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Microfinance

Microfinance Microfinance is a form 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.

Microfinance 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.

Microfinance For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

Microfinance Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed

Microfinance - Purpose
Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income

In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by Hernando de Soto and others, even if they happen to own land in the developing world, they may not have effective title to it. This means that the bank will have little recourse against defaulting borrowers.

Seen from a broader perspective, the development of a healthy national financial system has long been viewed as a catalyst for the broader goal of national economic development (see for example Alexander Gerschenkron, Paul Rosenstein-Rodan, Joseph Schumpeter, Anne Krueger)

Hopes of quickly putting them out of business have proven unrealistic, even in places where microfinance institutions are active.

The industry has been growing rapidly, and concerns have arisen that the rate of capital flowing into microfinance is a potential risk unless managed well.

As seen in the State of Andhra Pradesh (India), these systems can easily fail. Reasons for failure include lack of use by potential customers, over-indebtedness, poor operating procedures, neglect of duties and inadequate regulations.

Microfinance - Microfinance and poverty
In 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:

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.

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

Institutional inefficiencies

Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Microfinance - Ways in which poor people manage their money
Rutherford argues that the basic problem poor people as money managers face is to gather a 'usefully large' amount of money

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

Most 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. 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."

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

Microfinance - Examples
An example of microfinance is the Saving Up program

FINCA, the Foundation for International Community Assistance, was formed in Latin America in the 1980s

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

Another important basic personal financial intermediation is called the saving up and down; Rabeya’s “fund” which takes place in Dhaka, Bangladesh

Microfinance - Microfinance debates and challenges
There are several key debates at the boundaries of microfinance.

Microfinance - Interest rates
The high costs of traditional microfinance loans limit their effectiveness as a poverty-fighting tool

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. However, global average interest rates for microfinance loans are still well above 30%.

However, it remains to be seen whether such radical alternative models can reach the scale necessary to compete with traditional microfinance programs.

Microfinance - 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.

Microfinance - 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

Microfinance - Who should provide microfinance services?
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). Nevertheless, public officials in many countries hold a different view, and continue to intervene in microfinance markets.

Microfinance - Reach versus depth of impact
This is true not only for individual institutions, but also for governments engaged in developing national microfinance systems.

Microfinance - Gender Microfinance experts generally agree that women should be the primary focus of service delivery

Microfinance - Benefits and Limitations
The limitations of microfinance are that through this savings plan participants are losing money by having to pay a fee

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.

Lastly, a microfinance initiative can promote larger poverty reduction movements by increasing the financial knowledge of the average citizen.

Secondly, when creating a microfinance project, time may be an issue

There are two ways in which the needs of the poor are not being met by micro finance

Also, there are complications associated with implementing micro-finance projects in Canada

Microfinance helps the poor people get access or save funds over a period of time with low interest rates

Microfinance - History of microfinance
Microfinance programmes also need to be based on local funds

The history of microfinancing can be traced back as far as the middle of the 1800s, when the theorist Lysander Spooner was writing about the benefits of small credits to entrepreneurs and farmers as a way of getting the people out of poverty. Independently of Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany.

The modern use of the expression "microfinancing" has roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of microfinancing. Another pioneer in this sector is Akhtar Hameed Khan.

Microfinance - Microfinance standards and principles
It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a heifer pool are engaged in microfinance

Some principles that summarize a century and a half of development practice were encapsulated in 2004 by CGAP and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004:

Poor people need not just loans but also savings, insurance and money transfer services.

Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.

"Microfinance can pay for itself." Subsidies from donors and government are scarce and uncertain and so, to reach large numbers of poor people, microfinance must pay for itself.

Microfinance means building permanent local institutions.

Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system.

"Donor funds should complement private capital, not compete with it."

"The key bottleneck is the shortage of strong institutions and managers." Donors should focus on capacity building.

Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.

Microfinance institutions should measure and disclose their performance—both financially and socially.

Microfinance is considered a tool for socio-economic development, and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions.

Microfinance - Scale of microfinance operations
Of these accounts, 120 million were with institutions normally understood to practice microfinance

Considering that most bank clients in the developed world need several active accounts to keep their affairs in order, these figures indicate that the task the microfinance movement has set for itself is still very far from finished.

By type of service, "savings accounts in alternative finance institutions outnumber loans by about four to one. This is a worldwide pattern that does not vary much by region."

An important source of detailed data on selected microfinance institutions is the MicroBanking Bulletin, which is published by Microfinance Information Exchange. At the end of 2009, it was tracking 1,084 MFIs that were serving 74 million borrowers ($38 billion in outstanding loans) and 67 million savers ($23 billion in deposits).

The 2011 report contains information on the environment of microfinance in 55 countries among two categories, Regulatory Framework and the Supporting Institutional Framework

As yet there are no studies that indicate the scale or distribution of 'informal' microfinance organizations like ROSCA's and informal associations that help people manage costs like weddings, funerals and sickness. Numerous case studies have been published, however, indicating that these organizations, which are generally designed and managed by poor people themselves with little outside help, operate in most countries in the developing world.

