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Title: A Research Paper on Microfinance Author Info Ms. Nasrinbanu M. Shaikh Student, LDRP-ITR E-mail: ldrp_08_10_53nasrinshaikh@yahoo.in nasrin_sano@yahoo.co.in Contact no. 91+ 09375941951 Address for Correspondence Department of Management, LDRP Institute of Technology and Research, Near Kh-5 circle, next to ITI, Sector-15, Gandhinagar Gujarat India

CONTENTS
1 Abstracts 2 Introduction 3 Important of Microfinance 4 Global scenario of Microfinance 5 Indian scenario of Microfinance 6 Growth of Microfinance 7 Challenges of Microfinance 8 References 3 4 5 6 8 10 12 15

ABSTRACT

"Give a man a fish; he'll eat for a day. Give a woman microcredit, she, her husband, her children and her extended family will eat for a lifetime." The most important finding in the last two de-cades in the world of finance did not come from the world of the rich or the relatively well-off. More important than the hedge fund or the liquid-yield option note was the finding that the poor can save, can borrow, and will certainly repay loans. This is the world of microfinance. Microfinance refers to small-scale financial services for both credits and deposits that are provided to people who farm or fish or herd; operate small or micro enterprises where goods are produced, recycled, repaired, or traded; provide services; work for wages or commissions; gain in-come from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and local groups in developing countries, in both rural and urban areas. Mohammed Yunus is the founder of Grameen Bank He developed the concept of microcredit. These loans are given to entrepreneurs too poor to qualify for traditional bank loans. In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize.

Microfinance both credit and savingshas potential to improve the well-being of poor women in developing countries. This paper explores practical ways to achieve that potanital. KEY words: Microfinance, challenge, growth, economy

Introduction In the development paradigm, micro-finance has evolved as a need-based policy and programme to cater to the so far neglected target groups (women, poor, rural, deprived, etc.). Its evolution is based on the concern of all developing countries for empowerment of the poor and the alleviation of poverty. Development organizations and policy makers have included access to credit for poor people as a major aspect of many poverty alleviation programmes. Micro-finance programmes have, in the recent past, become one of the more promising ways to use scarce development funds to achieve the objectives of poverty alleviation. Furthermore, certain micro-finance programmes have gained prominence in the development field and beyond. The basic idea of micro-finance is simple: if poor people are provided access to financial services, including credit, they may very well be able to start or expand a micro-enterprise that will allow them to break out of poverty. Although microfinance often targets women and although women often use microfinance product design rarely addresses gender-specific aspects of the use of financial services. Indeed, despite the pervasive belief that microfinance helps women, few programs have developed concrete ways to meet the distinct demands of poor women for saving services. How can saving services best serve poor women? A source of lessons is the informal savings mechanisms that poor women already use all over the world: door-to-door deposit collectors, Rotating Savings and Credit Associations, and Annual Saving Clubs. Examples of practical uses of these lessons are the creation of the Safe Save organization in Bangladesh (Rutherford, 2000) and the design of savings products at Bank Rakyat Indonesia (Robinson, 1994). These efforts are not gender-specific, but they do combine some of the strengths of informal and formal savings mechanisms. Two specific services are discussed. The firstsafe-deposit boxesallows women to maintain independent savings. The secondmatched-savings accounts-structures saving, promote peer support among women savers, and subsidize savings targeted to women-specific concerns such as health care or school fees.

Important of microfinance Access to credit and other financial services is important to growth and investment, yet few small businesses or individuals are able to get the access they need. Poverty reduction through growth requires a focus on the indigenous private sector, small and medium enterprises . . . they are the primary source of jobs and economic opportunities. Micro-finance institutions (MFIs) . . . have grown under the pioneering work of non-government organizations. But much more needs to be done in this area. Governments should encourage the development of a variety of financial intermediaries that serve poor people with diverse financial services, not just loans. Countries need to build a much stronger investment climate: Government will continue to help them do so . . . through the promotion of a stable, efficient and harmonized legal business framework . . . and increased access to finance including strong support for the development of micro-finance.

