Microfinance

Mid 2
 Contents
Chapter 1: Introduction to Microfinance ................................................................................... 1

Chapter 2: Microfinance Products ............................................................................................. 5

Chapter 3: Technology to Leverage, extend, disinter mediate MFIs ......................................... 9

Chapter 4: Commercialization, Transformation and for-Profit Organizational Change for MFIs

.................................................................................................................................................. 12

Chapter 5: Microfinance Investment Vehicle .......................................................................... 15

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Chapter 1: Introduction to Microfinance

1) What is Microfinance? Describe it briefly.

2) Describe the origin of Microfinance.

Microfinance initiated by a Bangladeshi banking innovator Professor Muhammad Yunus and

it becomes an important development tool to alleviate poverty, women empowerment and
promote entrepreneurship in the developing world. In 1983, Muhammad Yunus founded
Grameen Bank, which is the first microfinanceinstitution in operation in the world.
Microfinance means providing financial services to the impoverished. The novelty of
microfinance is to stimulate development by financial inclusion of the commercially excluded
people through meeting their financial and non-financial needs.

3) Describe four types of Microfinance product in briefly.

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4) How many types of Microfinance Institutions are in Bangladesh?

In Bangladesh, there are mainly four types of institutions involved in micro-finance activities.

These are:

 Grameen Bank (GB): A member owned specialized institution.

 Non- Governmental Organizations (NGO): Around 1500 Non- Governmental
Organizations (NGO) like BRAC, Proshika, ASA, BURO-Tangail, BEES, CODEC, SUS,
TMSS, Action- Aid etc.
 Commercial and Specialized banks: Commercial and Specialized banks like Bangladesh
Krishi Bank (BKB), Rajshahi Krishi Unnayan Bank (RAKUB) and
 Government sponsored micro finance projects/ Programs: Government sponsored
micro finance projects/ Programs like BRDB, Swanirvar Bangladesh, RD-12 and others
which are run through several ministries viz., Ministry of Women & Children Affairs,
Ministry of Youth & Sports, Ministry of Social Welfare etc.
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5) What is Credit Market? Describe the types of credit market.

Credit market refers to the market through which companies and governments issue debt to
investors, such as investment-grade bonds, junk bonds, and short-term commercial paper.
Sometimes called the debt market, the credit market also includes debt offerings, such as notes
and securitized obligations, including collateralized debt obligations (CDOs), mortgage-
backed securities, and credit default swaps (CDS).

The credit market can be classified into two categories:

 Government Securities Market: This is one of the significant sources of borrowing funds
by the central and state governments. The government issues short term and long-term
securities to raise funds from the general public. However, these securities do not carry any
risk. The reason being, the government promises the payment of interest and repayment of
the principal amount.
 Corporate Bond Market: The corporate bond market is a similar financial market where
the private and public corporations issue bonds and debt securities. Likewise, the
companies issue bonds to raise money for a variety of purposes.

6) How can the success of microfinance in Bangladesh be explained?

 The Success of Poor Women

 A Favorable Environment
 The Political Economy of Success

7) Discuss the Microfinance program of Bangladesh.

8) Which are the Challenges of Microfinance in Bangladesh?

 Problems Faced by the Personnel of Microfinance Institution

 Problems Faced By the Clients

9) Discuss the problems which the clients of microfinance face.

 Insufficient Amount of Loan or Investment

 Social Custom and Culture
 Excess Tension for Defaulter Group Members
 Lack of Modern Technology
 Lack of Proper Information
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 Excessive Formalities and Huge Signatures

10) Discuss the problems which the personnel of Microfinance Institution faces

 Misuse of Investment
 Illiteracy
 Social Custom Barrier
 Severe Poverty
 Migration to Foreign
 Lack of Skilled and Reliable Customers
 Natural Calamities
 Involvement of the Clients in Local Crime
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Chapter 2: Microfinance Products

1. What is MFIs products? What are the significance of MFIs products?

Microfinance comprises several financial tools such as savings, credit, leasing, insurance and
cash transfers. These services are provided by a variety of institutions, which can be broadly
divided into banks, NGOs, credit and savings cooperatives and associations, and non-financial
and informal sources.

