suggest your own answer! Back to top 9. we refer to them as MFIs. These institutions tend to have a broader client base than the financial NGOs and already consider themselves to be part of the formal financial sector. to serve better off clients who can absorb larger loan amounts. A great many NGOs that offer microcredit. since they are engaged in supplying financial services to the poor. although they tend not to reach down market as far as the financial NGOs. It varies from country to country. perhaps even a majority. an NGO that is fully and virtually exclusively dedicated to offering financial services. after adjusting for inflation and after taking out subsidies programs might have received. there are a great number of very poor. Data from the MicroBanking Bulletin reports that 63 of the world's top MFIs had an average rate of return. Can microfinance be profitable? Yes it can. This group of a few hundred NGOs have led the development of microcredit. however. even though only a small portion of their assets may actually be tied up in financial services for the poor. massive growth in the numbers of clients can be achieved. Others worry that an excessive concern about profit in microfinance will lead MFIs upmarket. For our purposes. when people in the industry refer to MFIs. Many feel that once microfinance becomes mainstreamed. The same sort of situation exists with a small number of commercial banks that offer microfinance services. and subsequently microfinance. Others are owned and managed by local entrepreneurs or municipalities. These are community-based financial intermediaries.The image most of us have when we refer to MFIs is of a “financial NGO”. of about 2. In both cases. There are other institutions. poor. Yet.
Many governments have set up apex facilities that channel funds from multilateral agencies to MFIs. Click here to send us feedback on this answer or to suggest your own answer! Back to top 12. governments can also get involved in microfinance by concerning themselves with the regulatory framework that impinges on the ability of a wide range of financial actors to offer financial services to the very poor. and subsidized microenterprise credit is still relatively rare when compared to its rural counterpart. More and more MFI managers have come to understand that sustainability is a precursor to reaching exponentially greater numbers of clients. development banks. managers of leading MFIs are seeking ways to dramatically increase operational efficiency. see the following documents in the Microfinance Gateway Library: 11. formal financial institutions are recognizing the benefits of serving poorer clients. and agricultural banks to move microcredit. In urban areas. and if they commit to that path. they disburse too quickly (and thoughtlessly) and they collect too sporadically (unwillingness to be tough on defaulters). their performance is improving rapidly and at the same pace as the programs serving a broad-based client group did some years ago. Given this. The evidence supports this position. Short term political gain is just too tempting for politically controlled lending organizations. Now that microfinance has become quite popular. unless the government has a clear acceptance of the need to avoid the pitfalls of the past and a clear means to do so. and other community-based intermediaries to . credit unions. This is not generally a good idea. What is the role of the financial regulator in supporting the development of microfinance? Many feel that the most important role of a financial regulator in supporting the development of microfinance is to create an alternative institutional type that allows sound financial NGOs. Finally. governments never really got into the act. including credit programs for the disadvantaged. Until recently. Are commercial banks involved in microfinance? Yes. For more information. postal savings banks. Apex facilities can be quite complicated and there are few successful examples in microfinance. What is the government’s role in supporting microfinance? Governments have a complicated role when it comes to microfinance. not the other way around. Click here to send us feedback on this answer or to suggest your own answer! Back to top 10. Twenty years of insightful critique of rural credit programs revealed that governments do a very bad job of lending to the poor. In short. This topic is treated below. governments generally felt that it was their responsibility to generate development finance'. Successful apex organizations in microfinance tend to be built on the backs of successful MFIs. governments are tempted to use savings banks. Increasingly. we have every reason to expect that programs that reach out to the very poorest microclients can be sustainable once they have matured.segment.
