Beneficiaries: The beneficiaries of microfinance are typically the low income group which works on a hand to mouth model and do not have a sustainable income source. Majority of these groups need financing to fund their pity shops, raise cattle, start small business on pushcarts etc. Till now farmers do not have the luxury to enjoy the benefits of these loans.
Amount of credit disbursed: The loan amounts usually are very low in the range of Rs1000/- to Rs 10,000/-, these credit are for terms ranging from 3 months to 2 years with payback starting immediately in form of monthly/ weekly instalments.
Recovery Rates: The loan repayment rates have been very high, industry standard is 98.5%. The remaining 1.5% in most cases has been attributed to circumstances beyond human control like terminal illness in the family, a major accident etc.
Saturday, August 16, 2008
MF factors
Sunday, August 3, 2008
Microfinance basics
Microfinance has been considered as an effective poverty alleviation tool because it is based on the fundamental principle that human beings are motivated to do whatever it takes to make themselves as well off as possible. It’s a way to provide fund to those sections of the society which are not been catered by the traditional banking systems. Over time, the definition of microfinance has become broader to include services like credit, savings, insurance, etc. We have realized that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products. The potential clients for a microfinance institution would be poor or low-income clients, including consumers and the self-employed. The term also refers to the practice of sustainably delivering those services.
As was said by Robert Peck Christen, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation, Microfinance broadly refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.”
How it differs from Traditional loans?
Traditional loans are given against some or the other kind of collateral which could be any of your material possessions. On the other hand in microfinance the clients are not required to keep any collateral, the only security for a lending firm is either the JLG (Joint liability groups) or the SHGs(Self help groups). These are also now being called as moral or social collaterals.
As was said by Robert Peck Christen, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation, Microfinance broadly refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.”
How it differs from Traditional loans?
Traditional loans are given against some or the other kind of collateral which could be any of your material possessions. On the other hand in microfinance the clients are not required to keep any collateral, the only security for a lending firm is either the JLG (Joint liability groups) or the SHGs(Self help groups). These are also now being called as moral or social collaterals.
Microfinance in the past
Microfinance as a concept has been around for a long time but has gain prominence only in the last three decades. Savings and credit groups with the likes of "Susus" of Ghana, "Chit funds" in India, "Tandas" in Mexico, "Arisan" in Indonesia, "Cheetu" in Sri Lanka, "Tontines" in West Africa, and "Pasanaku" in Bolivia, as well as numerous savings clubs and burial societies found all over the world have been around for centuries.
One of the earlier and longer-lived micro credit organizations providing small loans to rural poor with no collateral was the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about 300 funds all over Ireland. In 1800s, various larger and more formal savings and credit institutions like People’s Banks, Credit Unions and Savings & Credit Co-operatives emerged in Europe, these were organized primarily among the rural and urban poor.
By early 1900s, various adaptations of these models were used in parts of rural Latin America. The primary aim of these institutions were modernization of the agriculture sector, increased commercialization of the rural sector by mobilizing idle savings and increasing investments through credit. In most cases, these institutions were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive.
Between the 1950s and 1970s, the focus shifted to agricultural credit to marginal farmers, in hopes of raising productivity and incomes. Most of the lending institutions were state-owned development finance institutions providing concessional loans. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers.
Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These programs had an almost exclusive focus on credit for income generating activities targeting very poor (mostly women) borrowers.
One of the earlier and longer-lived micro credit organizations providing small loans to rural poor with no collateral was the Irish Loan Fund system, initiated in the early 1700s by the author and nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread institution of about 300 funds all over Ireland. In 1800s, various larger and more formal savings and credit institutions like People’s Banks, Credit Unions and Savings & Credit Co-operatives emerged in Europe, these were organized primarily among the rural and urban poor.
By early 1900s, various adaptations of these models were used in parts of rural Latin America. The primary aim of these institutions were modernization of the agriculture sector, increased commercialization of the rural sector by mobilizing idle savings and increasing investments through credit. In most cases, these institutions were not owned by the poor themselves, as they had been in Europe, but by government agencies or private banks. Over the years, these institutions became inefficient and at times, abusive.
Between the 1950s and 1970s, the focus shifted to agricultural credit to marginal farmers, in hopes of raising productivity and incomes. Most of the lending institutions were state-owned development finance institutions providing concessional loans. These subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their capital base due to subsidized lending rates and poor repayment discipline and the funds did not always reach the poor, often ending up concentrated in the hands of better-off farmers.
Meanwhile, starting in the 1970s, experimental programs in Bangladesh, Brazil, and a few other countries extended tiny loans to groups of poor women to invest in micro-businesses. This type of microenterprise credit was based on solidarity group lending in which every member of a group guaranteed the repayment of all members. These programs had an almost exclusive focus on credit for income generating activities targeting very poor (mostly women) borrowers.
Affect of alternative financing on small businesses.
Microfinance is a flexible means to widen access to financial services, both to help alleviate poverty and to encourage private sector activity. The principal objective of this is to raise incomes and broaden financial markets by providing financial services (principally credit) to small-scale entrepreneurs who otherwise lack access to capital markets. Some of the programs have primarily social missions, focusing on outreach to women and measuring success in terms of poverty alleviation.
A range of financial and social justifications underpin micro-finance. Mayoux (2003) has described three paradigms of micro-finance: The three paradigms constitute distinct discourses arising from different political and value premises.
The three paradigms are,
• The Financial Sustainability paradigm: This argues that group lending is good business for banks.
• The Poverty Alleviation paradigm: This aims for communitarian self organized development.
