|
Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group. In some regions, for example Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking. For some, microfinance is a movement whose object is "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."[1] Many of those who promote microfinance generally believe that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.[2] Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion. Background Microfinance and poverty Financial needs and financial services.I developing economies and particularly in rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. This is often the case when people need the services money can provide but do not have dispensable funds required for those services, forcing them to revert to other means of acquiring them. In his recent book The Poor and Their Money, Stuart Rutherford cites several types of needs:[3] Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood and old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. 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. Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry and precious metals. As Marguerite Robinson describes in The Microfinance Revolution, the 1980s demonstrated that "microfinance could provide large-scale outreach profitably," and in the 1990s, "microfinance began to develop as an industry" (2001, p. 54). In the 2000s, the microfinance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial microfinance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial microfinance industry include: Inappropriate donor subsidies Poor regulation and supervision of deposit-taking MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural microfinance methodologies Ways in which poor people manage their money Saving upRutherford argues that the basic problem poor people as money managers face is to gather a 'usefully large' amount of money. Building a new home may involve saving and protecting diverse building materials for years until enough are available to proceed with construction. Children’s schooling may be funded by buying chickens and raising them for sale as needed for expenses, uniforms, bribes, etc. Because all the value is accumulated before it is needed, this money management strategy is referred to as 'saving up'.[citation needed] Often, people don't have enough money when they face a need, so they borrow. A poor family might borrow from relatives to buy land, from a moneylender to buy rice, or from a microfinance institution to buy a sewing machine. Since these loans must be repaid by saving after the cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is that microcredit is addressing only half the problem, and arguably the less important half: poor people borrow to help them save and accumulate assets. Microcredit institutions should fund their loans through savings accounts that help poor people manage their myriad risks.[citation needed] Saving downMost needs are met through a mix of saving and credit. A benchmark impact assessment of Grameen Bank and two other large microfinance institutions in Bangladesh found that for every $1 they were lending to clients to finance rural non-farm micro-enterprise, about $2.50 came from other sources, mostly their clients' savings.[4] This parallels the experience in the West, in which family businesses are funded mostly from savings, especially during start-up. Recent studies have also shown that informal methods of saving are unsafe. For example, a study by Wright and Mutesasira in Uganda concluded that "those with no option but to save in the informal sector are almost bound to lose some money—probably around one quarter of what they save there."[5] The work of Rutherford, Wright and others has caused practitioners to reconsider a key aspect of the microcredit paradigm: that poor people get out of poverty by borrowing, building microenterprises and increasing their income. The new paradigm places more attention on the efforts of poor people to reduce their many vulnerabilities by keeping more of what they earn and building up their assets. While they need loans, they may find it as useful to borrow for consumption as for microenterprise. A safe, flexible place to save money and withdraw it when needed is also essential for managing household and family risk.[citation needed] Examples Microfinance is defined by the process of formulating groups within a community to assist poverty stricken people by lending them money without the need of credit or collateral. An example of microfinance is the Saving Up program. In the Saving Up Program people put aside a certain amount of money, for example $1 per week which is collected and dispersed as a lump sum by an external agent minus a fee for holding the funds. The Saving Up Program assists the poor in saving their money and teaches them how to save. FINCA, the Foundation for International Community Assistance, was formed in Latin America in the 1980s. It set out with the Village Banking Manual with the idea to run a savings-and-loans club run by the poor women clients with initial help from outsiders. It turned savings in to lump sums with support from various NGO’s who took on the project and spread it around the world. These village banks blended ‘hot’ (members’ savings) and ‘cold’ (external financing) money to provide these time-based services. It runs multiple savings accounts and grows from interest on loans. Its strategy of financing and blending money allows for the system to become self-sustaining from the NGO after several cycles of loans, aiming for sustainability and long-term services which is of course a huge advantage. The disadvantage of this model is it’s assumption that larger loans are needed by their clients, and although that may be true to a certain degree, each group of clients has different needs and maximum loan capacity due to their income. Situations must be tailored to fit the needs of their clients rather than assuming that growth is inevitable. The other disadvantage is the same with many informal and semi-formal financing, and it is that if one defaults on their payments it disrupts