CHAPTER FOUR

Micro-Financing Institutions
 Micro-Financing Institutions
• the provision of financial intermediation through
distribution of small loans acceptance of small
savings & the provision of other financial products
and services to the poor
• making small loans available to the poor through
schemes specially designed to meet the poor's
particular needs and circumstances.
• MFI is an org. that offers financial services to the
very poor
 MF in Ethiopia
Extension of credit in cash or in kind, to urban
or rural poor with a loan ceiling of birr 5000
having a maximum of one year maturity and
accepting saving deposits.
Proclamation ?
 Clients of Micro Finance Institutions

 poor people who don't have access to formal FI

 typically self-employed
 entrepreneurs
In rural areas, they are usually small farmers & others who are
engaged in small IGAs
food processing
petty trade.
In urban areas, MF activities are more diverse
shopkeepers
service providers
artisans
street vendors
 Services Provided by MFIs
• Credit provision
• saving mobilization
• Others
• local money transfer, insurance and pension fund
administration and short-term training to clients.
 Distinguishing X-tics of MFs from Conventional Banks
• Procedures are user friendly
– are simple to understand
– locally provided and easily and quickly accessible.
• physical collateral is usually replaced by system of collective
guarantee groups whose members are mutually responsible for
ensuring individual loans are repaid.
• Loans are dependent not only on individual's repayment
performance, but also on that of every other group members.
• Loan amounts are too small
• Borrowers are usually also required to be savers.
• Objective of ending poverty
• MFI's operating costs & admin. cost per loan are higher than
the conventional banks
 Objectives of the MFIs
 

• The goal of MFIs as dev’t orgs is to service the financial

needs of un-served or underserved markets (the poor) as
a means of meeting dev’t objectives.
• Dev’t objectives includes
1. To reduce poverty.
2. To help existing businesses grow or diversify their
activities and to encourage the dev’t of new businesses.
3. To create employment and income opportunities
through the creation and expansion of micro enterprise
4. To increase the productivity and income of vulnerable
group, especially women and the poor
 Lending Methodology of MFIs

• principles on the successful provision of micro financial

services that address the two central problems of all the
financial markets
– Imperfect information
– contract enforcement
• To overcome these problems
– developing nontraditional methods to screen applicants
– monitor the actions of borrowers
– create incentives to repay.
• Many elements of the technology impose costs on the
clients that they would prefer not to pay, or may result in
services less than ideal.
 The leading Methodologies

1. Solidarity group lending

2. Individual lending 

• Group lending methodology involves the formation of

groups of people who have a common wish to access
financial services.

• Having the principal objectives of poverty reduction,

Character based collateral substituting lending
methodology is crucial weapon to fight against poverty.
 The peer group lending programs
• Three principal goals
1. To provide services to the poor
2. Attain financial self-sufficiency
3. Reach large numbers
• The group mutual guarantee method reduces risks and admin. cost per
borrower.
• The pioneer work done by the Grameen bank in Bangladesh & the ACCION
international in Latin America

• The reasons individual coming together to form group & center are
– educating and awareness building
– collectives bargaining power
– peer pressure

• Group lending methodology was developed by Grameen Bank of Bangladesh to

serve rural landless women wishing to finance IGA’s.
 Eligibility for Credit
 Willingness to form a group
 Identical economic status and thinking
 Identical sex
 Living in the nearby village
 No closest blood relationship
 May contain 5-7 members
 Agreement to help each other to succeed in their business
 Equal responsibility for the entire loan repayment
•  
• The group members select their own leaders and also develop their own
internal regulations. The leader arranges meeting in order to evaluate the
performance of the group members and ensure the loan is utilized
according to the approved purpose. In this respect it can be said that the
strength and quality of the group determines the repayment of the loans.
Conditions set by MFIs- peer group lending

 Attend weekly
 Compulsory saving contribution
 Opening of saving accounts prior to accessing loans
& should continue after receiving loans.
 Loan appraisal is performed by group member &
center leaders.
 Operational staffs visit clients business
 MFIs
• Giving services at the doorstep
• “bringing the bank to the people not asking the
people to come to the bank”
• For security reasons loan disbursement is
done at office.

• The center meetings are opened & closed by

rituals those are meant to symbolize the
discipline & unity of the group.
 center meeting issues

 the problem of repayment

 problem of shifting the loan for unapproved purpose
and others are discussed and the solutions are
provided by the members.

 After the center meeting the credit officers often visit

the borrower's houses to inspect the performance of
their business
 Individual Lending Methodology

• Clients are usually individuals working in the informal sector

who need working capital and credit for fixed assets.
• The methodology requires frequent and close contact with
individual clients to provide loan product tailored to specific
need of the business.
• Detailed financial analysis & projections are often included with
the loan application. The amount & terms are negotiated with
the client & the credit officer's supervisor or other credit
officers.
• Documentation is required; including a loan contract, details
regarding the client's references, if applicable, a form signed by
the consignor & his or per personal information, and legal deed
to assets being pledged and credit history
 Basic differences
• In individual lending
– loan sizes are relatively larger
– compulsory savings are not required
– loan maturity is relatively higher and clients are in the medium income level.

• Characteristics of individual lending

•  
 The guarantee of loans by some form of collateral or a consigner
 The screening of potential clients by credit checks & character
reference,
 The tailoring the loan size and term to business needs,
 The frequent increase over time of the loan size and term
 Significant investment of staff time and energy.