.obtain a license to offer deposit services to the general public and obtain funds through apex organizations. reporting requirements. but the cost of adequate supervision could eat up between 25 and 50 % of the total budget of the agency. and much more. working with civil authorities to ensure that private loan contracts can be recognized by courts in those transition economies that lack even basic legislative infrastructure. limits on group guarantee mechanisms. and cost…please consider the institutions listed below as a starting point in learning more about microfinance training. and reporting requirements that will prepare MFIs to eventually become regulated. http://economictimes. regulators can work with the nascent microfinance industries of most countries on issues such as modifying usury limits as stated in the commercial code to allow appropriate levels of interest. and internal regulations that limit the ability of traditional banking institutions to do microfinance. Regulators can also examine the laws. location. In order to ensure that the poorest benefit from this growth. And. budgetary restrictions faced by bank regulators make it very unlikely that they will be able to supervise a whole host of small institutions.cms Scaling up microfinance in India The impressive recent growth of certain sectors of the Indian economy is a necessary but insufficient condition for the elimination of extreme poverty. the general level of development of the microfinance industry does not yet warrant the licensing of a separate class of financial institutions to serve the poor. generating credit information clearinghouses to share information on defaulting borrowers to limit their ability to go from one MFI to another. In a few countries. limits on branch office operations (scheduling and security). executive decrees. and requirements for the contents of loan files. In most countries. and also contribute to it. however. Are there training courses that would enable me to get more in-depth exposure to microfinance? Yes. in most countries. These regulations include limits on the percent of a loan portfolio that can be lent on an unsecured basis. Trainings vary in length. the expansion and improvement of the microfinance sector should be a national priority. this may be an appropriate strategy. Not least.com/articleshow/1648287. these institutions' total assets may make up a tiny percent of the total financial system. See also the Events page of the Gateway for specific announcements of upcoming workshops. Rather. 13. banking regulators may need to look at the way in which they would evaluate microloan portfolios within large banks. A number of institutions provide workshops and trainings on microfinance topics from product costing to accounting to MFI management to reaching the poor.indiatimes.
SKS has emerged as the fastest growing microfinance institution in the world and its founder. Unitus. Still.5 million families. these three organisations now serve more than 1. microfinance is one of the few market-based. The rest of India is catching on and catching up. and others.000. In 2000 three leading MFIs — SHARE. Grameen Capital India). Vikram Akula. but it is clearly no panacea. Loan products are still too inflexible.Researchers tell us that in Bangladesh. The impressive accomplishments of MFIs and their clients in one state — Andhra Pradesh — provides a glimpse as to what is possible country-wide. According to Sa-Dhan. Two other studies suggest that the impact of microfinance on the poorest is greater than on the poor. ICICI Bank. With support from Sidbi. Our experience in the business world has taught us that solutions marketed as cure-alls to complex societal problems rarely if ever pan out as promised. Microfinance is powerful. Microfinance does not directly address some structural problems facing Indian society and the economy. and it is not yet as efficient as it will be when economies of scale are realised and a more supportive policy environment is created. Insufficient data exists on client-level impact. SHARE. Moreover. led by the extraordinary microfinance pioneer Udaia Kumar. and the argument to scale it up to meet the overwhelming need is compelling. well-managed microfinance institutions (MFIs) have shown a capacity to wean themselves off of subsidies and become sustainable within a few years. Citigroup. HDFC.000 families. the overall . as one would expect. was recently honoured as one of the top 100 people “who shape our world” by Time magazine. Grameen Foundation (and its new joint venture. though new tools such as the Poverty Progress Index of Grameen Foundation and the work of Sa-Dhan (the association of Indian MFIs) on measuring client satisfaction are addressing this gap. 40% of the overall reduction of rural poverty in recent years has been due to microfinance. and savings and insurance services that the poor also need are not widely available due to regulatory barriers. Friends of Women’s World Banking. SKS and Spandana — reached far fewer than 100. and yet another that non-participating members of communities where microfinance operates experience socio-economic gains — suggesting strong spillover effects. where 15 million families now benefit from small loans and other financial products such as micro-savings and micro-insurance. most of them very poor when they started accessing micro-financial services. scaleable anti-poverty solutions that is in place in India today. Economies of scale and imaginative uses of technology have brought costs and interest rates down in Andhra Pradesh. alone reaches 900.