Global scenario of microfinance

The microfinance sector has grown over time with more and different types of actors becoming involved, with increasing numbers of geographic regions around the world being serviced, with new types of products and services being developed, and with new ideas and technologies to support it. The global picture regarding microfinance outreach is quite impressive. From a mere 7.6 million poorest families in 1997, the Micro credit Summit Campaign reported an outreach of more than 92 million clients by December 31, 2004. This number includes 66.6 million families who were among the poorest when they started with a program. Of these 66.6million poorest clients, 55.7 million or 83.6 percent were served by the 52 largest individual institutions, all with 100,000 or more clients. Among these largest MFIs, 79% are in Asia, 17% are in Africa and only 4% are in Latin America. Of the 3,164 institutions that had reported to the Micro credit Summit Campaign by December 31, 2004, 1628 were in Asia, 994 in Africa, 388 in Latin America and Caribbean, 48 in North America, 34 in the Middle East, 72 in Europe and the Newly Independent States (NIS). The increase in the number of institutions reporting, from 618 in 1997 to 3164 in 2004, is definitely an indication of an impressive growth in the field of Microfinance. Of the over 92 million people reached by the end of 2004, 81.5 million were in Asia, 7 million in Africa and 3.8 million in Latin America and the Caribbean. Only 5.2 million of the 61.5 million poorest families in Africa and the Middle East were covered by microfinance programs by the end of2004. Asia, which is home to some 67 percent of the worlds people living on less than US$ 1 a day can therefore rightfully boast of a vibrant microfinance sector. In Asia, Bangladesh distinguishes itself by reaching more than 75 percent of poor families with microfinance. It is home to 31 percent of the largest programs in the world, who have individually reached more than 100,000 clients. MFPs in Bangladesh reached over 18

million poorest clients by the end of 2004. The intensity and density of microfinance is greater in Bangladesh than in any other country.

Microfinance in India

Evolution of Microfinance in India Microfinance has been in practice for ages (though informally). Legal framework for establishing the co-operative movement set up in 1904. Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department. Nationalization of banks in 1969 Regional Rural Banks created in 1975. NABARD established as an apex agency for rural finance in 1982. Passing of Mutually Aided Co-op. Act in AP in 1995. Indian microfinance is dominated by two operational approaches: self-help groups (SHGs), and microfinance institutions (MFIs), in addition to a few cooperative forms. The SHG model was initiated by the National Bank for Agriculture and Rural Development (NABARD) through the SHG-Bank Linkage Programme in the early 1990s. Today the SHG model, which links informal groups of women to the mainstream banking system, has the largest outreach to microfinance clients in the world. MFIs emerged in the late 1990s to harness social and commercial funds available for on lending to clients. Today there are over 1,000 Indian MFIs. According to estimates from Intellecap's Inverting the Pyramid: The Changing Face of Indian Microfinance (2007), SHGs and MFIs have together disbursed USD3.7 billion in micro loans through March 2007 (See Figure 1). While the SHG model provides the majority of disbursements, the MFI model has demonstrated a higher growth rate. From 2003 to 2007, the MFI disbursement share rose from 28% to 47% of all Indian microfinance loans - a value of USD1.7 million. Despite such growth, estimates suggest that the current supply of micro credit amounts to only about 7% of potential demand.

Figure 1: Growth in cumulative disbursements by SHGs and MFIs 8

(2003-07)

2000 1500 1000

1946 1729 1236 969 507 467 SHGs MFIs 328 156 170 71

500 0 2007 2006

2005

2004

2003

Source: Inverting the pyramid- The Changing face of Indian Microfinance.

Growth of microfinance 9

The growth of microfinance is visible in many aspects. There are more than 2000 NGOs involved in the NABARD SHG-Bank linkage program. Out of these, approximately 800 NGOs are involved in some form of financial intermediation. Further, there are 350 new generation co-operatives providing thrift and credit services. According to our estimate, the present total outstanding, including Sa-Dhan members and bank linkages is approximately Rs.700 crores (Rs. 150 crores of Sa-Dhan members and another Rs. 550 crores from the Banking system). The total client base is estimated at 6-8 million as opposed to the Government of India (GOI) intention to reach 25 million clients. The growth of community institutions has taken place with the role to take social and financial intermediation. A numbers of community banks have come into existence at village and block levels call ' Federation of Self Help Groups'.

The inadequacies of the formal financial system to cater to the needs of the poor and the realization of the fact that the key to success lies in the evolution and participation of community based organizations at the grassroots level led to the emergence of new generation of MFIs.

One kind of MFI is an NGO engaged in promoting Self Help Groups (SHGs) and their federations at a cluster level and linking SHGs with Banks under the Scheme. Examples are Myrada in Karnataka, which has promoted Sanghmitra, a company of its village saving and credit sanghas, PRADAN which has established a large number of SHGs and federated them under Damodar in Bihar, Sakhi Samiti in Rajasthan.