Help can come in the form of more and better-qualified staff, thus higher education is needed for microfinance institutions. This has begun in some universities, as Oliver Schmidt describes. Mind the management gap

Microfinance - Microfinance in the United States and Canada
The average microfinance loan size in the US is US$9,732, ten times the size of an average microfinance loan in developing countries (US$973).

Microfinance - Impact According to reports, every domestic microfinance loan creates 2.4 jobs

Microfinance - United States
In the late 1980s, microfinance institutions developed in the US. They served low-income and marginalized minority communities. By 2007, there were 500 microfinance organizations operating in the US with 200 lending capital.

Change in social welfare policies and focus on economic development and job creation at the macro level.

Encouragement of employment, including self-employment, as a strategy for improving the lives of the poor.

These factors incentivized the public and private supports to have microlending activity in the United States.

ACCION USA, an affiliate of ACCION International, offers microloans and other financial services to low- and moderate-income entrepreneurs for their small businesses who cannot get financial support through traditional means. Accion Chicago Accion Texas-Louisiana

Founded in 1997 in New York City, Project Enterprise provides support to entrepreneurs and small businesses in lower income communities through access to business loans, business development services, and networking opportunities.

Based in New York and founded by Muhammed Yunus, Grameen America provides micro-loans, savings programs, financial education, and credit establishment to low-income entrepreneurs.

An example of a Microfinance startup, this organization was founded by two Brown University students in Based in Providence, Rhode Island, CGF provides credit-building business and consumer loans, financial coaching, and free tax preparation.

RISE Financial Pathways (formerly Community Financial Resource Center)

Based in Los Angeles, this first public-private partnership of its kind provides micro-loans, SEED/expansion loans, high interest savings accounts, financial education & counseling to low and moderate income entrepreneurs and disinvested communities.

Microfinance - Canada Microfinance in Canada took shape through the development of credit unions

Microfinance - Canada Efforts to transfer specific microfinance innovations such as solidarity lending from developing countries to Canada have met with little success.

Microfinance - Canada Founded by Sandra Rotman in 2009, Rise is a Rotman and CAMH initiative that provides small business loans, leases, and lines of credit to entrepreneurs with mental health and/or addiction challenges.

Microfinance - Canada Formed in 2005 through the merging of the Civil Service Savings and Loan Society and the Metro Credit Union, Alterna is a financial alternative to Canadians. Their banking policy is based on cooperative values and expert financial advising.

Access Community Capital Fund
Microfinance - Canada Access Community Capital Fund

Microfinance - Canada Based in Toronto, Ontario, ACCESS is a Canadian charity that helps entrepreneurs without collateral or credit history find affordable small loans.

Montreal Community Loan Fund
Microfinance - Canada Montreal Community Loan Fund

Microfinance - Canada Created to help eradicate poverty, Montreal Community Loan Fund provides accessible credit and technical support to entrepreneurs with low income or credit for start-ups or expansion of organizations that cannot access traditional forms of credit.

Microfinance - Canada Using the community economic development approach, Momentum offers opportunities to people living in poverty in Calgary. Momentum provides individuals and families who want to better their financial situation take control of finances, become computer literate, secure employment, borrow and repay loans for business, and purchase homes.

Microfinance - Canada Founded in 1946, Vancity is now the largest English speaking credit union in Canada.

Microfinance - Micro Finance in India
Loans to poor people by banks have many limitations including lack of security and high operating cost and so Microfinance was developed as an alternative to provide loans to poor people with the goal of creating financial inclusion and equality.

Muhammad Yunus a Nobel Prize winner, introduced the concept of Microfinance in Bangladesh in the form of the "Grameen Bank"

Micro Finance is defined as, financial services such as Saving A/c, Insurance Fund & credit provided to poor & low income clients so as to help them to rise their income & there by improve their standard of living.

From this definition it is clear that main features of Micro Financing:

1) Loan are given without security

4) Maximum limit of loan under micro finance ₨25,000/-

6) Micro Finance is different from Micro Credit- under Micro Credit, small amount of loans given to the borrower but under Micro Finance besides loans many other financial services are provided such as Savings A/c, Insurance etc. Therefore Micro Finance has wider concept as compared to Micro Credit.

Microfinance - "Inclusive financial systems"
The microcredit era that began in the 1970s has lost its momentum, to be replaced by a 'financial systems' approach. While microcredit achieved a great deal, especially in urban and near-urban areas and with entrepreneurial families, its progress in delivering financial services in less densely populated rural areas has been slow.

The new financial systems approach pragmatically acknowledges the richness of centuries of microfinance history and the immense diversity of institutions serving poor people in developing world today. It is also rooted in an increasing awareness of diversity of the financial service needs of the world’s poorest people, and the diverse settings in which they live and work.

Brigit Helms in her book 'Access for All: Building Inclusive Financial Systems', distinguishes between four general categories of microfinance providers, and argues for a pro-active strategy of engagement with all of them to help them achieve the goals of the microfinance movement.