full-service MFIs can and do complement the self-help group movement. and the vice-chair of the India Advisory Council of Grameen Foundation. shows that in most countries where quality microfinance programmes have been scaled up. sometimes dramatically. There is an opportunity to make a real dent in hard-core poverty through microfinance. A new paper.outreach is 6.cgap.html . Professionally-run. Furthermore. most recently by proposing an industry-wide consumer protection code that most MFIs have already agreed to in principle.5 million families and the sector-wide loan portfolio is Rs 2.org/keyprinciples. we will slowly but surely transform India in ways we can only begin to imagine today. Each Indian state could consider forming a multi-party working group to meet with microfinance leaders and have a dialogue with them about how the policy environment could be made more supportive and to clear up misperceptions. However.500 crore. which has its own impressive track record. and a member of the Investment Committee of Grameen Foundation. are raising standards. is a partner at Khosla Ventures. such as eastern and central Uttar Pradesh. the market should be left to set interest rates. government regulators should set clear criteria for allowing MFIs to mobilise savings for on-lending to the poor. new initiatives are expanding this success story to the some of the country’s poorest regions. Gandhi is a managing director and head of the Global Financial Institutions Group of Credit Suisse Group. (Khosla. the co-founder of Sun Microsystems. By unleashing the entrepreneurial talent of the poor. through Sa-Dhan. not the state. Indian MFIs. With one state leading the way. poverty has been reduced. “Measuring the Impact of Microfinance: Taking Stock of What We Know “(which can be downloaded for free from website. A new institutional capacity-building collaboration between American Express Foundation and Grameen Foundation will be critical in ensuring that progress is nationwide and sustainable. The local and national governments have an important role to play in ensuring the growth and improvement of microfinance. this would allow for a large measure of financial independence amongst well-managed MFIs — as the Grameen Bank of Bangladesh has achieved in recent years through an aggressive and highly successful savings initiative. we need to build on a successful model. First and foremost. Ensuring transparency and full disclosure of rates including fees is something the government should ensure. and something that new technologies as well as reporting and data standards are already enabling. Importantly.) http://www. this is meeting only 10% of the estimated demand.
build their assets. a microlender should not use high interest rates to make borrowers cover the cost of its own inefficiency. When governments regulate interest rates. other tools will alleviate poverty better—for instance. or social investors might care about. Achieving sustainability means lowering transaction costs. but not as part of the country’s mainstream financial system. In many cases. yet they are the least likely to be served by banks. recycle those savings into loans. Microcredit is not the best tool for everyone or every situation. and education. there will be less dependence on funding from donors and governments. Finance for the poor requires sound domestic financial institutions that provide services on a permanent basis. such services should be coupled with building savings. 7. insurance. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition. they can earn more. Microfinance is about building permanent local financial institutions. Cost recovery is not an end in itself. Their growth will be limited by the scarce and uncertain supply soft money from donors or governments. 6. Governments need to maintain macroeconomic stability. but also savings. high-default loan programs that cannot 2. and affordable. 8. Microfinance can pay for itself. and cash transfer services. or infrastructure improvements. and refrain from distorting markets with subsidized. National governments should set policies that stimulate financial services for poor people at the same time as protecting deposits. governments. so such regulation should be avoided. employment and training programs. Poor people need a variety of financial services. not just loans. However.The Consultative Group to Assist the Poor Key Principles of Microfinance 1. Rather. poor people are the majority of the population. including government development banks. Microfinance is a powerful tool to fight poverty. At the same time. they cannot cover their costs. Unless microlenders can charge interest rates that are well above average bank loan rates. and must do so if it is to reach very large numbers of poor people. When poor people have access to financial services. Microcredit is not always the answer. In most developing countries. Interest rate ceilings hurt poor people by making it harder for them to get credit. housing. As local institutions and capital markets mature. Destitute and hungry people with no income or means of repayment need other kinds of support before they can make good use of loans. Depending on circumstances. and provide other services. the poor need a range of financial services that are convenient. A financially sustainable institution can continue and expand its services over the long term. Strong institutions need to charge enough to cover their costs. Like everyone else. and finding new ways to reach more of the unbanked poor. These institutions need to attract domestic savings. flexible. The role of government is to enable financial services. and cushion themselves against external shocks. they usually set them at levels so low that microcredit cannot cover its costs. 4. Microfinance is often seen as a marginal sector—a “development” activity that donors. 5. avoid interest rate caps. Where possible. microfinance will reach the maximum number of poor clients only when it is integrated into the financial sector. Microfinance means building financial systems that serve the poor. It costs much more to make many small loans than a few large loans. not to provide them directly. . 3. they want not only loans. health. Most poor people cannot get good financial services that meet their needs because there are not enough strong institutions that provide such services. offering services that are more useful to the clients. small grants. it is the only way to reach scale and impact beyond the limited levels that donors can fund.
