“Microfinance” is financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as “micro finance institutions” (MFIs). These institutions use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks.
WHO ARE MICRO FINANCE CLIENTS ?
Typical microfinance clients are poor and low-income people that do not have access to other formal financial institutions. Microfinance clients are usually self-employed, household-based entrepreneurs. Their diverse “microenterprises” include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, micro-entrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers.
NAMURG targets local people in its catchment area, because research has shown that the default percentage in these loans to these people is much less than 1%.
Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population, including the destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans. Most clients below the poverty line are in the upper half of the poor.
How do borrowers use microcredit loans?
Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population, including the destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans. Most clients below the poverty line are in the upper half of the poor.
How do borrowers use microcredit loans?
Microcredit borrowers have microenterprises—unsalaried, informal income-generating activities. These enterprises exploit skills the borrowers already have, such as garment repair, food preparation, and other skills.
HOW DOES MICROFINANCE HELP THE POOR?
The impact of microcredit has been studied more than the impact of other forms of microfinance. Microcredit can provide a range of benefits that poor households highly value including long-term increases in income and consumption. A harsh aspect of poverty is that income is often irregular and undependable. Access to credit helps the poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or education is lost. Credit can make it easier to manage shocks like sickness of a wage earner, theft, or natural disasters. Women participants in microcredit programs often experience important self-empowerment.
There is a strong indication from borrowers that microcredit improves their lives and the lives of their entire families. They faithfully repay their loans even when the only compelling reason is to ensure continued access to the service in the future.
When is microfinance NOT an appropriate tool?
When is microfinance NOT an appropriate tool?
Micro-financial services, particularly credit, are not appropriate for all people at all times. For loans that will be used for business purposes, microcredit best serves those who have identified an economic opportunity and can capitalize on it if they have access to a small amount of ready cash. Regardless of how loans are used, MFIs can provide long-term, stable credit access only when clients have both the willingness and ability to meet scheduled loan repayments.
Microfinance is not appropriate for the destitute, who may need grants or other public resources to improve their economic situation. Grants are a more efficient way to transfer resources to the destitute than are loans that many will be unable to repay. Too much risk is placed on the MFI and client, when the only way a destitute client can repay a loan is by starting a successful business. Basic requirements like food, shelter, and employment are often more urgently needed than financial services and should be appropriately funded by government and donor subsidies.
WHY DOES MICROFINANCE INDUSTRY PLACE SO MUCH EMPHASIS ON SUSTAINABILITY ?
From a development perspective, financial sustainability is not an end in itself. Rather, it is a tool for reaching the maximum number of clients. MFIs may only operate for a limited time, reach a limited number of clients, or be driven more by political goals than by client needs if services are not priced at sustainable levels.
The trade-off between financial viability and reaching very poor people is much less acute than many once thought. A number of financial providers have managed to offer high-quality financial services to very poor people while also covering their costs.
IS THE MICROFINANCE INDUSTRY SUSTAINABLE?
Are MFIs as profitable as banks? Measured by return on assets, MFIs are on average more profitable than the commercial banks in their countries. Sustainability is a fundamental requirement to protect the investments and returns of the shareholders.
Muhammad Yunus and Grameen Bank (from Wikipedia, the free encyclopedia)
Muhammad Yunus is a Bangladeshi banker and economist. He was a professor of economics when he developed the concept of microcredit. These loans are given to entrepreneurs too poor to qualify for traditional bank loans. Yunus is the founder of Grameen Bank. In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize, "for their efforts to create economic and social development from below." Yunus himself has received several other national and international honors, and he is the author of the book, “Banker to the Poor”.
Muhammad Yunus and Grameen Bank (from Wikipedia, the free encyclopedia)
Muhammad Yunus is a Bangladeshi banker and economist. He was a professor of economics when he developed the concept of microcredit. These loans are given to entrepreneurs too poor to qualify for traditional bank loans. Yunus is the founder of Grameen Bank. In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize, "for their efforts to create economic and social development from below." Yunus himself has received several other national and international honors, and he is the author of the book, “Banker to the Poor”.