2. Describe the types of MFIs products introduced in Bangladesh.

 Micro savings – A possibility to save money without no minimum balance. Allows people
to retain money for future use or for unexepected costs. In SHGs the members save small
amounts of money, as little as a few rupees a month in a group fund.
 Micro insurance – Gives the entrepreneurs the chance to focus more on their core business
which drastically reduces the risk affecting their property, health or . There is different
types of insurance services like life insurance, property insurance, health insurance and
disability insurance.
 Micro leasing – For entrepreneurs or small businesses who can´t afford buy at full cost
they can instead lease equipment, agricultural machinery or vehicles. Often no limitations
of minimum cost of the leased object;
 Money transfer – A service for transferring money, mainly overseas to family or friends.
Money transfers without opening current accounts are performed by a number of
commercial banks through international money transfer systems such as Western Union ,
Money Gram, Bkash , Nagad and Rocket etc.
3. Define the micro group lending? What is difference between micro group lending &
micro individual lending?

The group-lending of microcredit is a development intervention in which small-scale credit for

income-generation activities is provided to groups of individuals who do not have material
collateral. The two primary providers of microcredit in Bangladesh are the Grameen Bank and
BRAC both of which started their operations in the late 1970s.

4. What is micro individual loan? Discuss the purpose and terms of micro individual
loan.

The Micro Individual Loan is designed for clients and non-clients that have specific needs
beyond the group lending model. Loans are given to an individual outside of the group lending
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process. Amounts are typically higher than that of the income generating loan and repayments
are less frequent.

Purpose: Income generation, asset development Small business owners, self-employed

persons, micro enterprises and others who have low capital requirements or lesser access to
lending institutions can avail a smaller loan for their requirements. This sort of a small, short
term personal loan is termed a micro personal loan.

Terms: This loan is typically short term basis. The duration of the loan is usually 1-2 years and
loan is repaid monthly

5. Define Micro savings and the purposes of this savings. What roles the Microsavings
play in MFIs sector?

Definition: This is a possibility to save money without no minimum balance. The microsaving
products allow the poor entrepreneurs to save and retain money in the institution for future use
or for unexpected costs or as a guarantee against their outstanding loan. This product allows
their client to borrow from the institution for a variety of purposes such as meeting health
challenges, business, education and other household emergencies.

Purposes for Microsavings in MFIs: Microsaving in MFIs provides for four purposes. They are
–

1. as a demonstration of discipline and commitment to the institution;

2. as a guarantee against outstanding loans;

3. As a financial asset the poor can accumulate against emergencies and long-term needs;

4. As a source of loan capital for the institution directly or indirectly.

Roles of Microsavings: In MFIs, this product play a potential role in helping clients to manage
the impacts of disaster in Bangladesh. Through their savings, the clients were able to borrow
to mitigate the risks posed by the disaster. Clients that have access to microsaving product did
not resort to distress sales of assets after disaster strikes.

6. What is microinsurance? How micro insurance works in MFIs?

The International Association of Insurance Supervisors (IAIS) defines microinsurance as “the

protection of low-income people against specific perils in exchange for regular premium
payments appropriate to the likelihood and cost of the risk involved.”
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7. Describe the types of micro-insurance products.

 Crop insurance: Crop Insurance protects agricultural producers against crop losses
resulting from natural causes.
 Disability insurance: Disability insurance is a type of insurance that will provide income
in the event a worker is unable to perform their work due to disability.
 Natural disaster insurance: Natural disaster insurance isn't an actual type of policy that
you can purchase. However, your homeowners’ insurance already protects your property
from wind and rainstorms, accumulating snow, and fire
 Livestock insurance: Livestock insurance is protection against accidents and unexpected
events that may affect your animals.
 Credit-life insurance: Credit life insurance is a type of insurance policy that exists solely
to pay off an outstanding debt if you pass away. When you take out a large loan, such as a
home or vehicle loan, your lender may offer you a credit life insurance policy that covers
the value of the loan.
 Burial insurance: Burial insurance is a basic type of life insurance that is used to pay for
funeral services and merchandise costs.
8. What is micro remittance? How it works and mobilizes?