These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs, ASCAs and input supply shops. Because they know each other well and live in the same community, they understand each other’s financial circumstances and can offer very flexible, convenient and fast services. These services can also be costly and the choice of financial products limited and very short-term. Informal services that involve savings are also risky; many people lose their money.

These include self-help groups, credit unions, and a variety of hybrid organizations like 'financial service associations' and CVECAs

The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to about 133 million clients by the end of 2006

The increasing use of alternative data in credit scoring, such as trade credit is increasing commercial banks' interest in microfinance.

With appropriate regulation and supervision, each of these institutional types can bring leverage to solving the microfinance problem. For example, efforts are being made to link self-help groups to commercial banks, to network member-owned organizations together to achieve economies of scale and scope, and to support efforts by commercial banks to 'down-scale' by integrating mobile banking and e-payment technologies into their extensive branch networks.

Microfinance - Microcredit and the web
Due to the unbalanced emphasis on credit at the expense of microsavings, as well as a desire to link Western investors to the sector, peer-to-peer platforms have developed to expand the availability of microcredit through individual lenders in the developed world

The volume channeled through Kiva's peer-to-peer platform is about $100 million as of November 2009 (Kiva facilitates approximately $5M in loans each month). In comparison, the needs for microcredit are estimated about 250 bn USD as of end Most experts agree that these funds must be sourced locally in countries that are originating microcredit, to reduce transaction costs and exchange rate risks.

There have been problems with disclosure on peer-to-peer sites, with some reporting interest rates of borrowers using the flat rate methodology instead of the familiar banking Annual Percentage Rate. The use of flat rates, which has been outlawed among regulated financial institutions in developed countries, can confuse individual lenders into believing their borrower is paying a lower interest rate than, in fact, they are.

Microfinance - Microfinance and social interventions
Such interventions like the "Intervention with Microfinance for AIDS and Gender Equity" (IMAGE) which incorporates microfinancing with "The Sisters-for-Life" program a participatory program that educates on different gender roles, gender-based violence, and HIV/AIDS infections to strengthen the communication skills and leadership of women "The Sisters-for-Life" program has two phases where phase one consists of ten one-hour training programs with a facilitator with phase two consisting of identifying a leader amongst the group, train them further, and allow them to implement an Action Plan to their respective centres.

Microfinance - Microfinance and social interventions
This approach shows, that microfinance can not only help businesses to prosper; it can also foster human development and social security

Microfinance - Impact and criticism
Most criticisms of microfinance have actually been criticisms of microcredit. Criticism focuses on the impact on poverty, the level of interest rates, high profits, overindebtedness and suicides. Other criticism include the role of foreign donors and working conditions in companies affiliated to microfinance institutions, particularly in Bangladesh.

Microfinance - Impact The impact of microcredit is a subject of much controversy. Proponents state that it reduces poverty through higher employment and higher incomes. This is expected to lead to improved nutrition and improved education of the borrowers' children. Some argue that microcredit empowers women. In the US and Canada, it is argued that microcredit helps recipients to graduate from welfare programs.

Microfinance - Impact Critics say that microcredit has not increased incomes, but has driven poor households into a debt trap, in some cases even leading to suicide. They add that the money from loans is often used for durable consumer goods or consumption instead of being used for productive investments, that it fails to empower women, and that it has not improved health or education.

Microfinance - Impact The available evidence indicates that in many cases microcredit has facilitated the creation and the growth of businesses

Microfinance - Role of foreign donors
The role of donors has also been questioned

Microfinance - Working conditions in enterprises affiliated to MFIs
There has also been criticism of microlenders for not taking more responsibility for the working conditions of poor households, particularly when borrowers become quasi-wage labourers, selling crafts or agricultural produce through an organization controlled by the MFI

Microfinance - Further reading
Adams, Dale W., Douglas H. Graham & J. D. Von Pischke (eds.). Undermining Rural Development with Cheap Credit. Westview Press, Boulder & London, 1984.

de Aghion, Beatriz Armendáriz & Jonathan Morduch. The Economics of Microfinance, The MIT Press, Cambridge, Massachusetts, 2005.

Branch, Brian & Janette Klaehn. Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. PACT Publications, Washington, 2002.

Dowla, Asif & Dipal Barua. The Poor Always Pay Back: The Grameen II Story. Kumarian Press Inc., Bloomfield, Connecticut, 2006.

Floro, Sagrario & Pan A. Yotopoulos, Informal Credit Markets and the New Institutional Economics, Westview Press, Boulder Col., 1991, ISBN

Hirschland, Madeline (ed.) Savings Services for the Poor: An Operational Guide. Kumarian Press Inc., Bloomfield CT, 2005.

Khandker, Shahidur R. Fighting Poverty with Microcredit, Bangladesh edition, The University Press Ltd, Dhaka, 1999.

Ledgerwood, Joanna and Victoria White. Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006.

Mas, Ignacio and Kabir Kumar. Banking on mobiles: why, how and for whom? CGAP Focus Note #48, July 2008.

Rai, Achintya et al. Venture: A Collection of True Microfinance Stories. Zidisha Microfinance, (Kindle E-Book,

Raiffeisen, FW (translated from the German by Konrad Engelmann). The Credit Unions. The Raiffeisen Printing & Publishing Company, Neuwied on the Rhine, Germany, 1970.

