MicroFinance

Term IV – PGPFin02 –2022

Pankaj Baag
baagpankaj@iimk.ac.in
M no 8943716269
 Assessment Tool Percentage
Project 25%
1. Open Book Exam
Class participation 15%
and attendance 2. Assign includes 1 case
presentation and 2
End term Exam 35% submissions- 1
Assignments 25% individual & 1 group
• Gr Assignment (30 marks) (per day delay or part – (-)10 marks) (early submissions – up
to 5 extra marks)

• Gr 1: (given in B3) : R1: J. Ledgerwood--Microfinance Handbook: An Institutional and Financial Perspective, pp. 93-106 --
(Overview of Microfinance) - submit a ppt of the R1, include recent updates on the topic, and three questions which can be
answered by going through the reading/your ppt. by July 31 st.

• Gr 2: (given in B5) : R3: Armendariz B. and J. Morduch--Why Intervene in Credit Markets?, The Economics of Microfinance,
Ch. 2 pp. 29-66 –(Commercial Microfinance) - submit a ppt of the R3, include recent updates on the topic, and three questions
which can be answered by going through the reading/your ppt. by July 31 st.

• Gr 3: (given in B5) : R5: Armendariz B. and J. Morduch--Measuring Impacts, The Economics of Microfinance, Ch. 9 pp. 261-316
–( Client Impact Studies) - submit a ppt of the R5, include recent updates on the topic, and three questions which can be answered
by going through the reading/your ppt. by July 31 st.

• Gr 4: R6. Navajas, S. et al.--Microcredit and the Poorest of the Poor: Theory and Evidence from Bolivia –(Client Impact Studies) -
submit a ppt of the R6, include recent updates on the topic, and three questions which can be answered by going through the
reading/your ppt. by July 31st.

• Gr 5: R7. Hulme, D.--Impact assessment methodologies for microfinance: Theory, experience and better practice –(Client Impact
Studies) - submit a ppt of the R7, include recent updates on the topic, and three questions which can be answered by going
through the reading/your ppt. by July 31st.
• Gr Assignment (30 marks) (per day delay or part – (-)10 marks) (early submissions – up to 5 extra marks)

• Gr 6: R9b. Microfinance Institutions Fostering Sustainable Development by Region written by Icíar García-Pérez, María Ángeles
Fernández-Izquierdo and María Jesús Muñoz-Torres - (Sustainability) - submit a ppt of the R9b, include recent updates on the
topic, and three questions which can be answered by going through the reading/your ppt. by July 31 st.

• Gr 7: R9c. Sustainability and Governance of Microfinance Institutions: Recent Experiences and Some Lessons for Southeast Asia
by Ganesh Thapa - (Sustainability) - submit a ppt of the R9c, include recent updates on the topic, and three questions which can be
answered by going through the reading/your ppt. by July 31 st
• G8: R11a. Rahman A. -Micro-credit Initiatives for Equitable and Sustainable Development: Who Pays? (Gender) - submit a ppt of
the R11a, include recent updates on the topic, and three questions which can be answered by going through the reading/your ppt. by
July 31st

• Gr 9: (given in B5) : R11b : Armendariz B. and J. Morduch—gender-The Economics of Microfinance -Ch 7 – Gender (p211-p237) -
(Gender) - submit a ppt of the R11b, include recent updates on the topic, and three questions which can be answered by going
through the reading/your ppt. by July 31st

• Gr 10: (given in B3) : R10b: J. Ledgerwood--Microfinance Handbook: An Institutional and Financial Perspective, Ch 2 --pp. 33-46
-- (The Target Market) - submit a ppt of the R12, include recent updates on the topic, and three questions which can be answered by
going through the reading/your ppt. by July 31 st.
• Individual assignment : 15 marks
• To be submitted by Aug 31st
• Topics will be communicated in due course with
instructions
• Case Presentation: (30 marks)
• 20-25 min presentation .. Followed by Q&A