the whole system and has the ability to ruin it. According to Rutherford, there are three ways to save, known as basic personal financial intermediations; saving up (deposit collectors), saving down (the urban moneylenders) and saving through (the merry go round) (Rutherford, 2009). Jyothi, from the city of Vijayawada in India, is used as an example of a saving up initiative. Her clients are given a simple card, divided into 220 cells, and every day she will collected a certain amount of money from her clients until the card is filled. Then she will return the lump sum of money back to her clients but with a small interest rate of 9 percent (Rutherford, 2009). The saving down basic personal financial intermediation is followed when a money lender gives loans to poor people without any collateral or securities and then takes his money back in regular installments over the next few weeks or months. He charges the service by deducting a percentage of the loan borrowed, in this case 15 percent (Rutherford, 2009). Finally, the saving through is an example described by a lady named Mary who with fifteen other members, would save 15 shillings a day, with a total of 1,500 shillings combined. Each member will take turns to receive that lump sum for a number of years (Rutherford, 2009). Another important basic personal financial intermediation is called the saving up and down; Rabeya’s “fund” which takes place in Dhaka, Bangladesh. Basically, the funds and saving amounts can vary and it combines both saving up and saving down but all in one club. The fees charged are five percent for saving down, and this interest is paid out for saving up, so therefore there is a profit to be made with members who are saving up. For those members who save down, the interest rate is very low, more useful and flexible (Rutherford, 2009). Microfinance debates and challenges There are several key debates at the boundaries of microfinance. Interest rates This shop in South Sudan was opened using money borrowed from the Finance Sudan Limited (FSL) Program. This program was established in 2006 as one of the only microfinance lenders in the country.One of the principal challenges of microfinance is providing small loans at an affordable cost. The global average interest and fee rate is estimated at 37%, with rates reaching as high as 70% in some markets.[6] The reason for the high interest rates is not primarily cost of capital. Indeed, the local microfinance organizations that receive zero-interest loan capital from the online microlending platform Kiva charge average interest and fee rates of 35.21%.[7] Rather, the main reason for the high cost of microfinance loans is the high transaction cost of traditional microfinance operations relative to loan size.[8] Microfinance practitioners have long argued that such high interest rates are simply unavoidable, because the cost of making each loan cannot be reduced below a certain level while still allowing the lender to cover costs such as offices and staff salaries. For example in Sub-Saharan Africa credit risk for microfinance institutes is very high, because customers need years to improve their livelihood and face many challenges during this time. Financial institutes often do not even have a system to check the person's identity. Additionally they are unable to design new products and enlarge their business to reduce the risk.[9] The result is that the traditional approach to microfinance has made only limited progress in resolving the problem it purports to address: that the world's poorest people pay the world's highest cost for small business growth capital. The high costs of traditional microfinance loans limit their effectiveness as a poverty-fighting tool. Offering loans at interest and fee rates of 37% mean that borrowers who do not manage to earn at least a 37% rate of return may actually end up poorer as a result of accepting the loans.[10] Example of a loan contract, using flat rate calculation, from rural Cambodia. Loan is for 400,000 riels at 4% flat (16,000 riels) interest per month.According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial Inclusion, more than one-third of borrowers surveyed reported struggling to repay their loans. Some resorted to measures such as reducing their food intake or taking children out of school in order to repay microfinance debts that had not proven sufficiently profitable. In recent years, the microfinance industry has shifted its focus from the objective of increasing the volume of lending capital available, to address the challenge of providing microfinance loans more affordably. Microfinance analyst David Roodman contends that, in mature markets, the average interest and fee rates charged by microfinance institutions tend to fall over time.[11] However, global average interest rates for microfinance loans are still well above 30%. The answer to providing microfinance services at an affordable cost may lie in rethinking one of the fundamental assumptions underlying microfinance: that microfinance borrowers need extensive monitoring and interaction with loan officers in order to benefit from and repay their loans. The P2P microlending service Zidisha is based on this premise, facilitating direct interaction between individual lenders and borrowers via an internet community rather than physical offices. Zidisha has managed to bring the cost of microloans to below 10% for borrowers, including interest which is paid out to lenders. However, it remains to be seen whether such radical alternative models can reach the scale necessary to compete with traditional microfinance programs.