In special cases where other funds are unavailable. works best when it measures—and discloses—its performance. credit bureaus. Microfinance http://www. government funding may be warranted for sound and independent microfinance institutions. and donors. and return. They should set clear performance targets that must be met before funding is continued. It should be used to build the capacity of microfinance providers. to develop supporting infrastructure like rating agencies. not compete with it. investors.be sustained. Skills and systems need to be built at all levels: managers and information systems of microfinance institutions. 9.g. and cost recovery) and social information (e. loan repayment. 10. including access to markets and infrastructure. The 11. not just moving money. central banks that regulate microfinance. and to support experimentation.. Such support should be temporary. They should also clamp down on corruption and improve the environment for microbusinesses. and equity for microfinance. Donors should try to integrate microfinance with the rest of the financial system. and customers need this information to judge their cost. banking supervisors.. loans.org/what_we_do/microfinance_in_action/ Microfinance Microfinance success stories Odette.g. Donors provide grants. Every project should have a realistic plan for reaching a point where the donor’s support is no longer needed. serving sparse or difficult-to-reach populations can require longer-term donor support. Donors. Haiti . Accurate. Public and private investments in microfinance should focus on building this capacity. number of clients reached and their poverty level). both financial information (e. key bottleneck is the shortage of strong institutions and managers. other government agencies. They should use experts with a track record of success when designing and implementing projects.grameenfoundation. Microfinance is a specialized field that combines banking with social goals. Donor funds should complement private capital. In some cases. interest rates. standardized performance information is imperative. and audit capacity. risk.
Each expansion pulls her further from the devastation of poverty. Microfinance consists of making small loans. It is sustainable and can be implemented on the massive scale necessary to respond to the urgent needs of those living on less than $1 a day. usually less than $200. to individuals. Microfinance. Mexico Chaibia. As the chickens multiply.Yuli. includes several support systems that contribute greatly to its success. For example. or Chaibia word: e-card story of An effective poverty reduction strategy Microfinance is often considered one of the most effective and flexible strategies in the fight against global poverty. Yuli. Microfinance institutions offer business advice and counseling. Indonesia Andrea. Soon she can sell the chicks. while clients provide peer support for each other through solidarity . the World’s poorest. self-sustaining business. the Grameen way. usually women. Andrea. a woman may borrow $50 to buy chickens so she can sell eggs. Morocco Spread the Send an with the Odette. she will have more eggs to sell. to establish or expand a small.
their communities benefit. MFIs must also know how their products and services are helping their clients to escape poverty. Our success is intricately tied to their impact and performance. This contributes substantially to the extremely high repayment rate of loans made to microfinance entrepreneurs. our partner microfinance institutions are the bedrock of our outreach to the poor. Grameen Foundation is helping them measure their social performance with its Progress Out of Poverty Index. how quickly clients leave poverty. they are re-loaned. these front-line institutions must be able to adapt to the changing needs of the communities they serve. An equally important part of microfinance is the recycling of funds. The vast majority of the loans go to women because studies have shown that women are more likely to reinvest their earnings in the business and in their families. we work with individual MFIs to develop a comprehensive technical assistance package. and what helps them to move out of poverty faster. As the demand for microfinance increases. It allows the MFIs to better determine their clients’ needs. For example. Microfinance has a positive impact far beyond the individual client.circles. As loans are repaid. which programs work best. Jobs are created. This continual reinvestment multiplies the impact of each dollar loaned.grameenfoundation. civic participation increases. It builds on previous efforts within the industry to measure and manage social . knowledge is shared. we provide each partner with financial products and services that are tailored to meet their needs. usually in six months to a year. her circle helps with her business until she is well. Drawing on the skills and expertise of our in-house professionals and a pool of consultants. including: • • • financing strategies that foster smart growth training and capacity-building programs that help to expand and strengthen day-to-day operations outreach initiatives that increase their visibility both in local and international communities To be more effective. http://www. As families cross the poverty line and micro-businesses expand. To help them operate more efficiently and be more effective. and women are recognized as valuable members of their families and communities.org/what_we_do/microfinance_support/ Microfinance Program Support Building strong institutionsRanging in size from just a few hundred clients to hundreds of thousands. If a client gets discouraged. if a client falls ill. the support group pulls her through.