• Gr 1, 2, 3 : June 22– Gr 1- M power & GK (Case 1 & case 5) ; Gr 2 –

IFMR; Gr 3- MSRA
• Gr 4, 5, 6 : June 29– Gr 4 – GFE & SCG (case 4 & Case 11); Gr 5 – MSE;
Gr 6 – E&M
• Gr 7, 9, 10 : July 6– Gr 7 – Sogesol-Haiti; Gr 9 – WTC; Gr 10 – BC (case
12 & case 13)
• Gr 8 : July 13 – Gr 8 - CV&T (including sequel-case no ( 9 & 14);
• Project Presentation: Select your project –given in the course
outline/your own topic –approved by me by June 30.
• 20 min presentation .. Followed by Q&A

• Gr 1, 2, 3 : July 13
• Gr 4, 5, 6 : July 20
• Gr 7, 8, 9 : July 27
• Gr 10 : Aug 3
Poverty, Rural Credit and
Financial Inclusion
Introduction
The major constraints to the poor for breaking away
from the “Poverty Trap” is lack of access to
productive capital. It can be viewed in terms of poor
person’s low capacity to generate income, saving
and investment in an economic environment.

Poverty of Opportunity: It is a multi

dimensional concept

Poverty of income is the result; poverty of

opportunity is often just the cause

Credit has become a major components for

many of the poverty alleviation programs.
Poverty, Its Form and Extent

Poverty, the state of one who lacks a usual or socially acceptable amount of money or
material possessions. Poverty is said to exist when people lack the means to satisfy
their basic needs
There is multiple degrees and kind of poverty. The severity of poverty differs from
person to person. The world bank defines extreme poverty as living on less than US
$1.25 per day (PPP) and moderate poverty as less than US $2 a day.
Rapid and sustained poverty reduction requires inclusive growth to allow
to contribute for economic activity.

Financial inclusion for the nearly two-third of India’s

population who are unbanked required.
Poverty Levels in India
Two-thirds of people in India live in poverty: 68.8% of the Indian population lives on
less than $2 a day. Over 30% even have less than $1.25 per day available - they are
considered extremely poor.

 More than 800 million people in India are considered poor. Most of them
live in the countryside and keep afloat with odd jobs

 Poverty in India impacts children, families and individuals in a variety of

different ways through:
 High infant mortality
 Malnutrition
 Child labor
 Lack of education
 Child marriage
 HIV / AIDS
Role of Credit in Poverty Alleviation
The credit needs of the poor are characterized by the absence of any clear distinction
between production and consumption purpose.

The needs of credit can be majorly classified into:

 Life cycle needs: wedding, education, child birth, house construction, old age, etc.
 Personal emergency needs: sickness, injury, unemployment, thefts, accidents, etc.
 Natural calamities and disasters such as fire, floods, cyclones, wars etc.
 Investment needs: expanding or new business, purchase of land or equipment,
other asset purchase, securing a job etc.

Trends and Challenges of Credit Lending to the poor

 The Debt and Investment Survey has revealed that the share of moneylenders had
increased from 17.5% in 1991 to 29.6% in 2002 in case of rural households.
 The failure of the formal sector to play a pivotal role in lending to the poor is
attributed to the asymmetric information and close proximity of the informal sector.
TWO Approach

Poverty Lending Approach

Focus is on poverty reduction and empowerment through

credit and other subsidies provided by institutions that are
funded by donor and government subsidies

Credit is provided to poor borrowers at below market rates

and the emphasis is on micro credit not micro finance. It is
supported through networks of government agencies such
as development banks and donors.

Many institutions providing micro credit to poor borrow-

ers at low cost are not sustainable primarily because the
interest rates on loans are too low for full cost recovery.
 Financial System Approach
Aims at applying commercial finance
principles and building a financial
intermediation system for the poor
without ongoing subsidy. Commercial microfinance is not
. appropriate for extremely poor
people who are badly
The goal of this approach is to reach malnourished, ill and without skills
sustainable microfinance. Large or employment opportunities.
scale sustainable microfinance can
be achieved only with a financial In India, many IRDP loans were
system approach. distributed to the poorest of the
poor during the 1980s who could
Sustainable microfinance refers to not use the loan productively and
the commercial microfinance were unable to repay the loan.
institution’s ability to deliver financial
services at a rate that enables them
to cover all the costs and risks to
generate profits.
State Intervention in
Rural Credit in India
 Financial Infrastructure through Nationalization

1955 1969 1973 1975 1980

Imperial Bank of 14 Major Farmers Service Regional Rural 6 Commercial

India Commercial Societies Bank Banks
Banks

 Till mid 1960’s credit demands in rural sector were met largely by co-operative societies in India.
 Resulted in multi agency approach for taking banking services to the far-flung rural areas.
 In 1982, NABARD was created at a national level with Rs 500Cr as share capital and Rs. 100Cr
as paid-up capital as an “apex refinance and development bank”.
 What was the purpose of Nationalization?