Robinson, Marguerite S., The microfinance revolution, The World Bank, Washington D.C., 2001.

Roodman, David, Due Diligence: An Impertinent Inquiry into Microfinance, Center for Global Development, 2012.

Seibel Hans Dieter & Shyam Khadka, "SHG Banking: a financial technology for very poor microentrepreneurs", Savings and Development, Vol. XXVI, n. 2, 2002, ISSN

Sinclair, Hugh. Confessions of a Microfinance Heretic. Berrett-Koehler Publishers, 2012.

Rutherford, Stuart. The Poor and Their Money. Oxford University Press, Delhi, 2000.

Wolff, Henry W. People’s Banks: A Record of Social and Economic Success. P.S. King & Son, London, 1910.

Maimbo, Samuel Munzele & Dilip Ratha (eds.) Remittances: Development Impact and Future Prospects. The World Bank, 2005.

Wright, Graham A.N. Microfinance Systems: Designing Quality Financial Services for the Poor. The University Press, Dhaka, 2000.

United Nations Department of Economic Affairs and United Nations Capital Development Fund. Building Inclusive Financial Sectors for Development. United Nations, New York, 2006.

Yunus, Muhammad. Creating a World Without Poverty: Social Business and the Future of Capitalism. PublicAffairs, New York, 2008.

Yunus Muhammad, Moingeon Bertrand & Laurence Lehmann-Ortega, "Building Social Business Models: Lessons from the Grameen Experience”, April-June, vol 43, n° 2-3, Long Range Planning, 2010, p "

Long-tail - Microfinance and microcredit
The banking business has used internet technology to reach an increasing number of customers. The most important shift in business model due to the long tail has come from the various forms of microfinance developed.

As opposed to e-tailers, micro-finance is a distinctly low technology business

Grameen Bank in Bangladesh has successfully followed this business model. In Mexico the banks Compartamos and Banco Azteca also service this customer demographic, with an emphasis on consumer credit. Kiva.org is an organization that provides micro credits to people worldwide, by using intermediaries called small microfinance organizations (S.M.O.'s)to distribute crowd sourced donations made by Kiva.org lenders.

Joint and several liability - Microfinance
In trying to achieve its aim of alleviating poverty, Microfinance often lends to group of poor, where each member of the group is jointly liable to each other

Micro-finance - Microfinance and poverty
In developing economies and particularly in rural areas, many activities that would be classified in the developed world as financial are not monetization|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:Stuart Rutherford. The Poor and Their Money. Oxford University Press, New Delhi, 2000, p. 4. isbn = X

* 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.

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).

* Inappropriate donor subsidies

* Poor regulation and supervision of deposit-taking MFIs

* Few MFIs that meet the needs for savings, remittances or insurance

* Institutional inefficiencies

* Need for more dissemination and adoption of rural, agricultural microfinance methodologies

Micro-finance - History of microfinance
Microfinance programmes also need to be based on local funds

Micro-finance - History of microfinance
The modern use of the expression microfinancing has roots in the 1970s when organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer Muhammad Yunus, were starting and shaping the modern industry of microfinancing. Another pioneer in this sector is Akhtar Hameed Khan.

Micro-finance - Microfinance standards and principles
It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a Heifer International|heifer pool are engaged in microfinance

#Poor people need not just loans but also savings, insurance and Electronic funds transfer|money transfer services.

#Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.

#Microfinance can pay for itself.Helms (2006), p. xi Subsidies from donors and government are scarce and uncertain and so, to reach large numbers of poor people, microfinance must pay for itself.

#Microfinance means building permanent local institutions.

#Microfinance also means integrating the financial needs of poor people into a country's mainstream financial system.

#Donor funds should complement private Financial capital|capital, not compete with it.

#The key bottleneck is the shortage of strong institutions and managers. Donors should focus on capacity building.

#Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.

#Microfinance institutions should measure and disclose their performance—both financially and socially.

Microfinance is considered a tool for socio-economic development, and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions.

Micro-finance - Scale of microfinance operations
Of these accounts, 120 million were with institutions normally understood to practice microfinance

By type of service, savings accounts in alternative finance institutions outnumber loans by about four to one. This is a worldwide pattern that does not vary much by region.Christen, Rosenberg Jayadeva. Financial institutions with a double-bottom line, pp. 5-6

Micro-finance - Microfinance in the United States and Canada

Micro-finance - Microfinance and social interventions
Understanding the impact of a microfinance-based intervention of women's empowerment and the reduction of intimate partner violence in South Africa

Micro-finance - Microfinance and social interventions
Pro Mujer uses a “one-stop shop” approach, which means in one building, the clients find financial services, business training, empowerment advice and healthcare services combined.Microinsurance - Healthy Clients

United Nations Relief and Works Agency - UNRWA Microfinance Department
UNRWA's Microfinance Department (MD) aims to alleviate poverty and support economic development in the refugee community by providing capital investment and working capital loans at commercial rates. The programme seeks to be as close to self-supporting as possible. It has a strong record of creating employment, generating income and empowering refugees.

