MICROFINANCE

Unit: III

Microfinance Credit Lending Models.

1. Gramin Model: i) Individual Lending ii) Group Lending (Solidarity Model and Groups to
Groups Model)
2. Village Banking Model.

3. Co-operative Model:
• Or say Financial Cooperative Model, since there are several other types and nature
of cooperatives such as Health Sector Cooperatives, Housing Cooperatives,
Consumer Cooperatives, Agriculture Cooperatives, Social Cooperatives etc.
• Cooperative in general is an autonomous association of like-minded or community
people, who are called members, united to address their common socio-economic
and cultural needs.
• Governance and control is carried out by the members themselves, in a democratic
and transparent manner.

• Financial Cooperatives:
• meant for socio-economic development, in particular poverty reduction, job
creation and social integration.
• Formed by lower to middle level income group with self- generated capital base, or
partial or full financial support of outside donor / microfinance institutions, with an
objective to provide quite specific financial services to their member groups.
• Number of the members might increase as per the nature, objective and need of
the cooperatives concerned, all activities are self-governed.
• May or may not be registered / regulated, which, however, depends upon
respective country’s regulation.

• Importance & Contribution of Financial Cooperatives:

• Significant outreach to more individuals and families as compared to other financial
institutions, including those who do not have account in formal financial
institutions, and amounts such group 2 to 3 billion world-wide.

• Much more than a simple alternative to the traditional banking model since it has
made significant contribution to social development and improved living condition
in communities worldwide, particularly as employers. They are constantly working
for capacity enhancement and innovation to meet critical demands and challenges
arising out of the changing world situation. Though, a proper regulatory format to
be developed collectively by cooperatives and regulators in order to avoid working
outside the limit beyond of their core objective of establishment.

• More resilient than formal financial institutions – Addressed 2008/09 financial crisis
everywhere around the world better than formal financial institutions resulting
increased confidence, increased membership and increased assets and savings
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volume compared to formal financial institutions who were slowing down their
lending activities due to prevailing unfavorable scenario for them.

• A definite financial inclusion and financial literacy – collective activities and

ownership / management / governance from grass root level of communities,
welfare of the members with reasonable product pricing and no profit motive,
educating / training as well as help members to better understand credit, evaluate
their borrowing capacity and understand the commitments.

• Substantial contribution to economic development in global arena – Collective

wealth creation for sustainable local prosperity, Individuals, including the poorest,
become self-sufficient, safeguard to the communities against aggressive practices
and risks, major driving force for economy growth through creating quality jobs,
long lasting and all the way devoted to address members’ need through innovation
for sustainable development.

4. Self-help Group Model (SHG):

• A small group of rural poor people, who have voluntarily come forward to form a
group for improvement of the social and economic status of the members or say
come together to resolve various socio-economic and other issues like education,
health, family tortures and harassments, awareness building, migration, livelihood
portfolios, collective bargaining power etc.
• Homogeneous group of about 15 to 20 come together with four important concepts
i) self-help is the best help ii) unity is the strength iii) united will stand and divided
will fall iv) we can make our own bank.
• Every member to save small amounts regularly and come together with the
intention of solving their socio-economic problem through regular saving and also
having access to credit which in turn lead to have certain degree of self-sufficiency.
• Like Gramin Model, the SHG Model works on the peer pressure by eliminating
collateral for availing a loan.
• Every member learns prioritization and financial discipline, and focuses more on the
overall socio-economic development through using the concept of saving and
credit.
• This model is much in use in Nepal and almost all NGOs used this model.