9. What is SMEs? Describe the prospects of SMEs as MFIs products.

Definition of Small Enterprise: Small enterprises refers to the firm which is not a public limited
company and complies the following criteria :

Service sector where worth of asset from 50000 to5000000 and employed manpower not
above 50.

Industrial sector where assets worth from 50000 to 150000000 and employed manpower not
above 50.

2. Definition of Medium Enterprises: It refers to the establishment which is not a public limited
company and complies the criteria:

Service sector where worth of asset 50 lack to 1crores and employed manpower not above
50
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Industrial sector where asset worth 15 crores to 20 crores and employed manpower not above
150.

10. What do you mean by Small and medium enterprise? Describe the scopes of SMEs in
MFIs in Bangladesh?
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Chapter 3: Technology to Leverage, extend, disinter mediate

MFIs
1) What is branchless banking? How branchless banking perform their banking
activities?

Branchless banking is the provision of financial services outside traditional bank branches,
often via agents, and transmitting transaction data via information and communication
technologies. These usually include card-reading POS terminals and cell phones.

Customers get the following facilities through the Branchless Banking system:

 Financial Transactions: Deposit, Withdrawal, Fund Transfer, Payments on

Account, Mobile and Other Utility Bill Payments

 Non-Financial Transactions: Balance inquiry and statement of transactions.

2) What are the pros and cons of branchless banking?

Advantages of Branchless Banking

 Economics of Large Scale.

 Spreading of Risk.
 The economy in Cash Reserves.
 Diversification of Deposits and Assets.
 Decentralization of Risks.
 Easy and Economical Transfer of Funds.
 Cheap Remittance Facilities.
 Uniform Interest Rates.
 Proper Use of Capital.
 Better Facilities to Customers.
 Contacts with the Whole Country.
 Uniform Rates of Interest.
 Better Training Facilities for Employees.
Disadvantages of Branch Banking System

 Difficulties of Management, Supervision and Control.

 Lack of Initiative.
 Monopolistic Tendencies.
 Regional Imbalances.
 Continuance of Non-profitable Branches.
 Unnecessary Competition.
 Expensiveness.
 Losses by Some Branches Affect Others
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3) Describe the current scenario of branchless banking activities of Bangladesh. Is it

effective or not and why?
4) What is traditional banking? How branchless banking can overcome the challenges
of traditional banking?

Can overcome the challenges by:

 Rapid Financial Inclusion

 Increased Adoption
 Improving Financial Literacy
5) What is mobile banking? How mobile banking is improving the living standard of
Bangladeshi people?
Mobile banking is the act of making financial transactions on a mobile device like cell phone,
tablet, etc. This activity can be as simple as a bank sending fraud or usage activity to a client's
cell phone or as complex as a client paying bills or sending money abroad can.
6) Describe various types of mobile banking and how they work?
 Mobile Banking Via Mobile Apps
 Mobile Banking Services over SMS
 Mobile Banking via USSD
7) Describe the current scenario of mobile banking and the pros and cons of mobile banking
activities of Bangladesh.

Advantages of Mobile Banking

 Improved customer experience

 Time efficiency
 Workload capacity
 Monitoring Transactions
 Added services
 Enhanced security
 Managing funds

Disadvantages of Mobile Banking

 Security
 Tech issues
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 Extra charges for internet services

8) What is KIVA? Describe various characteristics of KIVA.

Kiva is an international nonprofit, founded in 2005 in San Francisco, with a mission to expand
financial access to help underserved communities thrive.