With operations in three countries, the MD currently has the broadest regional coverage of any microfinance institution in the Middle East

The MD works by extending micro-credit and complimentary services to small entrepreneurs, households and businesses

The MD conceives of its mission in the context of the United Nation’s broader vision of building inclusive financial services for the poor

In the intervening six years it has grown into the second largest microfinance provider in Syria, where it is also the first institution to reach operational self-sufficiency, and the fifth largest in Jordan

The department focuses its outreach on poor urban areas, which are both centres of commercial and industrial activity and host a high concentration of Palestine refugees

'Products and Services:'

Through its branch offices the MD provides a range of credit products. Existing products available in the MD’s markets include the following:

:'Microenterprise Credit (MEC):' targets the overwhelming majority of regional businesses which employ fewer than five workers, most of whom enjoy no access to formal credit and are vulnerable to shocks. The loans range from USD 300 to USD 8,500, and are designed to help such businesses build-up and maintain reserves of short-term working capital.

:'Microenterprise Credit Plus (MEC+):' allows mature microenterprises who seek to expand capital and grow employment to expand MEC borrowing with more extended repayment horizons. Eligible clients include formal enterprises and borrowers who have demonstrated repayment ability over several loan cycles.

:'Solidarity Group Lending (SGL):' designed for groups of women entrepreneurs who are collectively and individually responsible for repayment. Starting at USD 400, with a maximum ceiling of USD 5,000, the SGL sustains microenterprise, as well household expenditures on education, health, and basic needs.

:'Women’s Household Credit (WHC):' an adaptation of the SGL loan, first piloted in Syria to accommodate home-based enterprise by women, allowing them to build up household assets used for business. Unlike the SLG product, it does not work on a group-lending model. Average disbursements are in the range USD 150 to USD 800.

:'Consumer Loan Product (CLP):' supports low-income and working-class family consumption, regular investments in education and health, as well as emergency outlays.

:'Housing Loan Product (HLP):' helps poor families with no access to mortgage facilities improve, expand or acquire housing.

:'Small and Medium Enterprise Business Training (SMET):' an enterprise training program in Gaza that trains participants in subjects such as book-keeping, taxation, tendering, computing and e-commerce.

Cooperative banking - Microcredit and microfinance
The more recent phenomena of microcredit and microfinance are often based on a cooperative model They focus on small business lending. In 2006, Muhammad Yunus, founder of the Grameen Bank in Bangladesh, won the Nobel Peace Prize for his ideas regarding development and his pursuit of the microcredit concept.

Fairplay For All Foundation - Microfinance
People living in areas like Payatas rarely have access to financial instruments such as credit and savings. Through FFA’s microfinancing programs, families of the children the charity works with can avail of low-interest or interest-free loans, usually for medical emergencies or for starting small businesses. Any income generated is then reinvested for future microfinancing needs.

Islamic banking - Microfinance
Already, several microfinance institutions (MFIs) such as FINCA Afghanistan have introduced Islamic-compliant financial instruments that accommodate sharia criteria.

Microfinance Information Exchange
'Microfinance Information Exchange, Inc.' (commonly known by its acronym 'MIX') is a non-profit organization that acts as a business information provider in the microfinance sector. Founded by the Consultative Group to Assist the Poor (CGAP) and sponsored by the Bill and Melinda Gates Foundation, CGAP, Citigroup|Citi Foundation, Deutsche Bank|Deutsche Bank Foundation, IFAD, and Omidyar Network, MIX is headquartered in Washington DC, and has regional offices in Peru, Morocco, and India.

Microfinance Information Exchange - Business Information Provider
In providing objective data and analysis on microfinance providers, MIX hopes to promote transparency (market)|financial transparency in the industry, build the information infrastructure in developing countries, and offer those involved in microfinance (practitioners, funders, policy makers, academia) a way to gain a better understanding of MFI operations, challenges, and performance trends.

Microfinance Information Exchange - MIX Market
MIX Market is MIX’s platform for delivering microfinance information. Described as the “microfinance information clearinghouse,” MIX Market provides online data on over 1800 microfinance institutions (MFIs) and 100 investors.

'MIX Market Statistics' – As of July 20, 2010, 1,834 MFIs were reporting data to MIX. Those MFIs total $43.8 billion USD in gross loan portfolio, $23.7 billion USD in deposits, 81.4 million borrowers, and in average loan balance per borrower.

'Data Collection and Analysis' - After receiving self-reported data from MFIs, MIX Financial analyst|analysts “review the data, ensuring there are no outliers and extremes. [They] double check against source documents such as audits and ratings, and standardize [the data] according to internationally accepted accounting standards and to provide for a more useful intra-regional comparison.”

'Data Products' - The main data products of the MIX Market include 'MFI Profiles' (including Economic indicator|Financial Indicators, wikt:trend|Trends, and Benchmarking|Benchmarks), 'Country-level and Regional profiles', 'Funding Structure Data', and 'Social Performance Reports'.