• Condition required for membership:

• Members should be between the age group of 21 to 60 years.
• From one family, only one person can become a member of an SHG, as such more
families can enjoy SHGs this way.
• The group normally consists of either only men or only women.
• Members should be homogeneous i.e. should have the same social and financial
background.
• Member should be rural poor.
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• Difference between Joint Liability Group (JLG) and Self-Help Group (SHG)

• SHG: Minimum 15 members and maximum 20. – JLG: Minimum 3 members and
maximum 5.
• SHG: Meeting is compulsory. – JLG: No necessary of compulsory meeting.
• SHG: Bank loan is available. – JLG: Gets loans only from MFIs.
• SHG: Gets the benefit of government scheme. – JLG: There is no such benefit.
• SHG: Individual responsibility may exist. – JLG: Share responsibility and stand as
guarantee for each other

5. Rotating Saving and Credit Association:

• A group of 5 to 50 individuals, primarily women, joining hands for making regular
cyclical or periodical individual contribution of mutually agreed fixed amount of fund
to create a mutually agreed common fund, in order to provide loan to every
member alternately through group consensus, lottery, bidding or other mutually
agreed terms, out of the fund created.
• Generally, interest on loan does not appear in this model.
• Generally, other financial intermediaries and NGO do not make any financial or
nonfinancial involvement in this group.

• Limitations:

• Seems like an informal structure of group involved in informal economic activities.

• Purpose of loan is not defined, hence, may be utilized for nonproductive activities
which is not going to address socio-economic problems.
• Requirement of regular contribution may attract external debt burden to members.
• No inbuilt widely accepted structure and operation modality, as such risk like higher
number of members’ dropout, default in contribution and any kind of fraud seem to
be most likely.
• Selection of group members and member for provision of loan are critical.
• Unavailability of loan to any member in case of urgency.
• Unavailability of loan to any member as per need.
• Hefty amount of unwanted operating expenses specially in meetings and gatherings.
• Government in some country may not allow such modality of raising fund and then
financing due to anti money laundering provision.

Lending Model in Nepal

• Wholesale Lending: Rural Self-Reliance Fund (RSRF) Rural Micro Finance

Development Centre Ltd. (RMDC).
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1) RSRF:
• Established in March 1991 by the government to provide wholesale credit to
qualified Saving and Credit Cooperatives which in turn provide necessary micro
credit services to the poor and the destitute living in backward village for enabling
them to generate employment opportunities and uplift economic conditions.
• Seed money of Rs.20 million from the government, an additional contribution of Rs.
70 million by the government during 2005 to 2007, NRB added Rs.253 million from
its profit to lend small farmers, tea growers in the Eastern Nepal.
• Formed Steering Committee headed by the Deputy Governor of NRB.
• Targeted people for agriculture, horticulture, livestock, micro enterprises, self-
employment and income generating activities, renewable energy and irrigation
purposes.
• SCC and NGO were provided with wholesale fund at 8% p.a. interest rate with the
scope of rebate of 6% if repaid interest and principal amount within the prescribed
time schedule.
• Criteria for borrowing:
• Registration of SCC and NGO as per Cooperative Act 1992 and Society Registration
Act 1979 respectively. They should obtain business license from NRB.
• Mobilizing savings and credits from and to at least 70% of its own members prior to
one year after the registration of the organization.
• Should be located in rural areas and under poverty mapping of National Planning
Commission, where no bank and FIs existed and majority of the population includes
Dalits and depressed caste and tribes.
• An individual or family to borrow from SCCs and NGOs should to have more than 15
ropanis of land in mountain region or 1 bigha of land in Terai region with no regular
income, can’t feed himself or the families have no outstanding loans from other FIs.
• The wholesale credit is provided to viable SCCs and NGOs as per credit manual.
• The interest rate of the fund is 8% p.a. with a provision of a return of 75% on timely
payment by the SCCs / NGOs.
• SCCs / NGOs need to finance 20% of the project cost through their own source and
80% of borrowing from RSRF.
• SCCs / NGOs to form their own policy and procedure to lend the fund.
• SCC / NGOs Generally charge 12% p.a. interest rate to their clients.
• RSRF provides loan up to Rs.1.5 million to a borrowing SCC / NGO in the first round
which should not be more than 20 times of its primary share capital. In the second
time Rs.2 million not exceeding 15 times of its primary share capital. In the third
times Rs.2.5 million not exceeding 15 times of its primary share capital. If all three
repayments are made in time would get refinance fund up to Rs.3 million.
• As of July 2016, the total loan disbursement by RSRF stands at Rs.193 million (Rs.21
million to NGOs and Rs.172 million to Cooperatives) given to 334 institutions in 50
districts.
• The recovery rate is 91% (FI-NGOs 87% and Cooperatives 91.8%).
• Managed by NRB without definite network system set aside for monitoring of the
loan disbursed. As such the fund is not institutionalized and professionally managed.
• The fund does not have to make financial statements formally.
• On timely repayments, the interest rate of the loan is only 2% p.a. which is very low
and brings distortion in the market.
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• There are two other wholesalers who are professionally managed, hence,
suggestions are in the floor to merge the said fund with them to have is professional
management.