[12] Use of loans Practitioners and donors from the charitable side of microfinance frequently argue for restricting microcredit to loans for productive purposes—such as to start or expand a microenterprise. Those from the private-sector side respond that, because money is fungible, such a restriction is impossible to enforce, and that in any case it should not be up to rich people to determine how poor people use their money[citation needed]. Who should provide microfinance services? Perhaps influenced by traditional Western views about usury, the role of the traditional moneylender has been subject to much criticism, especially in the early stages of modern microfinance. As more poor people gained access to loans from microcredit institutions however, it became apparent that the services of moneylenders continued to be valued. Borrowers were prepared to pay very high interest rates for services like quick loan disbursement, confidentiality and flexible repayment schedules. They did not always see lower interest rates as adequate compensation for the costs of attending meetings, attending training courses to qualify for disbursements or making monthly collateral contributions. They also found it distasteful to be forced to pretend they were borrowing to start a business, when they were often borrowing for other reasons (such as paying for school fees, dealing with health costs or securing the family food supply).[13] The more recent focus on inclusive financial systems (see section below) affords moneylenders more legitimacy, arguing in favour of regulation and efforts to increase competition between them to expand the options available to poor people. Modern microfinance emerged in the 1970s with a strong orientation towards private-sector solutions. This resulted from evidence that state-owned agricultural development banks in developing countries had been a monumental failure, actually undermining the development goals they were intended to serve (see the compilation edited by Adams, Graham & Von Pischke).[14] Nevertheless, public officials in many countries hold a different view, and continue to intervene in microfinance markets. Reach versus depth of impact These goats are being raised by Rwandan women as part of a farm cooperative funded by microfinance.There has been a long-standing debate over the sharpness of the trade-off between 'outreach' (the ability of a microfinance institution to reach poorer and more remote people) and its 'sustainability' (its ability to cover its operating costs—and possibly also its costs of serving new clients—from its operating revenues). Although it is generally agreed that microfinance practitioners should seek to balance these goals to some extent, there are a wide variety of strategies, ranging from the minimalist profit-orientation of BancoSol in Bolivia to the highly integrated not-for-profit orientation of BRAC in Bangladesh. This is true not only for individual institutions, but also for governments engaged in developing national microfinance systems. Gender Microfinance experts generally agree that women should be the primary focus of service delivery. Evidence shows that they are less likely to default on their loans than men. Industry data from 2006 for 704 MFIs reaching 52 million borrowers includes MFIs using the solidarity lending methodology (99.3% female clients) and MFIs using individual lending (51% female clients). The delinquency rate for solidarity lending was 0.9% after 30 days (individual lending—3.1%), while 0.3% of loans were written off (individual lending—0.9%).[15] Because operating margins become tighter the smaller the loans delivered, many MFIs consider the risk of lending to men to be too high. This focus on women is questioned sometimes, however a recent study of microenterpreneurs from Sri Lanka published by the World Bank found that the return on capital for male-owned businesses (half of the sample) averaged 11%, whereas the return for women-owned businesses was 0% or slightly negative.[16] Benefits and Limitations The benefits of microfinance are that it helps to manage the assets of the poor and generates income. Through microfinance institutions such as credit unions, financial non-governmental organizations and even commercial banks poor people can obtain small loans and safeguard their savings. The limitations of microfinance are that through this savings plan participants are losing money by having to pay a fee. The user can also pay back their loans whenever they chose therefore encouraging a borrower to have various outstanding loans. The lender is also vulnerable in that there is no guarantee of the loan being repaid in the given arranged timeframe, and the consequences to defaulting are not defined. When looking at a micro-finance initiative, there are three main benefits and limitations for the model. These are based on a basic micro-finance initiative though they can be applied to many variations. When looking at the three benefits and limitations, they revolve around three key ideas, poverty, mistrust, and promoting change. A micro-finance initiative wishes to address these issues in a positive way. For example, micro-finance can be an alternative program to address poverty reduction where the tools needed to raise an individual or a family out of poverty are given to them directly. In a micro-finance project these tools include money primarily, and may also be accompanied with a savings program, and financial help. Along with poverty reduction, a micro-finance initiative can aim to avoid a general sense of mistrust between the citizens and their national banks. The money in this case, is not coming from a bank, but rather within the community which allows those participating to foster social capital and community cohesion. Lastly, a microfinance initiative can promote larger poverty reduction movements by increasing the financial knowledge of the average citizen. However, these initiatives are not without limitations. These limitations focus on the same issues as stated before, but the negative consequences that may occur. For example, while there may be mistrust in the national banking system, there can be microfinance initiatives where the outside creator takes advantage of those participating. The money may not end up in the right places, resulting in distrust to all who have interest in monetary programs, and could potentially ruin the chance of any further microfinance projects becoming successful. Secondly, when |
About us|Jobs|Help|Disclaimer|Advertising services|Contact us|Sign in|Website map|Search|
GMT+8, 2015-9-11 21:43 , Processed in 0.154864 second(s), 16 queries .