 To increase the flow of credit to rural population.

 Strategy aimed at focusing credit to agriculture, allied sectors and rural industries.
 ‘Class Banking’ to ‘Mass Banking’, ‘Elite Banking’ to ‘Social Banking’, ‘Urban Based’ to
‘Rural Based’.

Principles of Development through Credit:

 Credit must facilitate asset building (for productivity) and additional income (for repayment)
 Supply of timely and adequate credit is important
 Credit must be used in accordance with suitable methods of science and Technology
 Respect of Terms and Conditions of credit
 Activities initiated must be done with skills
 Proper assessment of credit requirements (give only to the required)
 Credit availability as near to the borrower’s doorstep to avoid moneylenders
 Adherence of techno economic parameters
 Minimum cost of credit (transport, opportunity etc.)
 No risk in loan recovery for agency
 A part of additional income created by credit must be saved.
 Loan installment must be repaid in time.
 Government
Sponsored Programs
 Integrated Rural Development Program

Selected Block: 1978-79

Extended to entire country: Oct 2, 1980

Þ Provided assistance to rural poor through subsidy and bank credit for productive employment
opportunities.
Þ Aimed for accessibility of farm and nonfarm assets to generate income (and trigger economic
activity)
Þ Promoted self-employment and provided loans up to 50% subsidy.

Impact:

Þ Upliftment of households above poverty line was 16-18% despite massive outreach.
Þ Share of government programs in small borrowers’ account of commercial banks increased to
15% leading to loan waivers.
Þ Very low repayment rate of -25 to 33%

TRYSEM, DWCRA, SITRA were introduced as subprograms but were implemented separately.
Suffered from critical investment, overcrowding of certain projects and lack of market linkages.
Swaran Jayanthi Gram
Swarojgar Yojana

01 .
Self employment programme launched on
April 1, 1999.

02 Holistic program for micro enterprise

development in rural areas.

03 .
Network of agencies like DRDA’s, NGO’s, PRI’s
collaborate.

04 Improved SHG’s and increased per capita

income and investment
 How Inclusive was Indian Banking?
1980-1990
Development
banking
 The emphasis on
development banking
decreased in 1980’s-90’s.
 Banks were disinclined to
lend to the Poor due too
high-risk profile.
1991
Lending Gears
Up
 The situation improved
gradually as average
amount per small loan
account increased from Rs.
4648 in 1991 to Rs.10151 in
March 2001.
1996 2003
No. of accounts Rural Finance
declined Survey
 Although the average  Around 59% of rural
amount per account rose household have no access
and despite strong to deposit account and 79%
demand the no. of have no access to credit.
accounts declined from  79% of marginal farmers
52 million in 1996 to 27 have no bank account.
million in 2001
 E mergence
Of Microfinance

 Microfinance started as a global movement in

the early 1980s to provide credit to low-
income households with constrained access
to traditional banking.
Overview of
Microfinance  The uncertain regulatory landscape, over
indebtedness of borrowers and lack of an
Industry institutional framework have been some of the
key concerns for the microfinance industry
globally.

 In recent years, the microfinance industry has

undergone significant transformation with the
creation of self-regulatory organizations
(SROs) which has led to boost in no. of
borrowers.
  Several initiatives outside the formal sector to provide credit. Share of Microfinance
 Some banks include Sewa Bank in India and Grameen bank in
Bangladesh. Providers in India
 Improving rural banking and credit infrastructure to better serve
the unbanked poor.
 The micro credit sector is dualistic in nature. It has formal and
informal structure.
Different players like banks, SFBs, MFIs,
NBFCs and not-for-profit MFIs enable
micro lending in India. MFIs hold the
largest share of the loan portfolio, which
stands at INR 681 billion and accounting
for 38% of the total industry portfolio. This
suggests that borrowers are more inclined
Overview of India’s to take loans from MFIs.
Microfinance
Industry

Rural Finance
 Key opportunities of MFI in India

Your Picture Here And Send To Back

Credit Plus/additional Data Can help in Driving Collaborate with Fintech and
product and services Growth other players
 Conclusion .