2) RMDC:
• Established in 1998 with authorized and paid up capital of Rs.80 million, later
the authorized capital increased to Rs.640 million and issued / paid up capital to
Rs.320 million, the present paid up capital is Rs.899.32 million (as of FY
2076/77).
• Promoters / shareholders are NRB, 13 CBs, 5 GBBs, Deposit Insurance & Credit
Guarantee Cooperation (DICGC) and Nirdhan Santha-NGO. NRB and 13 CBs hold
6.6% and 90.1% shares respectively.
• Objective is to help improve socio-economic condition of majority of the rural
poor, the land-less, and asset-less women by increasing their access to financial
services for productive undertakings that generates income and employments.
• Makes wholesale lending to MFIs to further lend to the end users for productive
activities.
• Strengthens institutional capacity of partner organizations, and extends financial
and technical supports for upgradation confidence and skills of the ultimate
beneficiaries in undertaking income generating activities.
• All type of institutions which are legally entitled to undertake microfinance
operations are eligible for borrowing from RMDC.
• Collaborated with almost all MFIs covering entire districts.
• Currently its carries around 6 billion of loan portfolio with partner organizations
with almost 100% recovery rate in normal circumstances.
• Making good amount of profit, and divided distribution to its shareholders from
the very 1st year of operation. In 2076/77 (provisional FS)- EPS around Rs.32/-,
borrowing Rs.7 billion, Loan & Advances Rs.8 billion, interest income 1.1 billion,
NP- Rs.285 million (PBBT Rs.455 million), NPL-Nil, COF 7.95%, CAR-26.6%, Per
share net-worth Rs.289/-, provision for staff bonus – Rs.45 million and income
tax Rs.124 million, current market share price Rs.856 (as of 15th Oct. 2020).
• Broad objectives: Developing as lead wholesale lender to MFIs, making partner
organization financially viable and sustainable, promoting more MFIs sufficient
to serve unserved masses of the poor, helping to create conducive policy and
legal framework through organizing seminars, workshops and dialogues with key
stakeholders.
• Maintains excellent corporate governance and supervisions to partner
organization, for which ADB has already awarded them with ``Exemplary
Performance Award”.
• ADB’s observations are: Unique institution attaining operational and financial
self-sufficiency in its operation, Transparency in lending policies and procedures,
distinct working culture with educated and committed staffs, the concept of
barefoot bankers is innovative, tailor-made and predefined capacity building
packages.
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Retail Lending Model in Nepal

MFIs in Nepal have been following a few prominent microfinance models. These comprise
of Cooperative model, Small Farmer Cooperative Limited (SFCL) model, Grameen Bank
model, and Community based organizations (COs) or Self-Help Groups (SHGs) model. In
addition, Village Bank (VB)is also considered a separate program/model of microfinance in
Nepal.

1. Cooperative Model

Mostly implemented by the Saving and Credit Cooperatives (SCCs) under which a wide
range of savings and loan products are provided to the members.

The SCCs target all community members in a given locality regardless of their social and
economic status. However, organizations established by development programs stress more
on serving the disadvantaged population.

