Introduction to

Microfinance
Module - 1
Meaning
Microfinance refers to small-scale financial services including both credits and deposits provided to

people who farm or fish or herd; operate small or micro enterprises where goods are produced, recycled,
repaired, or traded; provide services; work for wages or commissions; gain income from renting out
small amounts of land, vehicles, draft animals, or machinery and tools; in both rural and urban areas.

Microfinance is an collective term used for financial intermediation services to low income group and poor
customers. Services offered are Credit facility, Saving accounts, Money transfers, Remittances, Insurance and
even Investments
Focus
 “Microfinance is an economic Development approach that involves providing f
inancial services through institutions to low income clients”.
• Micro finance is emerged in need of meeting special goal to empower under-
privileged class of society.
• The principles of Micro Finance are founded on the philosophy of cooperation
and its central values of equality, equity and mutual self-help. Microfinance is a
tool against poverty by enabling the beneficiaries to :
• Create sustainable economic activities to increase their incomes
• Reduce external shocks
• Improve the living conditions of entrepreneurs and of their families
• Empower people and mainly the women
Scenario
The scenario of supply of formal financial services within
India.
An estimated demand for credit ranging from $3billion to
$9 billion annually.
The formal sector is barely able to provide $200million to
$300 million,
A total of over 600,000 villages lives.
Barely 30,000 bank branches
Various Insurance, Investment and Saving Products for Poor
section.
Basic financial services remain out of reach.
Access to financial services are constraint for the poor and
not interest rates.
The poor can save and can indeed use a wide range of
financial services.
Poor people use not only credit but also saving service,
insurance and affordable remittance systems to manage
assets, generate income and improve their
For most of us, microfinance means providing very poor
families with very small loans (micro-credit) to help them
engage in productive activities
Reality view
https://www.voanews.com/a/microfinance-gives-voice-to-rural-indian-women/1620034.html

https://www.youtube.com/watch?v=9xNGB4GkEb0

https://www.youtube.com/watch?v=J4wxo5IHpT0

https://www.youtube.com/watch?v=ZDS5omszYaI

https://www.youtube.com/watch?v=rbm-A9v_97c

https://www.youtube.com/watch?v=Ik4Lcn6ygyQ

https://www.youtube.com/watch?v=LclQ9YJH8Ik

https://www.youtube.com/watch?v=gnl4Z_15Kf4

https://archive.org/details/EmpoweringWomenEntrepreneursInRuralIndiaThroughMicrofinancing-
 Definition
“I would say that I did something that challenged the banking world. Conventional banks look for the rich; we look
for the absolute poor. All people are entrepreneurs, but many don’t have the opportunity to find out that”
- Mohammad Yunus (founder of Grameen Bank)

“Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge. And while the lack
of financial services is not just a sign of poverty, today it is looked as an untapped opportunity to create markets,
bring people in from the margins and give them the tools to help themselves." – Kofi Annan (Ex.Sec. General of UN)

The poor stay poor, not because they are lazy but because they have no access to capital.“ – Laureate Milton Fried
man
Key Features of Microfinance
 Lend to the poor
 Do not take security
 Prefer saving over borrowing
 Small short-term loans
 Cost covering interest rates
 Group appraisal and guarantee
 Prefer women customers over men

Microfinance means the provision of banking services to lower-income people, especially the poor
and the very poor.
Industry preview

Developments in Microfinance – Global

Developments in Microfinance – South East Asia

Developments in Microfinance – India

Pillars of Microfinance in India

 Developments in Microfinance – Global
Since 1976, the grameen bank has grown to include more than 5.5. million members wit
h more than US$ 2 Billion is disbursed loans.

Microfinance has spread to cover five continents

and numerous countries

The grameen bank has been duplicated in Bolivia,

chile, china, Ethiopia, Honduras, India, Malaysia, Mali,
Philippines, Sri Lanka, Tanzania, Thailand, US and Vietnam.

Microfinance institutions have also begun to seek out public and international financing,
increasing their working capital and expanding the scope of their operations.

As MFIs became better versed in the microfinance markets, they applied their innovation
s in all processes from lending to the collection of deposits.