The poor and the marginalized in

India needs financial and banking
services. Despite, the fact that
Rural banks are growing there are
still a large section of people who
don’t have access to formal
banking system . Financial
inclusion has been the key focus
area for RBI and Govt. Of India to
penetrate Financial services.
It is important for microfinance
lenders to adopt a customer-centric
approach and leverage the data and
technology available to more
effectively and efficiently continue
to provide credit to the financially
excluded women from society.
 “Self realization and self initiative are th
two most powerful weapons to wash pov
out from the world”

– CHANAKYA
(World’s Greatest Ancient Economic and
Political Scholar).
 Just as new agricultural technologies spawned the
green revolution, Microfinance would do that in
1990s – Churchill, 1997

• Access to credits & savings is right to Human

development
• Unfortunately, in developing countries, financing
the rural poor through formal banks failed to meet
their credit requirements.
• Micro-finance is believed to be a tool of
development that can be used to get rid of poverty
• Micro-Finance has emerged as a major
Intervention aimed at poverty reduction
27 07/19/
2022
 FINANCIAL NEEDS OF POOR PEOPLE
Types of financial needs:-

 Lifecycle Needs: such as

weddings, funerals, childbirth,
education, homebuilding,

 Personal Emergencies: such as

sickness, injury, unemployment,
FINANCIAL NEEDS OF POOR PEOPLE

 Disasters: such as fires, floods,

cyclones and man-made events
like war or bulldozing of dwellings.

 Investment Opportunities:
expanding a business, buying
land or equipment, improving
housing, securing a job (which
often requires paying a large
bribe), etc.
FINANCIAL NEEDS OF POOR PEOPLE

 Poor people find creative and

often joint ways to meet these
needs, primarily through
creating and exchanging
forms of non-cash
different
value. livestock, grains,
jewellery and precious metals.
Including
German Technical Cooperation survey
• Conducted a study on Savings Mobilization in Karnataka &
Orissa
• Study showed there is need & demand for financial product for
poor.
• But reality is different –
• banks in rural regions do not provide such flexible products to
match the spending patterns of poor households
Major Findings of the survey
• Main purpose of savings by poor- Marriage,
education & emergencies
• Next list of priorities included savings for old age

Chit Funds was a popular savings scheme amongst the poor and considered best
alternative for rotation of money in society
Income Volatilty – why poor's cant raise
cash
WHY MICROFINANCE?
Although efforts were made by special agricultural/rural banks to provide loans to
Rural borrowers: BUT They failed
1.Difficulty to enforce loan repayments
2.Selection of relatively wealthy for granting loans.

Other Reasons:
 High transaction and risk of banks associated with loans and saving deposits.
 Absence of collateral.
 Difficulties in break-even due to the transaction Fixed costs such as
 processing, assessments, administration etc.

Because of above difficulties, poor people rely on local moneylenders.

Conditions that will ensure Microfinance operations are sustainable and viable:
 Loans repaid in time.
 Rate of interest covers risk on account of non repaymnets.
 Rate of interest covers inflation.
 Rate of interest covers cost of fund and operational cost.
 Rate of interest covers reasonable return for lender
Emergence of Microfinance from Perspective of Sustainability:
3 Stages:
1. NGOs and agencies involved in development work were attending the needs
of poor on grant basis.
experimenting with credit like delivery Models: Demanded beneficiaries to
payback the funding.
2. Above experiments shows high repayment rates.(eg: Grameen and BRAC models
shows repayment rates above 99%.)
3. Due to high repayment rates, significant resources are channelled.
result in 2 scenarios
a) Funding agencies: particularly through developmental resources- Maximum reach
b) Efficiency of fund management warranted that MFI Should charge interest that
covers their risk involved.
Objectives of MFI:
 Poverty reduction
 Women Empowerment
 Enterprise development
 Asset Building- Income yielding/productive assets