It employs high quality professionals to provide domain expertise. Centre is an autonomous. Jaipur. Core Values of CmF Integrity and Sensitivity towards Poor and Marginalized Innovative Proactive and Responsive . banks. deepening and up scaling the micro finance sector. Chaiman IDS. Jaipur undertook Feasibility Study and suggested for setting up the Centre for Micro Finance to help in widening. Given its mandate the centre places value on networking and collaborations with other stakeholders. The primary role of the centre is to help in coordinating and channeling actions and programmes of various stakeholders. 2005 at IIHMR. The Centre is an autonomous institution. centre of microfinance. It undertakes direct action only in gap areas where players neither exist nor can be catalyzed. met for the first time on June 9th. Prof V S Vyas. Given its mandate the centre places value on networking and collaborations with stakeholders. particularly of the implementation projects within it. N S Sisodia. it employs high quality professionals to provide a wide range of technical and other support services to mF players. IAS.government departments. The centre for microFinance is housed in Indian Institute of Health Management Research (IIHMR) Jaipur. as well as those outside the network. The Centre for microFinance is the nodal agency for all the projects under Sakh se Vikas-The Rajasthan Microfinance Initiative of The Sir Ratan Tata Trust. and civil society institutions to strengthen microFinance movement in Rajasthan. The Centre for microFinance (CmF) has been set up in Jaipur (Rajasthan) to widen. self-governing institution.performance and is available to Grameen Foundation partner MFIs. It undertakes direct action only in gaps where players neither exist nor can be catalyzed About Us The Centre for microFinance (CmF) has been set up in Jaipur (Rajasthan) to strengthen the microFinance sector. deepen and upscale the microFinance movement in Rajasthan. state government and partner NGOs thought about a ‘knowledge and support centre’ for micro finance sector in Rajasthan. ex Secretary Banking Government of India. The objective of the Centre is to provide services to mF players and various stakeholders in the microfinance sector. Sir Ratan Tata Trust along with banks. The Steering Committee headed by Mr.
I was pleased to see all the buzz about microfinance and the number and . Self-Governing http://www. Policy Division. Reconnecting after a few years. organised by CARE India. and build networks around the microfinance sector in India.Collaboration and Leverage Autonomous. and Innovation in the Microfinance Industry". discuss perspectives and research. the Small Industries Development Bank of India. The key themes of this conference were "Inclusion. This was the second annual event of what is now becoming a large annual gathering to celebrate successes. ICICI Bank. DFID* I recently participated in the Microfinance India conference (New Delhi. Ford Foundation and Friends for Women's World Banking to mark the International Year of Microcredit. SADHAN.php The Future of Microfinance in India: The Microfinance India Conference and a Look at an Expanding Market By Sukhwinder Singh Arora.org/english/microfinance/pubs/newsletter/pages/2005_06/ news_india. April 1214. PlaNet Finance India. CGAP. 2005). Financial Sector Team. the United Nations Development Programme.uncdf. Impact.
insights gained by NGOs. With the missionary zeal of the National Bank for Agriculture and Rural Development (NABARD). This short note is a personal reflection on what has changed.diversity of stakeholders who collaborated on the conference. the Small Industries Development Bank of India recognised the opportunity and started implementation of an ambitious national programme. The first breakthrough emerged from policy support to enable informal self help groups of 15-20 members (mainly women) to transact with commercial banks. The new generation microfinance was slow in coming to India. what may take a long time to change and what India and the rest of the World may learn from each other. Low levels of grants to microfinance institutions. A Long History of Social Banking India has supported social banking for a long time. The Self Help Group promoters emphasise that mobilising savings is the first building block of financial services. . These groups build up and rotate savings amongst themselves. What is Exciting about Indian Microfinance? A Task Force on Microfinance recognised in 1999 that microfinance is much more than microcredit. Providing loan and capacity building support to MFIs and capacity building and rating support for sector development. this national movement now encompasses 1. The number and diversity of delegates. the increasing enthusiasm of bankers and politicians and emerging successes in repayment and social impacts. the level of participation from senior policy makers and bankers and the quality of debates and media attention confirms that microfinance is no longer at the periphery of the financial sector in India. deliver large subsidy oriented credit programmes to serve marginal communities and poor households and control interest rates have been tried for over 35 years. an unfavourable policy environment. this programme already supports 70 MFIs and has disbursed US$46 million.4 million such groups (over 20 million members). mandate credit allocations for priority sectors (including agriculture). Policy directions to rapidly expand rural branches. substantial traditional banking infrastructure and a search for context specific solutions has constrained rapid scale up. credit and other financial services and products of very small amounts to the poor in rural. open bank accounts and take responsibility for lending and recovering money financed by banks. At a time when many questioned the need for specialised microfinance institutions (MFIs) in India. semi-urban and or urban areas for enabling them to raise their income levels and improve living standards". stating: "Provision of thrift.