* 'MFI profiles' – The most basic medium through which data can be accessed on MIX Market is through individual MIX Market MFI profiles which provide financial, operational, and social performance data as well as relevant documents, such as audits. With this data, users can view and compare performance data of several MFIs (by countries, indicators, and trends), create customizable performance and trend reports, and create benchmarks to view aggregated data in median values.

* 'Country-level and Regional Profiles' – These options permit a wider perspective on MFI performance data, allowing users to view information on a country-level scale or a regional scale. MIX Market currently has country profiles for 115 countries divided into six regions: Africa or Sub-Saharan Africa (SSA), Latin America and The Caribbean (LAC), East Asia and the Pacific (EAP), Middle East and North Africa (MENA), Eastern Europe and Central Asia (EECA), and South Asia (SA).

* 'Funding Structure Data' – Launched in June 2010, MIX Market’s Funding Structure Data provides information on debt financing sources for microfinance institutions. The Funding Structure Data cover over 15 billion USD of outstanding debt, ranging from local to foreign, public and private funding sources, and covering 86 countries and 890 MFIs, representing over 90% of all borrowers. The database allows users to aggregate data by country, funder type, and other variables.

Additionally, MIX manages the Social Performance Task Force (SPTF)-sponsored 'Social Performance Indicators Blog', which a medium for learning and exchange on topics related to social performance in microfinance

MFIs, funders (public and private funds that invest in microfinance), MFI networks, and microfinance service providers (academic institutions, Investment management|fund managers, development programs, peer-to-peer lenders, private corporations, raters/external evaluators, advisory firms, and governmental and regulatory agency|regulatory agencies) can create and update these profiles with their most recent business information (including company overview, website and other contact information, and products) as well as financial and operational data and documentation.

Microfinance Information Exchange - Publications
The semiannual 'MicroBanking Bulletin' publishes financial and portfolio data provided voluntarily by MFIs and organized by peer groups. It includes peer reviewed articles from microfinance practitioners and academics on topics related to transparency and benchmarking.

'Regional Analysis, Benchmarking, and Trend Reports' are published yearly after the end of the data collection and provide industry analysis including updates on broad economic, legal, and performance developments. These reports include regional benchmarks for financial and operational indicators for the upcoming year and provide a means by which to continually evaluate MFI performance.

'Data briefs' draw on MIX Market datasets to provide empirical and theoretical analysis on broader topics within the microfinance industry.

Microfinance in Tanzania
'Microfinance in Tanzania' began with NGOs and SACCOs (Savings and Credit Cooperative Organizations) in 1995 and has continued to grow with the increased success of microfinance internationally.

There are additional organizations involved in microfinance in Tanzania, including FINCA International|FINCA, PRIDE and SEDA as well as the Tanzania Postal Bank

A recent 2005 survey done by the Bank of Tanzania (the overseer of microfinance under the Ministry of Finance) updated the directory of microfinance practitioners and includes basic information on microfinance institutions including commercial banks, financial institutions, financial Non-Governmental Organizations (NGO), Savings and Credit Cooperatives Societies (SACCOs) and Savings and Credit Associations (SACAs)

Microfinance in Tanzania - National Microfinance Bank
It plans to add 16 more branches and offices that can offer microfinance services.

The primary microfinance product offered and stressed are savings deposits which is the easiest to obtain at NMB and quite reliable as well.

NMB’s specific strategy towards microfinance is unique in that they link large corporate customers to microfinance loan customers. NMB calls this the Kilombero strategy after they linked the loans given to the Kilombero sugar Company to sugar cane out-growers. The Kilombero strategy encourages growth through loans for the use of capital and growth to both small and large enterprises.

NMB encourages and expands microfinance in three ways:

* Loans to micro and small enterprises for the purchase and inventory and supply of goods

* Add-on services such as money transfers and payroll services to both the large corporate clients and micro and small enterprises

Microfinance in Tanzania - AKIBA Bank
Being a bank without as much outreach as a bank such as the National Microfinance Bank, AKIBA has an easier time focusing on its microfinance operations and is able to measure its success at a quicker and easier than NMB

AKIBA attributes its success to providing services outside the normal financial institution in teaching invaluable business practices as well as focusing on savings and deposits. The growth in deposits can be attributed to the increase in micro loans and the motivation for attaining loans through microfinance as well as additional success in other banking areas.

In preparation for these challenges, AKIBA has every intention to remain in microfinance and anticipates great success.

One interesting aspect of AKIBA is that 80% of their customers have never held a bank account of any form of savings account at an institution before. This is because most banks have turned these people down due to their lack of prior credit. AKIBA attributes their success to being able to gain these clients and then teaching them “the culture of savings.

Microfinance in Tanzania - CRDB Ltd.
However, unlike the other three commercial banks in microfinance, its primary source of funding comes from The Danish International Development Agency (DANIDA) which serves as one of CRDB’s single largest share-holders.

Microfinance in Tanzania - CRDB Ltd.
And its total loans and advances (including microfinance loans to smaller microfinance institutions) is US$ 60 million.