As per the Cooperative Act 1992, a group of 25 persons from a community can form a
cooperative by registering it with the Department of Cooperatives, Ministry of Agriculture
and Cooperatives.

These cooperatives take savings deposits from their members and whoever wants to put
savings in the cooperative becomes member. The SCCs generally require mandatory savings
from their members. However, members can also choose from a variety of services such as
individual or group saving products, deposits, and festival and educational savings. Members
are also provided with loans covering specific areas, such as agriculture, housing, micro
enterprises, or for some social or emergency purposes. Loans so provided have a minimum
term of three months to three years.

The SCCs are governed by Cooperative Laws and are supposed to be self-regulated.
However, some cooperatives that have been providing services to non-members after being
licensed from Nepal Rastra Bank (NRB) for banking services come under NRB’s regulation
and supervision.

Although the SCCs serve almost all the districts in Nepal, they are considered a more suitable
financing model for the hilly and mountain residents as they provide both savings and
financial services to the members in a homely atmosphere without much bureaucratic hassle.

Due to low cost operation, their interest rates are also lower than that of other financial
institutions.

2. Small Farmer Cooperative Limited (SFCL) Model

A SFCL is a multi-service cooperative formed to provide financial as well as non-financial

services, like, social mobilization, training and technical support services, to its members
(farmers), mostly in rural areas.
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Managed by the members themselves, it also provides financial loans in wholesale. A

SFCL’s services are targeted only at small farmers and are generally confined to a single
Village Development Council (VDC) serving round 500 household catering 200-700 clients
within a community.

SFCL has a three tiers structure. At the village level, promoters help local household
members to form groups; at the ward level, the farmers’ groups with proximity and common
interest are combined into intergroup associations; and at the VDC level, all groups and inter-
groups are represented in the Executive Committee.

The Executive Committee, comprising of the members elected by the General Assembly, is
responsible for hiring the Manager and other staffs and for ensuring the smooth and effective
operation of the organization by deciding on the rules and regulation needed.

Regular meetings are organized by the grassroots’ groups to collect compulsory savings, loan
repayments and applications for loan demand. Respective inter-groups appraise these loan
applications and forward them to the Executive Committee with their recommendations for
making the final decision.

The loans are extended mainly with collateral security. However, rare cases of loans provided
without collateral security can be observed as well. Sana Kisan Bikash Bank (SKBBL)
provides these MFI’s with wholesale loans while the Federation of SFCL’s regularizes and
supervises their financial activities.

3. Grameen Bank Model

This popular model, founded in 1976 by the Nobel Laureate, Professor Muhammad Yunusin
Bangladesh, is quite popular worldwide and has been adapted by a large number of
organizations.

First introduced in Nepal in the early 1990’s, the Grameen Bank model is comparatively
more feasible in Terai, where the economic activities are more flourished with a relatively
more developed market and road infrastructure.

Under this approach, peer groups, each comprising of five members, are formed. Three to ten
such peer groups form a centre at a particular location – close to a village, where they meet
once every week or fortnight or month as decided by the members.

A group chairperson and a centre chief, elected by each group and each centre respectively,
oversee the activities of group members and maintain group discipline, check loan utilization
and ensure that loan instalments are timely repaid.

In the meetings, group members collect savings and make demand for loans and also settle
the loans or interest due and repay loan instalments as per schedule. Additional loans may be
provided to the members using the group fund managed by the group members.

Loans are made initially to two members, then to two others and finally to the last member,
with a four to eight weeks interval between each disbursement. Such loans do not require
collateral security. However, group guarantee for repayment is mandatory. Subsequent loans
can be accessed only upon the successful repayment of existing loans by all group members.
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The MFI field staff facilitates the group meetings and also verifies the utilization of disbursed
loans.

The typical loan offers of MFIs under Grameen methodology are general loans, seasonal
loans, specific loans (sanitation, housing) and the loans issued from the group fund while the
savings products comprise of the compulsory group fund savings, and any additional
personal, voluntary savings.