Apart from Extending loans MFI also provides Financial and Non financial services
Such as savings, insurances, guidance, skill development, capacity building etc.
 Comparative analysis of features of microfinance products/service among different service products

Parameter Moneylender Commercial Banks Govt sponsored Microfinance

Programme Institution

Ease of access High Low Low High

Cost of access and Low Very high Very high Low-medium
transaction

Lead time for loans Very short Extremely long Extremely long Short

Repayment Terms Fixed and rigid Fixed and easy Fixed and easy Flexible

Interest rate Exorbitantly high Low and affordable Low affordable and Medium to high and
subsidized flexible

Incentives None None Interest rebates

Repeat borrowings Possible Possible but cannot be Possible but not likely Stream of credit
assured

Loan Access Very quick Extremely time Extremely time Simple and informal
procedures consuming and consuming and
complicated complicated

Loan Application Informal and Exhaustive and Exhaustive and Simple and informal
procedure exploitative complex complex

Collateral and demand Mandatory Hypothecation of Not required although Not required social
promissory notes assets financed a charge on the asset collateral no physical
becomes automatic collateral
Overview : Microfinance
According to Micro credit summit(1997), Micro credit refers to the -
“small loan programmes extended to the very poor for self employment
projects generating income allowing them to care for themselves and their
families.”

Micro credit ≠ micro finance

Microfinance is defined as “the provision of thrift and credit and other

financial services including insurance and products of very small amount to
the poor in rural, semi- urban and urban areas for enabling them to higher
income levels and improving their standard of living”

Micro finance refers to savings and loan products, insurance, pledge and
remittances in a sum wider range of financial services in addition to micro
credit .

In India according to the Micro credit special cell of RBI, the borrowed
amount up to 25000 will be considered as micro credit product and can
sometimes go up to 40000
Related Terms

Alternative finance: Aims at assisting communities of the

economically excluded to achieve greater levels of asset creation
and income security at the household and community level.

Development Finance: Aims to achieve this through a range of

financial services that go beyond credit and savings. It includes
enterprise development and marketing strategies, community
based investments and financial management schemes.

MF Initiatives

Poverty lending : is the term used, even though these

programmes and institution offer savings and insurance service as
well, when the objectives give higher priority to social outreach than
financial sustainability.

Micro banking : It is characterised by a focus on financial

sustainability for the financial intermediary.
Micro enterprise VS SMEs
Micro Enterprise

 Are the smallest recognizable business, usually one person or

family based

 (mE) are usually informal, hardly distinguishable from the

household

Small and Medium enterprise

 Are business with regular turn over and usually at least one
employee, theses are business with fixed location and/or
several hundred employees with the potential to serve beyond
regional markets.

 SMEs are organisations usually formally registered and

recognised
Importance of Micro Finance
• Potential to build on traditional informal financial system
• Financial Sustainability: MF helps to build financially self
sufficient collateral free, subsidy free, customer friendly locally
managed micro finance institutions
• Promotion of sustainable livelihood: this can be achieved by
providing easy and affordable access to credit and related
services.
• Empowerment of women
• Harnessing local capital: Many microfinance programmes
deliver credit and related services to the poor and women out of
their own savings
• Strengthening and expansion of existing formal financial
system: The microfinance activities can expand their markets for
both savings and credit operations and have the potential to
increase the profitability.
• Enterprise development and large scale employment
generation: Many rural poor have become entrepreneurs in their
own right dur to access to services through MF system
Importance of Micro Finance
Availability of better financial products as a result of experimentation
and innovation
a) Availability of small loans at frequent intervals
b) Providing savings services that meet the needs of small savers
c) Solving the problem of lack of collateral by using group based
approaches
d) Nurturing repayment discipline through high frequency of repayment
collection, use of peer pressure and promise of repeat loans
e) Reducing transaction costs by moving some of these costs down to
the group level and abolishing intermediary costs
f) Increasing outreach through well designed staff incentives
• Priority across different types of financial services among the rural
poor was consumption credit, savings, production credit and
insurance. Consumption constituted 2/3rd of credit usage and
withing consumption credit almost 3/4th of the demand was for
short periods for meeting emergent needs like illness and
households expenses.
• Entire demand for consumption credit was met by informal
financial sources at high and exploitative interest rates that were
often in excess of 36% or more per annum
Aspects of outreach of Micro Finance
Mark Schreinner proposes analytical framework that considers six
aspects of outreach of Microfinance
a) Worth to clients: Reflects willingness to pay. It hinges on the design
of the loan or savings product as well as on the clients preferences.
b) Cost to clients: these are explicit costs such as interest rates, fees,
transaction costs (include both opportunity cost and indirect
expenses)
c) Depth of outreach: refers to poverty level of MFI’s clients. Measured
using location, gender, type of housing, etc
d) Breadth of outreach: refers to the number of clients covered by the
MFI
e) Length of outreach: refers to the sustainability of the MFI
f) Scope: reflects the variety of financial services which an MFI offer. It
includes diversity of products such as income generating loans,
consumption loans, emergency loans, leasing, housing loans,
savings and insurance, payment services etc.
The Social benefits of microfinance depend on all the six dimensions
but the greatest of these is length.
Triangle of Microfinance