Characteristics

 It's a loan, not a donation

 One chooses where to make an impact
 Pushing the boundaries of a loan
 Lifting one, to lift many

9) What is Micro-place? Describe the working procedures of Micro-place.

MicroPlace was an American microfinance provider that focused on retail investors. Started
by Tracey Pettengill Turner in 2006, MicroPlace was bought out by eBay that same year.

MicroPlace provided everyday investors with the ability to make investments in the
microfinance industry that had the potential to earn interest. This contrasts with most other
services for microlenders, which generally rely on a charitable model. Interest earned was
typically between 1 and 3 percent. The company acted as a broker-dealer and is registered with
the SEC and is a member of FINRA.

10) Differentiate the branchless banking and mobile banking activities of Bangladesh.

Branchless Banking represents a significant alternative to conventional branch-based banking.

It allows banks to offer financial services outside traditional bank premises by using delivery
channel such as smartphone applications, USSD channel, Debit Card, QR Payments etc.

Mobile banking is the act of making financial transactions on a mobile device (cell phone,
tablet, etc.). This activity can be as simple as a bank sending fraud or usage activity to a client's
cell phone or as complex as a client paying bills or sending money abroad can.
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Chapter 4: Commercialization, Transformation and for-Profit

Organizational Change for MFIs
1. What are the preface regulations for Microfinance? Are they necessary?
 Phase I (1971‐1989): Conventional Laws & Grameen Bank Ordinance 1983

As argued earlier, since independence in 1971 to 1989, government‐owned agricultural banks,

state‐ owned commercial banks, Grameen Bank and two cooperatives were engaged in
microcredit activities.

 Phase II (1990‐2005): Conventional laws along with non‐prudential guidelines by PKSF

NGOs’ initial experiment with microcredit in the late 1980s got immediate positive response
from the demand side and pushed away their sceptical view of microcredit product as a strategy
for development intervention.

 Phase III (2006‐present): Conventional laws along with (i) MRA Act, 2006 (ii) MRA Rules,
2010 and (iii) MRA Directives/Guidelines

Recommendations of National Steering Committee in 2005 culminated a separate Microcredit

Regulatory Act 2006, which enabled to establish a regulatory authority, namely Microcredit
Regulatory Authority (MRA).

2. What are the challenges of microfinance commercialization?

• Inappropriate donor subsidies characterized by continued subsidization of the industry.

• Poor regulation and supervision of deposit-taking MFIs: Developing countries are often
accused of poor regulation and supervision of the formal financial system;

• Operation of most microfinance institutions as nonprofit nongovernmental

organizations (NGOs). These NGOs are not regulated financial institutions and therefore are
usually not permitted to mobilize client savings;

• Limited management capacity in MFIs: Since many of the MFIs begin as NGOs with a
social mission to reduce poverty through provision of loans, few MFIs have the management
capacity to successfully manage a commercial financial intermediary;

• Institutional inefficiencies in terms of high operational costs;

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

methodologies.

3. Describe the implications of commercialization? How they react on microfinance?

 The research supports previous findings that when an MFI undergoes commercialization it
moves up-market loaning to less poor clients indicated by an increase in minimum capital
requirements. This demonstrates that commercialization has a negative impact on depth of
outreach.

 As a result, to get the optimum benefits of microfinance programs, NGOs need to build
both their managerial and operational capacities.

 Many Poor Households Could Remain Unserved

 Microfinance Institutions Might Target Women Less

 Average Microloan Sizes Will Likely Increase

 Interest Rates Could Keep Rising

4. Identify the necessity for commercialization of microfinance in Bangladeshi context?

5. Describe the progress towards commercialization of microfinance in Bangladesh?

 Social visionaries have led the rapid expansion of microcredit, which began and continues
to be strongly oriented towards serving the unmet or undeserved demand by the poor for
financial services.