MFIs have become more efficient; increased their clients base & expanding their services
through different product such as micro-savings, flexible loan repayment and insurance.
Developments in Microfinance –south East Asia

Grameen bank discarded JLG (JOINT LIABILITY GROUP) model o

f Micro credit
The new approach that is grameen II (http://www.microsave.net/f
iles/pdf/MicroSave_GB_Briefing_Note_1_Overview.pdf); in which
all savings are on an individual basis and there is no group liability,
offers flexible loan arrangements for terms of 3 months to 3 years
and variable repayment schedules to avoid seasonal difficulties.

The expansion of scope of services beyond credit.

Services offered are credit facility, saving accounts, money transfer,
remittances, insurance & even investment.
Contd…

The emergence of profit-making microfinance institutions (MFIs)

Currently, profitable MFIs are present in most countries reporting huge returns on a
ssets (ROAs) and the returns on equity (ROEs) in comparison to conventional bankin
g institutions. The MFIs in south Asia have reached profitability through cost efficie
ncy while those in East Asia
seem to have relied more on relatively high interest rates.

Emergence of commercial microfinance.

Small core group of highly commercial and professional market-oriented institutions
have emerged but yet to become fully integrated into the broader mainstream comm
ercial financials.
Contd…
• NABARD and SIDBI are • The strength of microfin
devoting their financial ance sector lies in the di
resources and time tow versity of models, it has
ards the development o adopted including hoe g
f microfinance. rown models like MFI &
SHG to other learnt mod
els from various countri
es like Bangladesh, Thail
and, and Bulgaria.
Genesis & Development of microfinance- India
Microfinance in India has started to evolve in early 1980s with an effort of forming
informal SHGs to provide access of financial services to needy.

India is 2nd most populous country behind china with a large number of un-financed
poor people- main clients for EMIs.

MFIs are estimated to have 7.94 million borrowers as of mar’ 2008 with CAGR of 88.4
2% over the last 5 years and cumulative outstanding loan portfolio of US$824 million.

SHG has loan outstanding of US$ 356.45 million as of ARCH 2008. It Shows a CAGR
growth of 78.21% from FY03-FY08.

MFIs are increasing their share in Indian microfinance supply as of comparison to SHGs
where their share has one down to 53% in march 2008 from 72% in the year march
2003.
SOURCE:
 Pillars of microfinance in India
Niche-market Such as spandan, SHARE Microfinance Ltd and SKS Microfinance have
MFIs in India also scaled up their micro-credit outreach dramatically in recent years.

Private Bank Expanding its financial services to poor households through a multi-
like ICICI Bank pronged approach- Directly providing credit facilities to SHG, &
providing wholesale credit facilities to microfinance NGOs & NBFCs.
state The Syndicate Bank, Andhra Bank, Canara Bank, Indian Bank have
owned entered this market.
/commercial
banks
ADB Through its Microfinance development strategy, aims to ensure
permanent access to institutional financial services for the region’s
poor people and their small businesses.
Provate Equity Started to eye the low-profile MFIs, as they foresee huge potentiality
Firms in terms of returns fro this sector. For eg. JM Financial have their
investments from Old Lane Partners and Delhi based Lok Capital.
NABARD & These institutions are performing regulatory and promotional role in
IDBI providing financial resources as credit and equity and enhancing
technology know-how of MFIs.
PRESENT SCENARIO OF INDIA
India falls under low income class according to World Bank.
• It is second populated country in the world and around 70 % of its population l
ives in rural area
• 60% of people depend on agriculture, as a result there is chronic under
employment and per capita income is only $ 3262
• Result is abject poverty , low rate of education, low sex ratio, exploitation
• Low asset base-According to Reserve Bank of India, about 51 % of people house
possess only 10% of the total asset of India.
• resulted low production capacity both in agriculture (which contribute around
22- 25% of GDP) and Manufacturing sector
• Rural people have very low access to institutionalized credit( from commercial
bank).

SS: https://www.slideshare.net/ishanparekh/microfinance-in-india-24928293
A bird View…
Today the World Bank estimates that more than 16 million people are served by some

7000 microfinance institutions all over the world. CGAP experts means that about 500

million families benefits from these small loans making new business possible. In a

gathering at a Microcredit Summit in Washington DC the goal was reaching 100 million

of the world´s poorest people by credits from the world leaders and major financial i

nstitutions.