One could argue that MFIs are small and insignificant. All varieties of banks . During the same period. Equity investments into newly emerging MFIs. Chidambram announced "Government intends to promote MFIs in a big way. so why bother. Testing and rolling out specific retail products such as the Kissan (Farmer) Credit Card. grew from 1. national and regional . The insurance sector was partially opened to private and foreign investments during 2000. The outreach of SHARE Microfin Limited. Banks and NGOs jointly promoting MFIs.47 million to US$40 million. classify and rate such institutions. is to identify MFIs. In addition to the dominant SHG methodology. with loans being held on the books of banks. and empower them to intermediate between the lending banks and the beneficiaries. Outreach has expanded from 39.905 members between 2000 and 2005 and its loan portfolio has grown from US$0. the portfolios of Grameen replicators have also grown dramatically. The larger point is about policy space for innovation and diversity of approaches to meet large unmet demand. Many of the 26 CASHE partners and another 136 community organisations these NGO-MFIs work with. Microfinance programmes have rapidly expanded in recent years. The CARE CASHE Programme took on the challenge of working with small NGO-MFIs and community owned-managed microfinance organisations. the national budget and other policy documents have almost equated microfinance with promoting SHG links to the banks.000 women members over 2001-05. • Since banks face substantial priority sector targets and microfinance is beginning to be recognised as a profitable opportunity (high risk adjusted returns).875 to 86. which are paid for loan origination and recovery. Engaging microfinance institutions as agents. The way forward.have become involved. Assessing and buying out microfinance debt (securitisation). and ICICI Bank has been at the forefront of some of the following innovations: • • • • • • Lending wholesale loan funds. Some examples are: • • Membership of Sa-Dhan (a leading association) has expanded from 43 to 96 Community Development Finance Institutions during 2001-04. delivery methodologies and strategic partnerships." .For many years. Over 20 insurance companies are already active and experimenting with new products. a variety of partnership models between banks and MFIs have been tested. The central bank notification that lending to MFIs would count towards meeting the priority sector lending targets for Banks offered the first signs of policy flexibility towards MFIs. for instance. loans outstanding of these member MFIs have gone up from US$15 million to US$101 million.000 to around 300. I believe.domestic and international. represent the next level of emerging MFIs and some of these are already dealing with ICICI Bank and ABN Amro. The 2005 national budget has further strengthened this policy perspective and the Finance Minister Mr P.
the phone infrastructure was the monopoly of public sector institutions. With the right enabling environment. The central bank has strictly forbidden commercial banks from using agents in collection of savings services. A combination of agents and technology can play a powerful role in rightly aligning incentives for the collector and customers. mobile phones in India expanded by 160% during just one year 2003-04 (from 13 to 33 million). apart from approvals still needed from the central bank to open new branches or close existing ones. and fixed and operating costs are high. rural kiosks and village knowledge centres for providing credit support to rural and farm sectors and appointment of micro-finance institutions (MFIs) as banking correspondents are being worked out. medium and long terms.What is beginning to happen in microfinance can be seen from the perspective of what has happened to phones in India. Mobile tariffs fell by 74% during the same period. In the past. The banks can only open so many branches. despite hearing of unreliable savings collectors or even occasionally falling prey to such arrangements. Many of these are now graduating to sell internet services and could potentially be banking agents . branding. the 2005 Budget opened a small window in this area and the central bank annual policy recently confirmed discussions on this: "As a follow-up to the Budget proposals. This is unfortunate as: • • • • Effective microfinance delivery is about managing transaction costs for providers and customers.where a phone user could interface with a private sector provider using the public sector telecom infrastructure. Banking service may not be able to defy the commercial logic pursued by most other sectors where a variety of retailers provide services to customers. But many others lack access to safe. many banks sent collectors to gather these savings but problems with monitoring. "credit" has again crept in as the key perceived need. Even with this policy change." But readers may note that between the budget and the annual policy statement. In the late eighties. and intense competition amongst private sector players. Savings services are needed by many more customers and as frequently as access to phone services. literate and lucky to have banks working for them. there is a less heralded but even more powerful nationwide success on access. product design. modalities for allowing banks to adopt the agency model by using the infrastructure of civil society organisations. Phones were difficult to get and even more difficult to use for those lacking ownership. Realisation that users need not own a phone to access one led to privatisation of the last mile . While this is heady progress. quality control. logistics and distribution. Fortunately.that is the evolving story. national and international phone services through the length and breadth of India. secure and accessible savings services for the short. The appointment of agents can keep costs manageable and offer greater flexibility to Banks. Many poor households value access to savings services and find new providers and arrangements. today there are 2. while keeping transaction costs manageable for everyone.5 million entrepreneurs selling local. while companies focus on customer needs. Many customers are rich. inability to tackle misappropriation and the rising aspiration of collectors to become permanent staff of public sector banks killed a useful service. .