The triangle of microfinance

reflecting the three
objectives of outreach,
financial sustainability and
impact are represented the
figure

All MFIs attempt to contribute to these objectives but many stress

one particular objective of the three. Some may produce larger
impacts but achieve limited outreach. Others may have smaller
impacts but are highly sustainable. It is evident that there is trade-
offs between depth of outreach and financial sustainability. Similarly
tradeoffs may also exist between impact and financial sustainability.
 Assumption of Microfinance
•Operating principles for loans & savings mobilization is sustainable commercial
microfinance are trust & mutual advantage.
•The institute trust borrower on credit.
•Client should trust the institution when depositing.

Credit Worthiness Need for Technical Assistance

Poor man may not able to
repay the credit at commercial
rate of market.
The borrowers will be
monitored so that to know
whether the credit is used for
right purpose.
Willingness & Capacity to
Credit will be of little
save
productive use to the poor
Poor generally cannot afford
unless it is complemented with
to save. If they do it will be in
financial or business training
non-financial forms.
that teaches the recipients
They don’t trust the banking
how to maximise use of the
institution.
loan.
 Policies & Practices adopted under
the old approach

Credit Worthiness Willingness & capacity to save Technical assistance

Target Pattern I: Voluntary savings services Training programme in
supply led are not provided finance or business are
subsidized The savings cannot finance the loan required for those who
Credit portfolio. want institutional loans.
programmes are Pattern II: Voluntary savings services Additional literacy, health
provided to assist are provided but lending is poor. and skill development.
the poor. Deposit or invest the savings; little
microcredit will be provided.
 Result of the past approach

Credit Worthiness Willingness & capacity to

Technical assistance
High rates of arrears & save
Cost of providing auxiliary services
heavy losses. Subsidized credit tends to
decreases the possibility of
Corruption due to lower discourage institutional savings.
institutional sustainability.
rate interest in loans. Lack of voluntary savings.
The technical assistance comes at a
Loans may reach elitists High loan losses may put at risk
high cost.
instead of targeted poor. the savings of poor clients.
Demand for credit Demand for savings services Sustainability
Extensive demand exists for micro Massive demand exists for Demand for institutional microfinance can
credit at rates that commercial institutional, voluntary savings be met only by sustainable institutions.
providers need to change to achieve among the poor. Spread between loan interest rates and
full cost recovery. The poor save in variety of forms. the cost of funds will be higher than in the
Economically active poor are A mature and sustainable banking industry.
capable of repaying loans at industry microfinance intermediary is likely Governments and donors are increasingly
rate. to have more savings accounts than concerned with providing an enabling
loans. environment and disseminating
Micro loans are priced at levels that Voluntary savings instruments information about best practices in
enable institutions to cover all costs provide security, convenience, commercial microfinance, rather than with
and returns. liquidity, confidentiality & returns. funding the ongoing loan portfolios of
particular institutions.