Microfinance in Tanzania - Tanzania Postal Bank
The Tanzania Postal Bank is the 4th commercial bank” that is involved in microfinance. Like the National Microfinance Bank, the Tanzania Postal Bank was created by an Act of Parliament and like the previous three banks, it too is under the Companies Registrar and under

Microfinance institution
'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.

Microfinance institution
For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

Microfinance institution - Interest rates
The high costs of traditional microfinance loans limit their effectiveness as a poverty-fighting tool

Microfinance institution - Benefits and Limitations
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 choose 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.

Microfinance institution - Scale of microfinance operations

Microfinance institution - Microfinance in the United States and Canada

Microfinance institution - United States
In the late 1980s, microfinance institutions developed in the United States. They served low-income and marginalized minority group|minority communities. By 2007, there were 500 microfinance organizations operating in the US with 200 lending capital.

# Change in social welfare policies and focus on economic development and job creation at the macro level.

# Encouragement of employment, including self-employment, as a strategy for improving the lives of the poor.

*'RISE Financial Pathways (formerly Community Financial Resource Center)'

Microfinance institution - Micro Finance on the Indian Subcontinent
Loans to poor people by banks have many limitations including lack of security and high operating costs. As a result, microfinance was developed as an alternative to provide loans to poor people with the goal of creating financial inclusion and equality.

The National Bank for Agriculture and Rural Development (NABARD) took this idea and started the concept of microfinance in India

Microfinance is defined as, financial services such as savings accounts, insurance funds and credit provided to poor and low income clients so as to help them increase their income, thereby improving their standard of living.

In this context the main features of microfinance are:

* Loan given without security

* Maximum limit of loan under micro finance ₨25,000/-

* Microfinance is different from Microcredit- under the later, small loans are given to the borrower but under microfinance alongside many other financial services including savings accounts and insurance. Therefore microfinance has a wider concept than microcredit.

In June 2014, CRISIL released it's latest report on the Indian Microfinance Sector titled India's 25 Leading MFI's.[ Top Microfinance Institutions in India for 2014] CRISIL Report, June This list is the most comprehensive and up to date overview of the microfinance sector in India and the different microfinance institutions operating in the sub-continent.

Microfinance institution - Inclusive financial systems
The microcredit era that began in the 1970s has lost its momentum, to be replaced by a 'financial systems' approach. While microcredit achieved a great deal, especially in urban and near-urban areas and with entrepreneurial families, its progress in delivering financial services in less densely populated rural areas has been slow.

;Informal financial service providers: These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs, ASCAs and input supply shops

;Member-owned organizations: These include Self-help group (finance)|self-help groups, credit unions, and a variety of hybrid organizations like 'financial service associations' and CVECAs

;NGOs: The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to about 133 million clients by the end of 2006

The increasing use of alternative data in credit scoring, such as trade credit is increasing commercial banks' interest in microfinance.[ Turner, Michael, Robin Varghese, et al

With appropriate regulation and supervision, each of these institutional types can bring leverage to solving the microfinance problem. For example, efforts are being made to link self-help groups to commercial banks, to network member-owned organizations together to achieve economies of scale and scope, and to support efforts by commercial banks to 'down-scale' by integrating mobile banking and e-payment technologies into their extensive branch networks.

Microfinance institution - Microcredit and the web
In 2009, the US-based nonprofit Zidisha became the first peer-to-peer microlending platform to link lenders and borrowers directly across international borders without local intermediaries.[ Zidisha Set to Expand in Peer-to-Peer Microfinance, Microfinance Focus, Feb 2010]

The volume channeled through Kiva (organization)|Kiva's peer-to-peer platform is about $100 million as of November 2009 (Kiva facilitates approximately $5M in loans each month). In comparison, the needs for microcredit are estimated about 250 bn USD as of end 2006.[ Microfinance: An emerging investment opportunity]. Deutsche Bank Research. December 19, 2007.

MicroFinance Transparency

Microfinance institution - Microfinance and social interventions
Pro Mujer uses a “one-stop shop” approach, which means in one building, the clients find financial services, business training, empowerment advice and healthcare services combined.Microinsurance - Healthy Clients

Microfinance institution - Mission Drift in Microfinance
Mission Drift refers to the phenomena through which the MFIs or the micro finance institutions increasingly try to cater to customers who are better off than their original customers, primarily the poor families

Microfinance institution - Mission Drift in Microfinance
(2009) “Microfinance Mission Drift?” But in either way, this problem of selective funding leads to an ethical tradeoff where on one hand there is an economic reason for the company to restrict its loans to only the individuals who qualify the standards, and on the other hand there is an ethical responsibility to help the poor people get out of poverty through the provision of capital.

Microfinance institution - Role of foreign donors
The role of donors has also been questioned

Innovations for Poverty Action - Microfinance
IPA performs many evaluations of microfinance programs and products, including microcredit, microsavings, and microinsurance. IPA is part of the Financial Access Initiative (FAI), a consortium launched with the support of a $5 million grant from the Bill Melinda Gates Foundation with the goal of increasing knowledge about microfinance and communicating research lessons to a broad spectrum of policy makers, microfinance institutions, and the public at large.