Microfinance on its own is unlikely to be able to address formidable challenges of underdevelopment. including lending to and by MFIs. which contrasts with the stagnation in Eastern. and the variety and quantum of services to be provided are really large. At the time of the conference. Vijay Mahajan. Many speakers at the Microfinance India conference talked about the significant and growing gap between surging growth in South India.000 (all microfinance and beyond) remain and caps on deposit . 59% lack access to deposit account and 78% lack access to credit. While the central bank has deregulated most interest rates. The reality of the high transaction costs of serving small customers. and the poor quality of services currently provided does not figure prominently in this discourse.Challenges Remain A World Bank study assessing access to financial institutions found that amongst rural households in Andhra Pradesh and Uttar Pradesh. a leading and responsible MFI was being investigated by the authorities for charging "high" rates of interest. Competition. technology and human resources. Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services. for example. their continuing dependence on the informal sector. estimated that 90 million farm holdings. 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx US$30 billion credit annually. Central and North Eastern India. the fact that most bankers shy away from retailing to this market as a business opportunity. 80% of the financial sector is still controlled by public sector institutions. The Self Help Group movement is beginning to focus on issues of quality and there were some interesting discussions on embedding social performance monitoring as a part of the regular management information systems. Reaching this market requires serious capital. poor infrastructure and governance. Per unit transaction costs of small loans are high but many opinion leaders still persist with the notion poor people cannot be charged rates that are higher than commercial bank rates. merging public sector banks or even enhancing Foreign Direct Investments in Indian private banks. consolidation and convergence are all being discussed to improve efficiency and outreach but significant opposition remains. A tiny segment of this US$30 billion potential market has been reached so far and this is unlikely to be addressed by MFIs and NGOs alone. Managing Director of BASICS. This is about 5% of India's GDP and does not seem an unreasonable estimate. the numbers of customers to be reached. interest rates restrictions on commercial bank for retail loans below US$5. the All India Bank Employees Association has threatened to strike if the Government proceeds with its policy of reducing its capital in public sector banks. However.
Unusually. and be responsible for their actions. As Nachiket Mor of ICICI Bank said at the conference. I would like to congratulate CARE. for successfully hosting this global cross learning event. 2007 14:55 IST . Prescriptions and detailed circulars often limit organisational innovation and market segmentation. What is more. Closing Remarks In my view. savings service is the neglected daughter of the family of financial services.But most conference participants accepted the imperatives to build sustainable institutions. increased conference participation by public sector banks and redressal of North South divide) on which the sector should track progress in a years' time. with savings services. The knowledge. capital and technology to address these challenges however now exist in India.rates also discourage sharing transaction costs with customers. Credit/ deposit ratio). This is evident from different nomenclature used at both the international (UN International Year of Microcredit. both public and private banks have the capacity to rapidly address the remaining challenges. clear land titles or unique identity papers. the next few years promise to be exciting for the delivery of financial services to poor people in India. Annual Credit Policy. Microfinance is not yet at the centre stage of the Indian financial sector. despite their productive and reproductive role in financial services. as the lead organisers. the event ended with a statement of some objectively verifiable indicators (such as expansion of urban microfinance. utility bills. Is microfinance a success in India? November 08. Savings services can be a useful entry point for the unbanked to build up a history with the formal financial institutions before customers are entitled to other financial services. With a more enabling environment and surge in economic growth. I use this metaphor because of the sustained discrimination against and frequent disregard for savings services. poor customers need to trust the financial institution and not the other way round. MicroCredit summit) and national levels (Priority Sector Lending. There is still lot of policy focus on what activities are and are not allowed and not enough operational freedom as yet for banks and financial institutions to design and deliver programmes. With the greater spotlight on knowing the customer and the fact that poor households do not have a salary slip. although they are not yet fully aligned. if the right indicators are monitored and operational freedom and incentives are clear. a regular savings record could be the first building block to membership of the formal financial sector.