• The Feminist Empowerment paradigm: This argues that women need to organize themselves to escape their double oppression, both as women in the patriarchal gender order and within the working class
Now, the success of a microfinance programme cannot be measured only from the standpoint of high repayment ratio but also from the perspective of how far self-sufficiency has been achieved. Four basic factors that influence the consumption behaviour of marginalized people, which impinge on the success of microfinance, are,
• Awareness: Lack of awareness is the first structural hurdle. Awareness has to be created among beneficiaries so that they become motivated and cognizant of the outcome of empowerment. Beneficiaries need to be aware of opportunities through empowerment and understand the incentives that allow them to lead a better quality of life. Most of the people are not aware of their power to bargain for a lower interest rate from the banks, which have low default rates, unlike blue-chip corporate bodies that have high credibility and which borrow from banks at only 6-7% per annum.
• Self-esteem: Traditionally the trade carried out by individuals in rural areas is hereditary, and this imposes informal constraints on their lives. This continuous negligence by society leaves them in a state of very low self-worth. Inculcating a feeling of self-esteem in them will generate a much greater success of the programme.
• Dependence: It has been observed that social beliefs and customs are too strong for individuals to appreciate the benefits of self-reliance. For instance, it is believed that sons must support their parents in their old age; this is a deep rooted phenomenon in Asia, where family ties are strong. This dependence on familial ties for succour is a deterrent to independence. There are innumerable cases where the members cannot make consumption of investment decisions without the SHG’s help
• Sustainability: This can only be achieved when the micro financer ensures that the source of income is self-generating. The inability to sustain income flow is a major impediment to empowerment. Dropouts from SHGs are an indication of the failure of the microfinance programme, this is a result of direct or indirect result of the inability of microfinance programmes in such a way that the client comes out of poverty.
Hypothesis: “Is microfinance empowering the poor and helping India grow across all the sectors of society”
The success of micro financing can be measured in terms of the following dependent variables,
• No. of beneficiaries.
• Amount of credit disbursed.
• Recovery Rates.
• Profit flows.
• Ability to provide continuous sustained employment and earning.
• Socio-economic status.
This study also intends to do a secondary analysis on all available sources of financing and their comparison.
A range of financial and social justifications underpin micro-finance. Mayoux (2003) has described three paradigms of micro-finance: The three paradigms constitute distinct discourses arising from different political and value premises.
The three paradigms are,
• The Financial Sustainability paradigm: This argues that group lending is good business for banks.
• The Poverty Alleviation paradigm: This aims for communitarian self organized development.
• The Feminist Empowerment paradigm: This argues that women need to organize themselves to escape their double oppression, both as women in the patriarchal gender order and within the working class
Now, the success of a microfinance programme cannot be measured only from the standpoint of high repayment ratio but also from the perspective of how far self-sufficiency has been achieved. Four basic factors that influence the consumption behaviour of marginalized people, which impinge on the success of microfinance, are,
• Awareness: Lack of awareness is the first structural hurdle. Awareness has to be created among beneficiaries so that they become motivated and cognizant of the outcome of empowerment. Beneficiaries need to be aware of opportunities through empowerment and understand the incentives that allow them to lead a better quality of life. Most of the people are not aware of their power to bargain for a lower interest rate from the banks, which have low default rates, unlike blue-chip corporate bodies that have high credibility and which borrow from banks at only 6-7% per annum.
• Self-esteem: Traditionally the trade carried out by individuals in rural areas is hereditary, and this imposes informal constraints on their lives. This continuous negligence by society leaves them in a state of very low self-worth. Inculcating a feeling of self-esteem in them will generate a much greater success of the programme.
• Dependence: It has been observed that social beliefs and customs are too strong for individuals to appreciate the benefits of self-reliance. For instance, it is believed that sons must support their parents in their old age; this is a deep rooted phenomenon in Asia, where family ties are strong. This dependence on familial ties for succour is a deterrent to independence. There are innumerable cases where the members cannot make consumption of investment decisions without the SHG’s help
• Sustainability: This can only be achieved when the micro financer ensures that the source of income is self-generating. The inability to sustain income flow is a major impediment to empowerment. Dropouts from SHGs are an indication of the failure of the microfinance programme, this is a result of direct or indirect result of the inability of microfinance programmes in such a way that the client comes out of poverty.
Hypothesis: “Is microfinance empowering the poor and helping India grow across all the sectors of society”
The success of micro financing can be measured in terms of the following dependent variables,
• No. of beneficiaries.
• Amount of credit disbursed.
• Recovery Rates.
• Profit flows.
• Ability to provide continuous sustained employment and earning.
• Socio-economic status.
This study also intends to do a secondary analysis on all available sources of financing and their comparison.
Saturday, August 2, 2008
How I got into Microfinance (MF)?
Like most of my class mates I was looking for an empirical study topic (obviously someone who would agree to guide me) and was confused. In the meanwhile I happen to meet Mr. Anantharaman Mani, CTO Heymath.
During our initial discussions he suggested Microfinance, and my immediate reaction was oh yes I have heard about it… but initially all I knew about MF was that deals with financing the poor people, who have not been benefited by conventional financing methods. I knew very little about the potential of Microfinance about the way it has transformed lives of millions of people across the globe. Without knowing much I agreed on the topic, Ananth gave me another week to do some research and then decide the research topic.
After a week of research & guidance from Ananth I came up with a small write up about the topic. He agreed to Guide me & I got married to Microfinance for at least a year now.
Despite his busy schedule Ananth is all excited to guide me & some of my friends on different topics. Thanks Ananth!
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