 Dominated by the Grameen bank and nongovernment organisations (NGOs), microfinance

in Bangladesh has historically operated largely on a non-commercial basis, although two
of the largest such NGOs, The Association for Social Advancement (ASA) and the
Bangladesh Rural Advancement Committee (BRAC), are commercially viable and
currently reach about half the national market.

6. What are the main Microfinance Commercialization Challenges?

 Inappropriate donor subsidies characterized by continued subsidization of the industry.
 Poor regulation and supervision of deposit-taking MFIs: Developing countries are often
accused of poor regulation and supervision of the formal financial system;
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 Operation of most microfinance institutions as nonprofit nongovernmental organizations

(NGOs). These NGOs are not regulated financial institutions and therefore are usually not
permitted to mobilize client savings;
 Limited management capacity in MFIs: Since many of the MFIs begin as NGOs with a
social mission to reduce poverty through provision of loans, few MFIs have the
management capacity to successfully manage a commercial financial intermediary;
 Institutional inefficiencies in terms of high operational costs;
 Need for more dissemination and adoption of rural, agricultural microfinance
methodologies.
7. What are the authority and responsibility of each licensed micro credit institution according
to the Microcredit Regulatory Act 2006?
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Chapter 5: Microfinance Investment Vehicle

1) What is investment? Analyze direct and indirect investments.

Investment is the dedication of money to purchase of an asset to attain an increase in value over
a period of time. Investment requires a sacrifice of some present asset, such as time, money, or
effort. In finance, the purpose of investing is to generate a return from the invested asset.

Investors make direct investments when they buy securities issued by companies and
governments and when they buy real assets, such as precious metals, art, or timber

A common way to invest is through indirect investment vehicles. That is, investors give their
money to investment firms, which then invest the money in a variety of securities and assets
on their behalf. Thus, investors make indirect investments when they buy the securities of
companies, trusts, and partnerships that make direct investments. The following are examples
of indirect investment vehicles:  Shares in mutual funds and exchange-traded funds  Limited
partnership interests in hedge funds  Asset-backed securities, such as mortgage-backed
securities  Interests in pension funds

2) What is Pooled investment? In addition, explain how pooled investment vehicles works.

Most retail investors choose to save through pooled investment vehicles managed by
investment firms. The sole purpose of these investment vehicles is to own securities and other
assets. The investment vehicles, in turn, are owned by their investors, who share in the profits
and losses in proportion to their ownership.

Banks, insurance companies, and investment management firms organize most pooled
investment vehicles. The organizer is often called the sponsor. Sponsors can organize
investment vehicles as business trusts, limited partnerships, or limited liability companies.
Depending on the form of the organization, ownership shares are known as shares, units, or
partnership interests. Large sponsors can organize hundreds of investment vehicles.

3) What is ETFs? Mention some differences between open end mutual funds and closed
end funds.

Exchange-traded funds (ETFs) are pooled investment vehicles that are typically passively
managed to track a particular index or sector, although an increasing number of ETFs are
actively managed. ETFs are generally managed by investment professionals who provide
investment, managerial, and administrative services.
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4) Mention some differences between Index funds and hedge funds.

5) What is hedge funds? Describe some characteristics of hedge funds.

A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to
make extensive use of more complex trading, portfolio-construction, and risk management
techniques in an attempt to improve performance, such as short selling, leverage, and
derivatives.
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6) What is fund of funds? What are the investment strategies most actively identified for
funds?

A "fund of funds" is an investment strategy of holding a portfolio of other investment funds

rather than investing directly in stocks, bonds or other securities. This type of investing is often
referred to as multi-manager investment.

7) What is managed accounts? Discuss about Tax-advantaged accounts and managing

tax Liabilities

In banking, a managed account is a fee-based investment management product for high-net-

worth individuals. The main appeal for wealthy individuals is the access to professional money
managers, a high degree of customization and greater tax efficiencies in a fee-based product.

In general, tax-advantaged accounts allow investors to avoid paying taxes on investment

income and capital gains as they earn them. In addition, contributions made to these accounts
may have tax advantages.