Leads to policies and practices adopted – new– sustainability and reach

 The Assumptions of Microfinance as
pointed out by Vijay Mahajan.
All the poor people wish to be self employed.
It is true certain proportion of poor people like to take micro-scale farming, processing, manufacturing, trading
activities, but they don’t have entrepreneurial skills of the necessary level to be self employed.
Credit is the main financial service needed by the poor.
The experienced of SEWA bank in India shows that women at least value bank a safe place to keep their savings as an
equally important service.
Credit can automatically translate into successful micro enterprises
Microfinance is necessary but not a sufficient condition for micro enterprise promotion.
Microfinance enabled micro enterprises leads to greater income and wealth, increased savings and accumulation of
assets.
Micro credit institutions can all become financially self sustaining. An institution cannot become financially self
sustaining unless it is able to access funds at reasonable cost, get continuous support of funds and manage the
portfolio efficiency. The funds should be lent profitability merely being a MFI does not ensure sustainability.
Lessons learnt from International Experience
The poor are bankable

1
● Availability of evidence that the poor is capable to use the credit profitably and repay the loans
● MFIs should have effective methods for monitoring the loans and ensuring the repayment of loans

Micro-credit benefits the Poor

2 ●
●
MFIs benefits the poor by providing saving opportunities and improves their livelihood
If gender disparities abound, microfinance cater to women to raise their participation and empowerment

Penetration of the Poorest of the Poor is Difficult

3 ●
●
MFIs are focussed on less poor compared to the poorest of the poor due to higher risk of non-repayment
Support of advisory services, skill development, marketing is required for the poorest of the poor

A Realistic Interest Rate is Vital

4 ● In the initial stages, the interest rate should be higher than the commercial bank lending rates, but
much lower than the interest rates of informal lenders.

Savings Mobilization Strengthens MFIs

5 ● A strong correlation exists between the saving mobilization of MFIs with the overall success as it
enhances the financial viability
Lessons learnt from International Business
Governance and Financial Systems require strengthening

6
● Greater transparency and strong governance is needed to increase the scale of operations of MFIs
● MFIs should strengthen the accounting practices to ensure accountability

Strong Regulatory Framework

7 ● MFIs should be subjected to a regulatory framework for the long term viability and sustainability

No Single Model of MFI

8 ●
●
MFIs are to be designed based on the needs of the community, context and the environment it operates
Develop group actions, participatory involvement, collective responsibilities to increase its outreach

Most MFIs Require Outside funding

9 ● MFIs require outside finances for commencement and gestation period to meet the transaction
costs, expansion activities, etc.
Credit alone cannot achieve objectives

10
● Along with the micro-credit, MFIs should include macroscopic policy framework, infrastructure,
opportunities for skill development, marketing support is required for the success of micro-
enterprises
Microfinance
Models
Introduction to Microfinance Models

● The microfinance policies implemented in many developing countries reflect a shift to

demand led and market oriented financial services.
● Since 1970s, several informal and innovative approaches in financing the poor have
been experimented.
● The role of financial markets is not only a financial intermediation but a key tool for
poverty alleviation.
● Microfinance emphasizes on institutional sustainability and depth of outreach and
quality of services as key performance measures.
● Products of microfinance are designed to serve those previously excluded from the
formal finance and emphasis on voluntary savings mobilization rather than Government
fundings.
Models of Microfinance across the World
Country Microfinance Models

Bangladesh Grameen Bank Model

Indonesia Individual Bank Model
Philippines ROSCAs
Kenya, Indonesia The Group Model
Bolivia, Thailand Village Banking Model
Sri Lanka Credit Unions and Cooperatives
India SHG Model, Joint Liability Group
Model
Grameen Bank Model

● One of the Oldest and most successful model which was developed in Bangladesh.
● In this model:
○ Participants are organized into group of 5 members.
○ Makes mandatory contribution to group savings and insurance fund.
○ After a certain time, group members receive individual loans from the bank.
○ Repayment responsibility solely rests on the individual borrower.
○ Loans are provided for six months to one year duration.
○ Repayments are weekly payable.
● This model has been replicated in more than 40 countries in Asia, Africa and Latin America.
● MFIs in India is also based from this model.
Individual Lending Model