In recent years, several leading Nepalese microfinance providers have started offering
diversified saving schemes such as pension fund savings, education savings, and micro-
insurance covering risks related to health, life and livestock as in Grameen Generalized
System (GGS).

RMDC (Rural Microfinance Development Centre) finances Microfinance Development

Banks (MFDBs) along with commercial banks and finance companies under the Deprived
Sector Lending (DSL) scheme.

NirdhanUtthan Bank Limited, ChhimekBikas Bank Limited andSwabalambanBikas Bank

Ltd. are some Nepalese MFIs operating under the Grameen Bank Model.

4. Self-Help Groups (SHGs)/Community Organizations (COs) model

Based on the concept of “self-help”, SHG’s are small groups of individuals formed into
groups of ten to twenty and operating a savings-first business model whereby the member’s
savings are used to fund loans. In a SHG usually women from a similar class and region
come together to form a savings and credit organization.

They pool financial resources to make small interest bearing loans to their members. The
terms and conditions and accounting of the loan are set by designated members in the group.
The ‘Dhukuti’ system is one such example of a very old form of self-help group in Nepal
which has been in operation for over four decades.

Community Organizations (COs)/ SHG’s are formed at the VDC level with the assistance of
the Local Development Fund (LDF) under Participatory District Development Project
(PDDP) and Decentralized Local Governance Support Program (DLGSP).

Local community residents are organized into CO’s, either separately for men or women or
together irrespective of the gender. Similar to other MFI’s, the CO’s too mobilize mandatory
and other types of savings. Their lending schemes generally offer loans at 10-12% interest
per annum to the borrowers.

Members apply for loans and collect due instalments during a CO’s regular meetings. The
interest rates and other terms and conditions of loans are determined by the CO’s if they lend
money using their own savings.

If the member seeks a loan amount that is more than what the CO can provide from its
savings, the member would have to fill a separate application form addressed to the Local
Development Fund (LDF). The CO recommends the loan and forwards it to the LDF for
approval. Similarly, Poverty Alleviation Fund (PAF) too organizes the local groups of the
target families called COs’ with the help of local NGOs. They are informal groups and not
MICROFINANCE

linked up with any financial institutions. These groups are provided with seed fund at the rate
of Rs.3,000 per family member and are charged about 10% interest per annum.

5. Village Bank (VB) Model

Village banks are credit and savings associations that are managed and run by the community
members. Established by NGO’s with an objective to provide members with access to
financial services.

VB’s build community self-help groups and help members accumulate savings. A typical
village bank consists of 25 to 50 members, who are low-income individuals, seeking to
improve their lives through self-employment activities. Aiming to enhance the social status
and intra-household bargaining power of women. VB’s mostly seek more female
participation.

VB lends loan to the members from the loan capital extended to it by the sponsoring MFI. All
members sign a loan agreement with the village bank to offer a collective guarantee, thus
providing moral collateral for each extended loan.

A member generally gets Rs.3,000 to Rs.10,000 at a time, depending on the amount of

savings available in the bank. The loan cycle must end and all loans must be paid back at the
end of the 16th week to get new loans.

Members released from the loan liability are usually requested to save twenty percent of the
loan amount per cycle. New loans or collective income generating activities are funded using
members’ savings, thereby ensuring that the money stay within the village bank.

No interest is paid on savings but members receive a share of profits from the village bank’s
re-lending activities at the end of each loan cycle in proportion to the savings deposits. In a
VB, loans are generally charged at 24% interest per annum and interest is collected on
upfront basis.

A VB’s management is generally handled by the chair, the secretary and the treasurer elected
by the members. The members are also responsible for establishing the by-laws, distributing
loans to individuals and collecting payments.

All the documents, relating to the records, minutes and books of accounts maintained by the
management, are put in a tin box, triple locked by all the three officials and opened and
locked in the meeting in front of all the members to confirm transparency to all the members.
This model is most suitable and advantageous in the remote and less accessible districts of
Nepal.

