Unit 1: Overview of

Microfinance

Bharat Singh Thapa

Central Department of
Management
 Unit Outline
Concept of microfinance
Microfinance revolution
Rationale of growing microfinance
Key principles of microfinance
Understanding microfinance in Nepalese
context: suppliers of financial intermediation,
contextual factors and clients
(JL: Introduction and Chapter One; Lecture Notes;
Students Presentation)
 What is microfinance?
Microfinance is the provision of financial services in a
sustainable way to low income people who do not have access
to commercial financial services.

Microfinance is understood as offering of a range of quality,

flexible financial services in response to a wide variety of
needs of the poor (Wright, 2000).

Microfinance is defined as the financial services rendered to

the deprived groups of the people and small entrepreneurs in
savings, credit, remittance, micro insurance, etc. to help them
in developing self-employment opportunities and various
income generating activities. Nepal Rastra Bank (NRB,
2013).
 The European Commission defines
microcredit as
micro-loans to entrepreneurs, to social
economy enterprises, to employees
who wish to become self-employed, to
people working in the informal
economy and to the unemployed and
others living in poverty who are not
considered bankable.
Microfinance is also known and social banking, ethical
banking, sustainable banking, alternative banking,
cooperative banking and credit union
 How microfinance differs
from commercial finance?
Commercial Finance
(Banking)
Mostly concentrated in
city/towns
Customers come to bank
Access to educated customers,
mostly
Customers are mostly men
Collateral is prerequisite for loan Group guarantee as substotite
Large transactions
Purely profit oriented
Microfinance
Mostly located in villages
Bank goes to customers
(villages)
Access to illiterate or simply
literate customers mostly
Targeted to women, generally
for collateral
Small transactions
Profit driven by social mission as
well
 Characteristics of Microfinance
Mostly collateral free
Microfinance institutions (MFIs) go to clients rather than
clients going to MFIs
Simplified savings and loan procedures
Small size of loans and savings
Close supervision of clients
Quick repayment with repeated loans and the size of loan
increases in the subsequent cycles
Interest rate usually in between moneylenders and formal
banks
Repayment from business as well as other sources
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Rationale of Growing Microfinance

The promise of reaching the poor:

Microfinance activities can support income
generation for enterprises operated by low-
income households.
The promise of financial sustainability:
Microfinance activities can help to build
financially self-sufficient, subsidy-free, often
locally managed institutions.
 The potential to build on traditional systems:
Microfinance activities sometimes mimic
traditional systems (such as rotating savings
and credit associations) with greater flexibility,
at a more affordable price which attracts a large
number of low-income clients.
The contribution of microfinance to
strengthening and expanding existing formal
financial systems
 The growing number of success stories: Increasing
number of well-documented, innovative success stories
in settings as diverse as rural Bangladesh, urban
Bolivia, and rural Mali (state-run specialized financial
institutions failed in access to finance for poor)
The availability of better financial products as a result
of experimentation and innovation for example
solving the problem of lack of collateral by using group-
based and character-based approaches;
solving problems of repayment discipline through high
frequency of repayment collection, the use of social and peer
pressure, and the promise of higher repeat loans;
 Key Principles of
Microfinance
A variety of financial services to the poor, not just loans
A powerful instrument against poverty
Building permanent local financial institutions/systems
that serve the poor
Operationally and financially sustainable
Credit plus approach
Micro-credit is not always the answer

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 Revolution in Microfinance
Microfinance institutions (MFIs) have expanded
rapidly over the last 10 to 15 years:
According to the Microcredit Summit (Microcredit
Summit Campaign 2012), the number of very poor
families with a microloan has grown more than 18-fold
from 7.6 million in 1997 to 137.5 million in 2010.
Microcredit has generated considerable enthusiasm
and hope for fast poverty alleviation, culminating in
the Nobel Prize for Peace, awarded in 2006 to
Mohammed Yunus and the Grameen Bank for their
contribution to the reduction in world poverty.
 A change in lending methodology: Individual lending
seems to be getting most of the attention and the
excessive focus on women is being questioned.
A change in the supply of financial products: Over
the past decade, however, the almost exclusive
attention on microcredit has evolved into a broader
vision as captured by the use of the word
microfinance instead of microcredit. These
include savings, insurance, remittances, and many
more.
 A larger and a more diverse pool of suppliers: NGOs
and cooperatives with banks, microfinance banks and
financial intermediaries.
A radical transformation in supervision and
regulation: In most countries, microfinance
institutions are prevented from monopolistic
practices.
Local governments are trying to foster competition,
and stringent supervision for fully regulated suppliers
is being set-up in many countries.
 A fundamental change in financial priorities:
Focus on self-sustainability does not seem to
be the greatest challenge anymore.
Microfinance has demonstrated that it can not only
be self-sustainable, but also generate handsome
returns.
 Development of
Microfinance
Internationally:
Establishment of Grammeen Bank Bangladesh and
replicated to more than 50 countries
Village Banks in Latin America and then to Africa
In Nepal:
Informally - in the form of local moneylenders, informal
groups (mother groups)
Formally establishment of cooperative societies, Small
Farmer Development Programme (SFDP), Grameen Bikash
Banks, Microfinance Development Banks and Financial
Intermediary NGOs