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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 .

Proclamation ? .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.

Clients of Micro Finance Institutions  poor people who don't have access to formal FI  typically self-employed  entrepreneurs In rural areas. MF activities are more diverse shopkeepers service providers artisans street vendors . In urban areas. they are usually small farmers & others who are engaged in small IGAs food processing petty trade.

Services Provided by MFIs ‡ Credit provision ‡ saving mobilization ‡ Others ‡ local money transfer. insurance and pension fund administration and short-term training to clients. .

‡ Loans are dependent not only on individual's repayment performance. ‡ Loan amounts are too small ‡ Borrowers are usually also required to be savers. but also on that of every other group members. ‡ Objective of ending poverty ‡ MFI's operating costs & admin.Distinguishing X-tics of MFs from Conventional Banks ‡ Procedures are user friendly ± are simple to understand ± locally provided and easily and quickly accessible. cost per loan are higher than the conventional banks . ‡ physical collateral is usually replaced by system of collective guarantee groups whose members are mutually responsible for ensuring individual loans are repaid.

especially women and the poor . To reduce poverty. ‡ Dev t objectives includes 1. To increase the productivity and income of vulnerable group. To create employment and income opportunities through the creation and expansion of micro enterprise 4. 2.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. To help existing businesses grow or diversify their activities and to encourage the dev t of new businesses. 3.

.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. or may result in services less than ideal. ‡ Many elements of the technology impose costs on the clients that they would prefer not to pay.

‡ Having the principal objectives of poverty reduction. Individual lending ‡ Group lending methodology involves the formation of groups of people who have a common wish to access financial services. .The leading Methodologies 1. Character based collateral substituting lending methodology is crucial weapon to fight against poverty. Solidarity group lending 2.

3. To provide services to the poor Attain financial self-sufficiency Reach large numbers ‡ The group mutual guarantee method reduces risks and admin. .The peer group lending programs ‡ Three principal goals 1. 2. 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.

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.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. In this respect it can be said that the strength and quality of the group determines the repayment of the loans. .

peer group lending  Attend weekly  Compulsory saving contribution  Opening of saving accounts prior to accessing loans & should continue after receiving loans.  Operational staffs visit clients business .  Loan appraisal is performed by group member & center leaders.Conditions set by MFIs.

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 .

details regarding the client's references. ‡ Documentation is required. a form signed by the consignor & his or per personal information.Individual Lending Methodology ‡ Clients are usually individuals working in the informal sector who need working capital and credit for fixed assets. The amount & terms are negotiated with the client & the credit officer's supervisor or other credit officers. if applicable. ‡ The methodology requires frequent and close contact with individual clients to provide loan product tailored to specific need of the business. and legal deed to assets being pledged and credit history . ‡ Detailed financial analysis & projections are often included with the loan application. including a loan contract.

.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 frequent increase over time of the loan size and term  Significant investment of staff time and energy.  The tailoring the loan size and term to business needs.