Over the past few decades, microfinance in Nepal has witnessed quite a many changes and
adapted to various operating models with varying degrees of success. Individuals, especially
women and rural residents, have been able to create self-employment opportunities and
empower themselves economically as well as socially through increased income earning from
their small undertakings due to the access to micro-financial services.

With different models working for different terrains and traditional models being adapted to
suit the current times and need, microfinance has evolved into a novel economic development
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tool for alleviating poverty through self-sufficiency, financial inclusion, and socioeconomic
empowerment.

Unit IV: Microfinance Institutions:

# Objective of the Microfinance Institutions: Viability – Outreach – Quality Service.

Client perspective:

Providing the poor:

• with access to financial services.

• an opportunity to build their financial capacity and ability to grow financial self-sufficiency.
• relaxed criteria without or with less expensive collateral security for borrowing money.
• loan and various other services on no complicated paper work.
• loan and various other services with no formal or bureaucratic procedures.
• services with no intimidating offices and bank staff involved.
• women in major focus on financial services to empowering them, with core objective to
contribute tremendously to gender equity and family welfare in communities.

Organizational perspective:

• Build up robust plan and policies to fulfil the core objective to serve the poor.
• Prepare product guidelines in line with the core objective and regulatory norms if any.
• Ensure resource mobilization (men, material, capital etc.) in cost effective manner for
sustainable growth of the organization.
• Service to poor should always remain in the prime focus instead of profitability.
• Increasing outreach to serve communities / households at large.
• To safe guard stakeholders interest.
• Remain focused on innovation to remain competitive in the market on service / product
delivery.
• Build up trustworthy relation with lenders and donors agencies (if any).
• Arrange financial educational program and capacity building training to potential clients /
borrowers.
• Ensure best practices on loan monitoring, administration and control (also in line with
regulatory norms).
• Ensure timely collection of loans so as to minimize NPA.
• Ensure timely reporting to regulators as per the stipulations.
• Ensure every legal and regulatory aspects are well complied with.
• Create customer welfare fund on annual basis out of the profit fund to address their any
contingency arising from beyond- of-control situation or natural calamities.
• To remain as one of the main actors for socio economic development of the country
specially for poverty alleviation.
• Sustained long term viability through profit (basic cost of operation are covered by revenue
not subsidies), retained earnings and commercial capital deposits, but not through donors’
funding (services can be maintained in the future without being subject to unpredictable
fluctuations in donor funding – access to commercial source of funding);
• Well managed and staffed for long term success.
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• Large scale outreach – MFIs with deep outreach reach very poor - number of people with
access to MFIs services – large scale outreach to the majority potential clients.
• Quality of service – Liquidity, convenience, availability, flexibility of purpose, freedom to
borrow or save. Indicator of quality service is `Demand’.
• Operational and financial self-sufficiency: Depreciation, loan loss provision and cash
operating expenses are met by income from operations. MFIs that have not achieved
operational self-sufficiency rely on outside donation for continued operation. Inflation will
erode the loanable fund. Many MFIs have high operating cost reluctant to charge
sustainable interest rate due to competition or regulatory imposition have high
delinquencies and default rate.
• Best possible contribution on poverty elimination mission of country.

# Importance of Microfinance Institutions:

• Poor-access to banking, credit and various services, Loans to start business, Empower
Women, Employment Generation, Alternative to money Lenders, Offers Choices, Increases
Stability.

• It provides financial opportunities for those in impoverished nations or those with

lower socioeconomic backgrounds.
• It encourages people to be financially independent and provides them financial
resiliency to be able to cover any large unforeseen expenses.
• It helps to provide financial services to those in remote locations where traditional
financial institutions do not have operations.
• Those with limited financial resources should not be burden additional obligations of
collateral to gain access to micro credit.
• It provides education and encourages entrepreneurial activity and business
development in poverty-stricken areas.
• Development of micro enterprises who creates job.
• Supply of goods and services to low-income population is increased.
• Increase the productive use of capital.

