Because many applicants cannot offer any collateral, microlenders often pool borrowers together, as a buffer. After receiving loans, recipients repay their debts together. For example, if an individual is having trouble using his or her money to start a business, that person can seek help from other group members or from the loan officer. Through repayment, loan recipients start to develop a good credit history, allowing them to obtain larger loans down the line.
Interestingly, even though the borrowers often qualify as very poor, repayment rates on microloans are often higher than the average rate on more conventional forms of financing. For example, the microfinancing institution Opportunity International reported repayment rates of approximately History of Microfinance Microfinance is not a new concept: Small operations have existed since the 18th century. The first occurrence of microlending is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens.
But in its modern form, microfinancing became popular on a large scale in the s. The first organization to receive attention was the Grameen Bank, which was started in by Muhammad Yunus in Bangladesh. In , the Nobel Peace Prize was awarded to both Yunus and the Grameen Bank for their efforts in developing the microfinance system. Formed in , it has grown to become one of the biggest microfinance operations in the world.
SKS works in a similar fashion to the Grameen Bank, pooling all borrowers into groups of five members who work together to ensure loan repayment. There are other microfinance operations around the world. Some larger organizations work closely with the World Bank, while other smaller groups operate in different nations. Some organizations enable lenders to choose exactly who they want to support, categorizing borrowers on criteria like level of poverty, geographical region and type of small business.
Some groups tend to focus their efforts only on businesses which are created with the intent of improving the overall community through initiatives like education, job training and clean water. Benefits of Microfinance The World Bank estimates that more than million people have directly or indirectly benefited from microfinance-related operations.
The International Finance Corporation IFC , part of the larger World Bank Group, estimates that more than million people have directly benefited from microfinance-related operations as of In addition to providing microfinancing options, the IFC has assisted developing nations in the creation or improvement of credit reporting bureaus in 30 nations.
It has also advocated for the addition of relevant laws governing financial activities in 33 countries. The benefits of microfinance extend beyond the direct effects of giving people a source for capital.
Entrepreneurs who create a successful business create jobs, trade and overall economic improvement within the community. Empowering women in particular, as many MFIs do, leads to more stability and prosperity for families. The bank was started in as a nonprofit. However, 10 years later, management decided to transform the enterprise into a traditional, for-profit company.
Like most other microfinance companies, Compartamos Banco makes relatively small loans, serves a largely female clientele, and pools borrowers into groups. The main difference comes with its use of the funds it nets in interest and repayments: Like any public company, it distributes them to shareholders. In contrast, nonprofit institutions take a more philanthropic bent with any profits, using them to expand the number of people it helps or create more programs.
In addition to Compartamos Banco, many major financial institutions and other large corporations have launched for-profit microfinance projects. Other companies have created mutual funds that invest primarily in microfinance firms. Compartamos Banco and its for-profit ilk have been criticized by many, including the grandfather of modern microfinance himself, Muhammad Yunus.
The immediate, pragmatic fear is that, out of desire to make money, these MFIs will charge higher interest rates that may create a debt trap for low-income borrowers.
But Yunus and others also have a more fundamental concern: that the incentive for microcredit should be poverty alleviation, not profit. By their very nature and their obligation to stockholders , these publicly traded firms work against the original mission of microfinance — helping the poor above all else.
In response, Compartamos and other for-profit MFIs counter that commercialization allows them to operate more efficiently, and to attract more capital by appealing to profit-seeking investors. By becoming a profitable business, their argument goes, an MFI is able to extend its reach, providing more money and more loans to low-income applicants.
For now, charitable and commercialized MFIs co-exist. Other Concerns Regarding Microfinance On top of the divide between non- and for-profit microfinance enterprises, other criticisms exist. A better approach, these critics maintain, is to create jobs by constructing new factories and producing new goods. They cite the examples of China and India, where the development of large industries has led to stable employment and higher wages, which in turn has helped millions to emerge from the lowest levels of poverty.
Other critics have said that the presence of interest payments, however low, are still a burden. Despite the high repayment rates, there still are microfinance borrowers who cannot, or do not, repay loans, due to the failure of their ventures, personal catastrophe, or other reasons. The added debt can make these people poorer than when they started, even living hand-to-mouth. Types of microfinance institutions in India: Types of microfinance institutions in India By Priya Chetty on July 26, Microfinance organisation is not new to the financial market in India.
