Microfinance

Introduction
• Microfinance, also called microcredit, is a type of banking service
provided to unemployed or low-income individuals or groups
who otherwise would have no other access to financial services.

• Since the 1980s microfinance has become an important

component of development, poverty reduction and economic
regeneration strategies around the world.
Introduction

• By the early twenty-first century tens of millions of people

in more than 100 countries were accessing services from
formal and semi formal microfinance institutions

• There are now many different ‘models’ for microfinance,

many countries have substantial microfinance sectors and the
main activity is on providing microfinancial services rather
than the grander goal of social transformation.
Introduction

• While institutions participating in the area of

microfinance most often provide lending—microloans can
range from as small as $100 to as large as $25,000—many
banks offer additional services such as checking and savings
accounts as well as micro-insurance products, and some even
provide financial and business education. The goal of
microfinance is to ultimately give impoverished people an
opportunity to become self-sufficient.
Introduction

• In terms of the financial size of the organizations, in

Bangladesh, the Grameen Bank and the Bangladesh Rural
Advancement Committee (BRAC) have a cumulative
disbursement of over US$4.7 billion and US$2.2 billion
respectively (Hulme and Moore, 2008).

• World Bank estimates that more than 500 million people

have benefited from microfinance related operations.
History of Microfinance
• Microfinance has become a household name and a story of
success over the last few decades. However, its origins date
back much further.
• As early as back in the fourteenth and fifteenth centuries,
Franciscan monks founded collective pawnshops . Their aim
was to assist poverty‐stricken
‐ segments of the population to
secure their economic existence at times of crisis.
• At the beginning of the eighteenth century, the prolific Irish
writer Jonathan Swift instigated credit funds that would
issue smaller amounts of cash to people in need in Dublin.
History of Microfinance
• At the same time, Germany saw the arrival of the credit
cooperative system, with the foundation of the very first
savings association in Hamburg in 1778 and the foundation
of the first savings bank in 1801.
• The beginnings of modern microfinance in developing
countries are attributed to Muhammad Yunus and the
positioning of his Grameen Bank in the mid‐1980s.
 History of Microfinance
• In a short space of time, the microfinance model became the
international development community’s poverty reduction policy
and program of choice.
• The 1990s saw accelerated growth in the number of
microfinance institutionsmcreated and an increased emphasis on
reaching scale
• Along with the growth in microcredit institutions, attention
changed from just the provision of credit to the poor
(microcredit), to the provision of other financial services such as
savings, insurance, pensions (microfinance) and remittance when
it became clear that the poor had a demand for these other
services
History of Microfinance
• The importance of microfinance in the field of development was
reinforced with the launch of the Microcredit Summit in 1997.

• The Summit aims to reach 175 million of the world’s poorest

families, especially the women of those families, with credit for the
self-employed and other financial and business services, by the end
of 2015.

• More recently, the UN, as previously stated, declared 2005 as the

International Year of Microcredit.
History of Microfinance in Bangladesh

Dr. Muhammad Yunus Akhtar Hameed Khan

History of Microfinance in Bangladesh

• It starts in Bangladesh, a country that in the 1970s was

recovering from a bloody conflict associated with its
independence from Pakistan in 1971.
• In the early 1970s, Dr. Muhammad Yunus became the
chairman of the Economics department at Chittagong
University on return from a long sojourn in the USA, where
he had been first a doctoral student and then a university
lecturer.
History of Microfinance in Bangladesh

• He was inspired by a project which had been pioneered in

the 1950s in the then East Pakistan (later to become
Bangladesh) by Akhtar Hameed Khan.
• In Khan’s ‘Comilla Model’, microcredit was disbursed to poor
rural communities through village- and sector-based
cooperatives.
• The Comilla Model failed to flourish as much as had been
hoped due to many reasons ( i.e. government interference,
elite capture etc). Yunus was struck by the creativity of the
poor at Jobra in figuring out how to survive.
History of Microfinance in Bangladesh

• In several of his books Yunus vividly recounts his shock at

seeing the ‘near enslavement’ of the poor to local
moneylenders in Jobra village.

• On the spur of the moment, Yunus asked whether he could

make a quick list of all the women in Jobra in debt to local
moneylenders. He came away with a list of forty-two names,
and a collective debt of just USD 27. He decided to cancel
this debt out of his own pocket.
 History of Microfinance in Bangladesh
• He had come to the conclusion that if the poor were to ever stand a
chance of benefiting from their labor and escaping poverty, they
needed to be freed from the local moneylender.
• The poor needed instead a microcredit: a small low-interest loan to
establish or expand an income-generating activity.
• Low interest rates were important because they would liberate more
cash for the poor, which would put more food on the table, help
educate any children, permit some savings, and so on.
• With more cash free to be invested in the microenterprise, the poor
also had a much better chance of really making their way out of their
poverty.
Defining Microfinance

According to wikipedia,

“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”
Defining Microfinance

Dr. Muhammad Yunus defined microfinance as the

extension of credit to poor women, without the
provision of collateral
Key Characteristics Microfinance
Small transactions Loans for
and minimum entrepreneurial
balances activity.

Collateral-free
Group lending.
loans.
Key Characteristics Microfinance

Focus on poor Focus on female Simple application

clients. clients. processes.

Provision of services
Market-level
in underserved
interest rates.
communities.
Why is Microfinance growing?
Reduction of the
The promise of
The promise of poor’s dependency on
financial
reaching the poor. informal
sustainability.
moneylender

The potential to build

The growing number
on traditional
of success stories.
systems.
Why is Microfinance growing?
The availability of better
financial products as a
Women Empowerment-
result of experimentation
and innovation.

The contribution of
microfinance to
Escape from poverty and
strengthening and
Hunger
expanding existing formal
financial systems
Key Principles of MF (CGAP)
1. Poor people need a variety of financial
services, not just loans.

2. Microfinance is a powerful tool to fight

poverty.

3. Microfinance means building financial

systems that serve the poor.
Key Principles of MF (CGAP)

4. Microfinance can pay for itself, and must do so if

it is to reach very large numbers of poor people.

5. Microfinance is about building permanent local

financial institutions

6. Microcredit is not always the answer.

Key Principles of MF (CGAP)
7. Interest rate ceilings hurt poor people by
making it harder for them to get credit.

8. The job of government is to enable financial

services, not to provide them directly.

9. Donor funds should complement private

capital, not compete with it.
Key Principles of MF (CGAP)

10. The key bottleneck is the shortage of

strong institutions and managers.

11. Microfinance works best when it

measures—and discloses—its performance.
Thanks Everyone!
Any Questions?