Ghate attempts to put together a one-stop document that will help readers catch up on the latest developments. who is an independent researcher and consultant and had worked as a senior economist at the Asian Development Bank [Get Quote]. The step led to widespread criticism in the media and did much to reverse the slowly growing awareness and appreciation of the good work being done by microfinance institutions. Manila. just as bankers are curious about the opportunities that might lie in money transfers." says Ghate. This book furthers the goal of microfinance in India to bring the sector together to look at critical issues. by increasing transparency in dealings with borrowers and by educating the poor. the Andhra Pradesh government raided and temporarily closed down nearly all branches of microfinance institutions functioning in Krishna district." he writes. According to Ghate. and would like to know more about their activities. and is sitting on the cusp of regulation. not enough is known about the unfolding priorities of the donors. "The sector is growing rapidly. In March 2006. One short term impact of the crisis was a heightened perception of political risk among banks." writes Prabhu Ghate in 'Indian Microfinance: The Challenges of Rapid Growth'. . therefore. "Additionally. making it the largest in the world. comprehensive and up-to-date account of the sector. insurance companies are interested in opportunities offered by self help group (SHG) bank linkage programme. extending outreach to a growing share of poor households and to the approximately 80 per cent of the population. "For some time now.Microfinance has no doubt improved the lives of the poor in India but sometimes it leads people to borrow too much. It is. The writer says though the rate of growth of microfinance in India has accelerated to a great extent in the past few years." he says. says a new book. both in the scale and in the diversity of actors. "The controversy in Andhra Pradesh shows that the impact of microfinance needs to be more rigorously documented in order to convince policy makers and regulators that the movement should be supported. propose solutions and vision the harmonious growth of the sector as a whole. He goes on to cite a few examples. "Players in various parts of the sector want to know much more about the parts of the sector they would like to engage with more. the sector continues to face persisting challenges The main challenge facing the sector is identified as the need to enhance borrower. there has been a growing demand by practitioners. which has yet to be reached directly by the banks. policy makers. Another impact has been a sharp diminution in the rate of growth of microfinance institution model in Andhra Pradesh. the research community. which both increased the interest rates as well as reduced new lending to microfinance institutions in Andhra Pradesh. issues and achievements of the microfinance sector in India. In his book. financial institutions. in the midst of rapid flux. Everyone is affected by what the regulators in turn need to know more about the sector they are charged with regulating. Indian microfinance has continued growing rapidly towards the main objective of financial inclusion. public and regulatory support and understanding. saying bankers and social venture capitalists are vitally dependent on the success of the efforts of the training and capacity-building service providers in easing human resource constraints facing the sector. to the extent that over indebtness can lead to suicides in extreme cases. regulators. the media and the development community generally for a periodic.
2 million were poor. the microfinance institution (MFI) model.the self help group bank linkage programme . there is widespread evidence that the much stronger competition provided to the informal sector has significantly improved the terms of credit provided to both segments by this sector. of which 3. Apart from providing financial services to both these segments of the population. as well as a smaller share of the larger number of non-poor households who have yet to be reached by the formal financial sector. the total number of poor households being reached was roughly a fifth of all poor households.The larger of the two main models . . Even allowing for a degree of overlap of borrowers from both models. including the borderline poor.covered about 14 million poor households in March 2006 and provided indirect access to the banking system to another 14 million. which is losing its share to both the formal and the (semi-formal) MFI sector. the other.3 million households. Although firm estimates are lacking. served 7.
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