● In this Model:
○ Loans are directly given to the individuals, without any membership of the group.
○ Financial Institutions have to make frequent and close contact with individual
clients to provide credit products customised to the specific needs of the
individuals.
○ Appropriate for Urban based and production oriented businesses.
● Bank Rakyat Indonesia
○ State owned commercial bank, concentrated mainly on providing banking
services to rural areas of Indonesia.
● Land Bank in Philippines
○ Government owned bank which is balancing between the general banking
system and countryside development mission.
 Bank Rakyat Indonesia

● Key Features in Micro lending of BRI are:

○ Access to credit is more important than cheap credit

○ Small borrowers value reliable access to credit with right type of beneficiaries selection
and follow up.
○ The BRI units have shown that even very poor households are able to save and want
access to safe liquid saving instruments.
○ A market driven approach pays off for customer and the bank.
○ The lending rates of the units covers all costs including the overhead costs, commercial
costs of funds and loan risk and return a profit to the bank.
○ Credit is available to all credit worthy customers.
○ Credit decisions are borrower oriented and their ability to repay.
Land Bank in Philippines

● In 1988, comprehensive Agrarian reform programmes were implemented to provide land to the
landless poor.
● Under these programmes, the beneficiaries were provided credit facilities by the Land bank.
● The credit products include affordable credit facilities to the small farmers and fishermen cooperatives
under its countryside lending programme.
● The other short and long term credit products include:
○ Agricultural Crop/ Poultry/ Livestock product loan
○ Cattle importation financing / livestock breeding
○ Fixed asset financing
○ Operating Capital / Working Capital
● The most significance is that the bank provides finance not only for production but also for
infrastructure processing and marketing at the grassroots.
 The Group Model

● Group of 10-20 individuals

● Financial Institutions Delegates financial Process
● Group members make savings & contribute to common fund
● Financial Institutions issues credit in the name of group
● Whole group is considered responsible for repayment
● Loan amount depends on savings

1. Chiklova groups of Kenya

2. Program Hubungan Bank dan KSM(PHBK) project of Indonesia
 • Bolivia
Village Banking Model •
•
Mid 1980’s
FINCA

● Extension of Group Model

● Village Bank is developed by 30 to 100 individuals
● Financed by mobilization of members savings and loans from sponsored MFIs
● Group members run the village Bank and elect the members
● Distribute loan and collect payments, savings
● Loans repaid in weekly installments
● High degree of control and independence

1. Cooperative for Assistance and Relief Everywhere(CARE) in Guatemala

2. Save the children in EI Salvadore
3. Freedom from Hunger and Catholic Relief Services in Thailand
 Credit Unions and Cooperatives
● Credit Union is a non profit Financial cooperative
● Owned & Governed by its members (both owners & Customers)
● Members take the decisions and elect the officers for administration
● Loans granted only to the members

Savings- 10% to 14%

SANASA Loan - 18% to 24%

● 3 tier structure primary societies, District union and Federation which are interdependent
● Federation and district union provides lower tiers with deposits, support and education
● Members should purchase shares, develop savings record for being eligible for Loans (2
guarantors)
● Women constitute 50% of membership
● SANSA focused on poor, women and disadvantaged groups
Joint Liability Group Model in India

● 4 -10 individual group availing loan on mutual guarantee

● JLG members engage in similar economic activity
● Joint Undertaking to the bank
● JLG members are expected to support each other
● Save regularly
● Savings account is opened in the name of JLG/individual members to
ensure savings
● Quantum of Loan is dependent on need not on Savings
 SHG Bank Linkage Model in India
● To reach, unreached in rural areas like landless agricultural • NABARD
laborers, rural poor/women etc. • 1992
● RBI issued policy circular to commercial banks, RRBs and co-
operative banks to participate and extend finance to SHGs
● Agencies involved were NABARD, Banks, NGOs and SHG
members
● Group of 10 – 20 individuals having related specific purpose
● Members use savings, credit and social involvement for
empowerment
● Group keeps minimum balance for meeting any crisis
● Leaders withdraw the cash and members deposit cash by rotation
● Bank provides credit 3 to 4 times of savings

1. SHG Bank Linkage model emerged as the dominant model

2. It covered more than 20 million poor persons
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