Due to the overwhelming poverty in India, government gave special attention to the development of rural credit. Furthermore, microfinance industry in India has witnessed a fast-paced growth in last two decades. In , the total number of microfinance institutions in India was around Tripathi, Definition of microfinance institutions in India: Microfinance Services Regulation Bill of India, defines microfinance services as financial assistance to be provided to an eligible individual directly or by a group mechanism for: An amount of maximum fifty thousand in aggregate per person for small and cottage enterprises, agricultural and allied activities consumption purposes of the person is also included or A maximum amount of one lakh fifty thousand in aggregate per person for the purpose of housing or Such like the above amounts may be prescribed to a person for other purposes also.
The bill, in addition, explains microfinance institutions as the organization of individuals which includes the following if the establishment of the organization concentrates on the purpose of increasing microfinance services: Registration of society under Societies Registration Act A creation of trust under Indian Trust Act or registered public trust under state enforced governing trust.
A society registered under the Multi State Cooperative Societies Act which can be a cooperative society or a mutual benefit corporative etc Singh, Subscribe to our Newsletter Email Address You can unsubscribe at any time by clicking the link in the footer of our emails.
That process seems to be well under way on microfinance. It has been picked up and supported by the World Bank, the UN and increasingly, the private sector and reaching over m borrowers by Cue backlash.
The critique has come from several angles. Firstly the evidence. Many early studies compared borrowers with non-borrowers. But if borrowers are in any case more entrepreneurial than those who do not borrow, such comparisons are likely to overstate hugely the effect of microcredit. The results are striking. We show that the intervention increased total MFI borrowing, and study the effects on the creation and the profitability of small businesses, investment, and consumption.
Okeeffe and Fredrick, assert that a management information system facilitates the fundamental changes in the institution through information availability without interfering with the microfinance activities. It was also found out that Hofokam Ltd was undertaking a social objective of having gender balanced work force in which in some cases some positions were being specifically reserved for qualifying ladies. As a result of the intensive client training, the trust has been able to hand over more power to groups to manage their own affairs.
This is a worldwide pattern that does not vary much by region. Ndambu asserts that there is no sufficient evidence to suggest that regulatory status increases the sustainability of MFIs nor does the deposit intermediation.
It can be a formal or informal financial institution. Moreover, its involvement has shown to lead to a downward trend in income inequality Hermes,
All of the above indicators are key outputs for the MFI to address the needs of the various stakeholders who hold both social and financial perspectives of performance Consultative group to assist the poor, Poor women often have the best credit ratings.
Such reports are useful to management, donors and regulators CGAP, The study adopted both quantitative and qualitative approaches. What she actually receives in return for fulfilling those obligations are; fixed amounts of loans for productive activities usually determined by the longevity of her relationship with the MFI rather than her financial needs, emergency loans for consumption subject to approval from her group Srinivasan and Sriram, Results on the factors affecting the performance of MFIs in Uganda This study established the factors affecting the performance of microfinance institutions in Uganda using Hofokam Limited as the case study. Additionally, some MFIs have not lived long in the industry due to their inability to sustain their operations. Women's roles and their mobility are limited by rigorous customs and traditions.
With access to small amounts of credit at reasonable interest rates, poor people can set up small businesses. Determined to improve her life, Sarasu met the minimum savings requirement and soon took out a loan to buy two dairy cows. In the s, the micro finance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. The microfinance institution has evolved as a result of the efforts of committed individuals and assistance agencies to reduce poverty by promoting self-employment and entrepreneurship.
Experience shows that poor people are a good risk, with higher repayment rates than conventional borrowers in countries as diverse as Bangladesh, Benin and Dominica.
In recent years there has also been increasing emphasis on expanding the diversity of institutions, since different institutions serve different needs. Formed in , it has grown to become one of the biggest microfinance operations in the world. Direct access to financial services can allow very poor people to progress from hand-to-mouth survival to planning for the future, acquiring physical and financial assets, investing in better nutrition, health and education.