Limitations:

• Poor people do not repay loan.

• Poor people cannot pay the interest rates necessary to cover the cost of delivering the
services.
• MFIs cannot easily access commercial source of funding.
• MFIs cannot reach the very poorest of the poor only through credit.
• Financial sustainability is necessary for an MFI to reach large number of people.
• MFIs alone cannot alleviate poverty.
• The goal of MFIs is institutional sustainability as many MFIs operation are not
become sustainable.
• A solid understanding of the facts about micro finance is critical to making good
investment decision
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Critics:

Some downsides of microfinance include claims that it can take advantage of those in tough
economic situations, a situation similar to loan sharks. Some microfinance loans may include
interest that can be as high as 30% or even higher. Furthermore, according to several studies,
recipients of microfinance loans did not realize an improvement in their annual net income.

Associated Problems and challenges:

• Monitoring, Collection, Interest rates, Expensive to get started, Shady Schemes, often
doesn’t lead to increased household income or consumption, Use women to get credit, Loan
size negligible, High risk, Difficult to challenge macro level with micro-level approach, Lack of
effective national governance, Lack of infrastructure, Lack of demand / buying power in
community, Lack of business variety, Lack of business-building.
• Most of the poor families are living in the remote areas where infrastructure (such as road,
transport, communication), is relatively poor which may lead to high operational cost.
• Seasonal migration of the working-age people to other places and countries.
• Traditional income generating activities.
• Density of population in remote area is comparatively low than other plain or urban areas.
• Presence of many MFIs in the proposed area which may encourage the members to take
loans from different MFIs at a time.
• As market is saturated there is a possibility of overlapping and enrolling non-poor as
member.
• Portfolio at risk may increases and this may lead to low repayment rate, if one member
receives large amount of loan from different MFIs at a time.
• Besides, loan facilities, the poor also need other non-financial services such as education,
health, information, infrastructure, training on skill development to develop them as
successful micro-entrepreneur.
• There is possibility of using loan in an unproductive way due to lack if technical knowledge
and access to market.
• Monitoring of loan or loan utilization check may difficult because of remote area.

# Attributes of a good microfinance institution

Financial Viability point of view (The basic costs of operation are covered by MFI revenue not
subsidies):

1) MFIs that have not achieved operational self-sufficiency rely on outside donation for
continued operation.
2) Revenue fall short of operating expenses – inflation will erode the loanable fund.
3) Poor performers are subject to erosion of loanable fund through delinquency and default –
many have high operating costs, are reluctant to charge sustainable interest rate, and have
high delinquency and default rates especially older organization.
4) It is estimated that majority of MFIs operate with above features ((90% in Nepal).
5) MFIs that are operationally, but, not financially self-reliant they apply proven principles, are
generally efficient, have higher client to staff ratios, an increasing scale of operation, and
good control of delinquency and default.
6) Interest and fee income cover operating expenses, but inflation can erode equity – funds are
borrowed on terms near, but still below, market rates.
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7) Organizations can vary widely from those that are rely on soft money.
8) MFIs that are financially self-sufficient.
9) Operation is fully finance from retained earnings, clients’ savings, or commercial funds.
10) Interest rates and fees cover the full cost of service delivery and return on savings.
11) Interest rates and fees cover the real cost of fund.
12) MFIs can increase their equity base through profits and attract outside equity participation.
13) So far only a few MFIs have reached above features, but may poised to do so.

Institutional Viability point of view (Organizations that are well managed and staffed for long term
success):

• Capacity – Governance – Types.

1) Specialized financial institutions.
2) Specialized services within commercial financial institutions.
3) Non-governmental organizations.
4) Credit unions or other member owned institutions.

Both financial and institutional viabilities are necessary to support the goal of extending
services to the large number of people over time.