The year 2005 was proclaimed as the International year of Microcredit by the Economi

c and Social Council of the United Nations in a call for the financial and building sector

to “fuel” the strong entrepreneurial spirit of the poor people around the world.
Goals of microcredit year

The year 2005 was proclaimed as the International year of Microcredit by The Economic and
Social Council of the United Nation
The International year of Microcredit consists of five goals:
• Assess and promote the contribution of microfinance to the MFIs
• Make microfinance more visible for public awareness und understanding as a
very important part of the development situation
• The promotion should be inclusive the financial sector
• Make a supporting system for sustainable access to financial services

• Support strategic partnerships by encouraging new partnerships and innovation

to build and expand the outreach and success of microfinance for all.
For additional reading
Grameen Koota:
http://www.grameenkoota.org/index.php?option=com_content&view=article&id=48&I
temid=54

http://www.academia.edu/4913449/Genesis_of_the_Regulatory_System_in_Microfinance
_in_India

http://shodhganga.inflibnet.ac.in/bitstream/10603/3031/11/11_chapter%203.pdf
KEY PRINCIPLES OF MICROFINANCE
1. The poor need a variety of financial services, not just loans.
2. Microfinance is a powerful instrument against poverty.
3. Microfinance means building financial systems that serve the poor.
4. Financial sustainability is necessary to reach significant numbers of poor people.
5. Microfinance is about building permanent local financial institutions.
6. Microcredit is not always the answer.

7. Interest rate ceilings can damage poor people’s access to financial services.
8. The government’s role is as an enabler, not as a direct provider of financial services.
9. Donor subsidies should complement, not compete with private sector capital.
10. The lack of institutional and human capacity is the key constraint.
11. The importance of financial and outreach transparency.

SOURCE:
https://www.cgap.org/sites/default/files/CGAP-Consensus-Guidelines-Key-Principles-of-Mi
Microfinance as a Development Tool: The Indian
Experience.
A PROFILE OF RURAL INDIA : Scenario Analysis

1. 68.8% of total population is living in rural India.

2. 29.8% of total population is under below poverty line.
3. 95% of them have no access to micro finance.
4. 55% of those people still borrow from informal sector.
5. 450 million people don't have any deposit account.
6. 93% of the households are without any kind of insurance
Scenario Analysis continued…
According to the estimates of PriceWaterhouseCoopers report, there are over 233
million “unbanked” rural population in India as of 2015. They are mainly dependin
g upon the informal providers of finance, such as the village moneylender. It is
undisputed that access to finance is critical for enabling individuals & communiti
es to climb out of poverty. Village money lenders are exploiting the rural poor by
charging high interest rate and utilizing them for different works. Therefore the
Indian govt. and RBI have a policy of “financial inclusion”.
 Contd…

As part of this policy the govt. requires Indian banks to lend to “Priority sectors”, one o
f which is the rural poor. Until recently, banks were happy to lend money to MFIs who
would then on-lend funds, primarily to poor women across rural India. The bank have
welcomed this policy because historically they tended to charge MFls average interest
rates of 12-13% & benefited from 100% repayment rates. Thus, by lending to MFls,
banks have been able to meet their “priority sector” lending requirements with what
historically has amounted to a risk free and very profitable arrangement
 Continued…
DEVELOPMENT PROCESS IN RURAL INDIA:-

The People of rural India are mainly depending upon agriculture & small business
units like fishing, earning through domestic animals, small business units etc. They
are not making the agriculture and business profitable because due to the lack of
monetary resources. Only few people of rural India are using capital intensive
method to cultivate their lands. The most of the rural people are not sustaining in
their small business for a long period of time due to insufficient fund available
with them
Continued…
The Development process through a typical microfinance intervention can be
understood with the help of the following chart. The ultimate objective is to attain
social and economic empowerment. Successful intervention is therefore; dependent
on how each of these stages has been carefully dealt with and also the capabilities
of the implementing Organisations in achieving the final goal e.g., if credit delivery
takes place without consolidation of SHGs,it may have problems of self sustainability
and recovery. A number of Schemes under banks, central and State governments of
fer direct credit to potential individuals without forcing them to join SHGs.
Compilation and classification of the communication materials in the directory is
done based on this development process.
Development process through microfinance