Innovations for Poverty Action - Microfinance
Some examples of IPA's research on microfinance include examinations of the impact of group liability and commitment savings

#Bangladesh Association for Community Education (BACE)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Bangladesh Association for Community Education (BACE)

#Center for Community Development Assistance (CCDA)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Center for Community Development Assistance (CCDA)

#Centre for Rehabilitation Education Earning Development (CREED)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Centre for Rehabilitation Education Earning Development (CREED)

#Environment Council Bangladesh (ECB)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Environment Council Bangladesh (ECB)

#Integrated Community Development Association (ICDA)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Integrated Community Development Association (ICDA)

#Mohila Bohumukhi Sikkha Kendra (MBSK)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Mohila Bohumukhi Sikkha Kendra (MBSK)

Microfin360 - Partners' links[http://www. microfin360. com/index
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #New Era Foundation

Microfin360 - Partners' links[http://www. microfin360. com/index
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Patakuri Society

#Social Advancement Through Unity (SATU)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Social Advancement Through Unity (SATU)

#Shariatpur Development Society (SDS)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Shariatpur Development Society (SDS)

#Social Upliftment Society (SUS)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Social Upliftment Society (SUS)

#Thengamara Mohila Sabuj Sangha|Thengamara Mohila Sabuj Sangha (TMSS)
Microfin360 - Partners' links[ List of partners][ Microfinance Clients] #Thengamara Mohila Sabuj Sangha|Thengamara Mohila Sabuj Sangha (TMSS)

National Bank for Agriculture and Rural Development - Microfinance and NABARD
Thus the Reserve Bank of INDIA and NABARD has laid out certain guidelines in for the commercial banks, Regional Rural Banks and Cooperative Banks to provide the data to RBI and es data regarding loans given by banks to the microfinance institutions.

MercyCorps - Fostering microfinance
Partnering with banks and founding banking institutions, Mercy Corps facilitates microfinance around the world.[ Microfinance Partners #124; Mercy Corps]

* AFS (Ariana Financial Services Group), Kabul

* CFPA (Chinese Foundation for Poverty Alleviation), China

* MICRA (Microfinance Innovation Centre for Resources and Alternatives), Indonesia

* PATRA (Poverty Alleviation in the Tumen River Area), China

* CHAM (Community Health and Microcredit), Guatemala

Microcredit Summit Campaign - Microfinance access
By December 31, 2010, the Campaign counted more than 3,600 microfinance institutions that reported reaching more than 205 million clients with a current loan

According to the [ State of the Microcredit Summit Campaign Report 2012], out of the total number of clients reached in 2010, million were among the poorest and 82.3 percent (113.1 million) were women.

The growth in the number of very poor women reached has gone from 10.3 million at the end of 1999 to million at the end of This is a 1,001 percent increase in the number of poorest women reached from December 31, 1999 to December 31, The increase represents an additional million poorest women receiving microloans in the last 11 years.

Of the million poorest clients, million of them (89 percent) are being served by the 85 largest individual institutions and networks reporting to the Campaign, all with 100,000 or more poorest clients.

Cooperative banking - Microcredit and microfinance
The more recent phenomena of microcredit and microfinance are often based on a cooperative model. These focus on small business lending. In 2006, Muhammad Yunus, founder of the Grameen Bank in Bangladesh, won the Nobel Peace Prize for his ideas regarding development and his pursuit of the microcredit concept.

Queen Rania of Jordan - Microfinance
In September 2003, Queen Rania accepted an invitation to join the Board of Directors of the Foundation for International Community Assistance (FINCA), thus formalizing a relationship of support and advocacy which began in 2000.[ FINCA’S FINCA International Welcomes Queen Rania Al Abdullah, First Lady of the Hashemite Kingdom of Jordan, to Its Board of Directors], 15 September 2003.

Queen Rania of Jordan - Microfinance
An emissary for the United Nations’ International Year of Microcredit in 2005, Queen Rania’s belief in microfinance and her partnership with FINCA has generated more Jordanian micro-businesses, with the official opening of FINCA Jordan in February 2008.[ Queen highlights power of microfinance, tours FINCA Jordan microbusinesses], 26 February 2008.

Bangko Sentral ng Pilipinas - Microfinance and financial inclusion
In 2000, the [ General Banking Law] mandated the BSP to recognize microfinance as a legitimate banking activity and to set the rules and regulations for its practice within the banking sector. In the same year, the BSP declared microfinance as its flagship program for poverty alleviation. The BSP has become the prime advocate for the development of microfinance. To this end, the Bangko Sentral aims to:

# Provide the enabling policy and regulatory environment;

# Promote and advocate for the development of sound and sustainable microfinance operations.

The Bank is active in promoting a financial inclusion policy and is a leading member of the [ Alliance for Financial Inclusion]

Key Figures - cumulative as of 2014:
United Nations Relief and Works Agency for Palestine Refugees in the Near East - UNRWA Microfinance DepartmentFrom UNRWA's page and subpages about the Microfinance Department [ No update date shown; accessed Key Figures - cumulative as of 2014:

For More Information, Visit:
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