Another kind is NGO-MFI directly lending to the poor borrowers, who are either organized into SHGs or into Grameen Bank type of groups after borrowing bulk funds from SIDBI, RMK and FWWB. Examples in this category are Rashtriya Gramin Vikas Nidhi (RGVN)

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which runs credit and savings programme in Assam and Orissa on the lines of Grameen Bank, Bangladesh. Also we have SHARE in AP, ASA in Tamil Nadu under this category.

There are MFIs which are specifically organized as cooperatives, such as over 500 Mutually Aided Cooperative Thrift and Credit Socities (MACTS) in AP, promoted among others by Cooperative Development Foundation (CDF) and the SEWA Bank in Gujarat which also runs federations of SHGs in nine districts.

Then we have MFIs, which are organize as Non-Banking Finance Companies (NBFC) such as BASIX, CFTS Mirzapur, SHARE Microfin. Ltd and Sarvodaya Nanofinance Ltd.

Challenges of Microfinance

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Pervasively Weak MFI Capacity Pervasively weak institutional capacity exists in Bangladeshs microfinance industry and, along with the perception problem, is one of the main impediments to commercialization of the microfinance industry. Sustainable institutional development will be the key to the sectors viability to make it free of subsidies, operate commercially, and link with the formal financial sector. Several important internal challenges hamper the progress toward commercialization for many MFIs, especially for small and medium-sized NGOs.There are many small microfinance NGOs that lack institutional capacity to manage a rapidly growing, financial intermediary. In particular, they suffer from lack of clarity in their mission, weak governance, and low levels of the technical skills required of banking and finance. Many of them lack transparency in their accounting and operations, especially as a result of mixing credit plus activities with their financial services activities in their books. Weak Ownership and Governance Accountability and transparency in most microfinance NGOs are low because of weaknesses in ownership and governance. NGOs have no true owners; profits are expected to be reinvested into operations and no one is liable for any loss. Without significant resources at risk, however, investors generally lack incentives to monitor the institutions adequately. Most of these NGOs have socially-motivated investors who tend to put a priority on the institutions achievement of social objectives. The boards of directors of most such institution are often ineffective in overseeing the institutions; frequently they are chosen because they are friends of the chief executive, close kin, or retired government officers with inadequate understanding of the financial management aspects of microfinance.

Low Levels of Technical Understanding of Banking and Finance

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The capacity of MFIs largely depends on the quality of human resources, operating systems, procedures and practices, and the availability of support services. Unfortunately, the quality of human resources in the microfinance sector is abysmally low, especially among the small and medium-sized NGOs. Most MFI practitioners come from a social service background. Thus, most MFIs suffer from low levels of managerial and technical understanding of banking and finance, leading to adoption of inappropriate accounting practices, insufficient attention to developing an accurate and timely management information system, inadequate internal control, and ineffective risk management. Lack of Transparency It is difficult to assess the exact number of sustainable MFIs, because direct information is limited by the fact that most NGOs provide non-financial services or credit plus activities as well and rarely publish or allow external access to any separate accounting of their microfinance operations. Virtually no MFIs adhere to the Consultative Group to Assist the Poorest (CGAP) guidelines for financial reporting by MFIs. Poor people have little or no access to financial services that most of us take for granted Lack of access to affordable loans on the consumer side is a major hurdle in providing energy services for poverty reduction Reliable and affordable energy services are the underpinning of most productive enterprises, but it is not accounted for in the loans There is a knowledge gap between microfinance institutions and energy service providers Appropriate legal structures for the structured growth of MF operations Finding adequate levels of equity for the new entities to leverage loan funds Ability to access loan funds at reasonably low rates of interest. Ability to attract and retain professional and committed human resources.

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Design of apt MIS including user friendly software for tracking accounts and operations. Appropriate loan products for different segments. Ability to innovate, adapt and grow. Bring out a compendium of small and micro enterprises for the MF clients. Identify and prepare a panel of locally available trainers. Ability to train trainers. Capacity to provide backward linkages or create support structures for marketing.

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Bibliography

www.iimb.ernet.in/iimb/microfinance/Docs/mrrtintro.pdf http://en.wikipedia.org/wiki/Muhammad_Yunus http://www.celent.com/pressreleases/200805232/microfinanceindia.asp http://www.wikipedia.org/wiki/microfinance http://www.microcreditsummit.org http://www.microfinancegateway.org/content/article/detail/49567 http://www.un.org/esa/sustdev/csd/csd14/lc/prsentation/morris.pdf

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