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Group 1 Introduction.
Group 1 Introduction.
Financial systems are generally divided into the formal, semiformal and
informal sectors.
Formal Markets
Formal markets are markets subjected to not only general laws but also to
specific regulations and supervision. Examples include Rural banks,
Commercial Banks and postal saving banks.
Merits
• Regulate status by ensuring better quality of services
• Access to commercial funding
• Potential to serve more people and offer greater loans.
Demerits
• Interest rates
• Forma requirements may increase costs
• Potential mission drift towards less poor clients
Semi-Formal market
• Like the formal market, semi-formal markets are also subjected to
general laws since they are registered entities but they are under few
exceptions. Examples include financial cooperatives, NGO’s,
registered self-help groups (SHG etc.
Merits
• Focus more on poorer markets
• Not constrained by regulations
• Subsidiary assistance
Demerit
• No access to commercial funding may restrict outreach
• Usually not allowed to offer saving account
• Possible inefficiency and lack of transparency
Informal Markets
• The type of player does not take in consideration any general rules or
regulations. The operations also conducted are so informal. Examples
do include; local traders, landlords, shylocks and other money
lenders.
Merits
• Potential to reach remote areas
• Free of observation regulation
• Greater potential to experiment with new innovative services
Demerits
• Strong dependence on donor and subsidies
• Restricted potential for outreach
What role do donors play in microfinance
Donors interest in micro finance has increased substantially over the
past few years. Virtually all donors including local bilateral,
multilaterals government donors and local and international NGOs
support microfinance activities in some way, providing one or more of
the following services: -
• Grants institutional capacity building
• Grants to cover operating shortfalls
• Grants for loan capital or equity
• Concessional loans to fund on lending
• Lines of credit
• Guarantees for commercial funds
• Technical assistance.
FINANCIAL SECTOR POLICIES
3. Liquidity requirements
Liquidity is the amount of cash available (or near cash) relative to the
MFI’s demand for cash. MFIs are exposed to high level of liquidity risks
seasonal factors influence many of the clients; MFIs tends to depend
on donors whose funding can be unpredictable and their non-donor
liabilities tends to be short term. If the time organization is operating
in a stable financial market, it may be able to deal with liquidity risk
through short term borrowing
• 4. Asset quality
Represents the risk to earnings derived from loans made by the
organization I.e. it measures the degree of risk that some of the loan
portfolio will be repaid. Most MFIs don’t require formal collateral and
instead base their loan decisions on character, group solidarity and
past repayment history.
5. Portfolio diversification
Refers to financial institutions’ needs to ensure that they have not
concentrated their portfolio in one geographic sector or one market
segment. Unlike other financial institutions, most MFIs have highly
specialized portfolios that consist solely of short -term working capital
loans to informal sectors clients. Although an MFI may have thousands
of loans to diverse industries externalities could affect the entire
market. Regulations should encourage MFIs to diversify their loan
portfolios through development of guidelines that limit sector
concentration
ECONOMIC AND SOCIAL POLICY ENVIRONMENT
Poverty Level
• Poverty is referred to a state or a situation in which an individual or a
community is deficient in its financial resources and rudiments to
have the benefit of minimum standards of living and well-being that’s
considered acceptable in society. Poverty depicts the level of
necessities available to the people in the developing countries. In this
context microfinance has played a significant role and has been
considered as a tool to assuage poverty level.
Government View of the Microenterprise Sector
Microenterprises and small businesses may be affected by government
policies, including excessive regulation prohibitive levels of taxation,
inadequate government protection against cheap imported products,
laxity about black markets (which results in unfair competition for the
microbusiness sector), harassment by government officials for
operating businesses on the streets, and inadequate services and high
user fees in public market structures.
Many of these regulations work effectively to encourage
microenterprises to remain outside the legal or formal mainstream.
When policies and practices negatively affect clients’ businesses, an
MFI or donor may choose to undertake environment-level
interventions, such as policy and advocacy work, in addition to
providing or supporting the provision of financial services. Advocacy
can include helping clients organize to protest unfair policies or
treatment. MFIs can influence policy by working alone.
Conclusion
Most donors have moved away from subsidized lending and are
focusing more on capacity building and the provision of loan capital.
Since microfinance is perceived by some as a panacea for poverty
alienation, donors may want to take on the same kinds of activities,
especially lending to the poorest of the poor. Meanwhile, areas in
which donors may have real advantages such as capacity building and
policy dialogue; are greatly in need of resources.
A danger of widespread donor interest in microfinance is an
oversupply of funds for on-lending in the face of limited institutional
capacity to take on these funds.
The objectives of MFI’s include providing employment, reducing
poverty, empowering women etc. This is done under government
supervision depending on the category the MFI is categorized.
Donors can also be instrumental in directing governments to various poverty
alleviation initiatives that further the development of microenterprises such
as infrastructure development and land transfer programs.
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