INSTITUTE OF ACCOUNTANCY ARUSHA

ACCOUNTS AND FINANCE DEPARTMENT

INTRODUCTORY MICROFINANCE
Prepared by Ms. Philipina .k.
INTRODUCTION TO MICROFINANCE
 Microfinance made up of the two words;
 Micro means small financial transactions.
 Finance refers to the science of finding source of money,
investing and managing resources.
 Finance includes the process of channeling funds from surplus
unit to deficit unit in the form of loans, or invested capital. In
this subject finance will be defined as a system that comprises
of financial services to the people in the economy.
 Financial services can be defined as the products and services
offered by institutions like banks of various kinds for the
facilitation of various financial transactions and other related
activities in the world of finance like loans, insurance, credit
cards, investment opportunities and money management as
well as providing information on the stock market and other
issues like market trends.
 Financial services this are services that provided by
the finance industry.
 The finance industry encompasses a broad range of
organizations that deal with the management of
money.
 Among these organizations are banks, credit card
companies, insurance companies, consumer
finance companies, stock brokerages, investment
funds and some government sponsored
enterprises.
 So in the financial economy there are two groups of people
there;
(a)Surplus unit
Those with excess funds but they don’t know where to invest.
(b) Deficit unit
Those with deficit funds but they have investment opportunity.
NOTE; Therefore from that point is where the bank concept rise
that there are people who are saving money (surplus unit)and
there are those who are taking loans (deficit unit) against security
As bank plays financial intermediation role.
 So in that case there are people who are not able to get loans

because they don’t have security and still they are in need of
finance. So in that case is where MICROFINANCE RAISE.
 NOTE: Most of the poor people lack access to basic financial
services that would help them to run their different economic
activities and generate Income.
 Therefore micro finance arise from the word finance of
finding the source of money, investing and managing the
resources.

MICROFINANCE CONCEPT
Meaning of the term microfinance;
-Micro means small size of financial services provided to the
micro enterprises (small business makers).
 DEFINITION OF MICROFINANCE
Microfinance refers to the provision of financial services such as
micro-credit, micro-saving and micro insurance to the poor
people and there micro enterprises who are excluded by the main
stream financial institutions.
Such as those large banks which they are only providing those
financial transactions in a large size.
 Microfinance involves provision of financial services such as

deposits, loans, payment services, money transfers and

insurance products to the poor and low-income households,
for their microenterprises and small businesses, to enable them
to raise their income levels and improve their living standards.
 Those poor people can be either active/working poor or can be

absolute poor.
  Active/working poor these are poor people whose are able to
produce, if are being financially enabled they can produce and
return back the given amount.
 Absolute poor these are poor people whose can’t produce

 Why microfinance? In order to take care of the poor people who

are excluded by the mainstream financial institution.

REASONS FOR THE POOR PEOPLE TO BE EXCLUDED INCLUDES;
 Most of bank charges are not affordable.

 They do not have marketable security.

 Most of poor people leave in remoteness areas so it is high cost

and difficulty to reach them.

 Poor’s economic activities is undiversified, which this leads to

high risk of default in case of loans. (limited economic activities).

 SUPPLIERS OR SOURCES OF MICRO FINANCE
INSTITUTION
 Formal financial institution

These refers to the financial institution which are registered and

controlled by the central bank. Example; NMB, CRDB,NBC BANK
 Semi-formal financial institution

These are financial services which are being registered and not
controlled by the central bank. Example; SACCOS
 Informal financial institutions

These are financial services which are not registered and not
controlled by the central bank. Example; local lenders, VICOBA.
 MICROFINANCE INSTITUTIONS.
Microfinance institutions refers to the financial institutions
which deals with providing microfinance services such as micro
credit, micro saving and micro insurance to the poor people
(unbankable people) who are excluded by the mainstream of the
bank.
Institutions can be registered or not. Example FINCA, NMB.

CHARACTERISTICS OF MICROFINANCE.
 High interest rate due to high risk.
 Mostly it is collateral free.
 Simplified savings and loan procedures.
 Small size of loans and savings.
 Loans provided in a short procedure or
process
 Most of their clients are women.
 Raise of joint liability.
MICROFINANCE SERVICES FOR THE
GIVEN FINANCIAL NEEDS.
 IMPORTANCE/RATIONALE OF MICROFINANCE
 Employment opportunities/Job creation; Micro financing can
help create new employment opportunities, which has a
beneficial impact on the local economy.
 It mobilize savings; microfinance mobilize people to save
their surplus in which in turn they can be in a position to get
return interms of interest.
 Poverty Elleviation; as microfinance enables poor people to be
able to invest in different economic activities and earns
income and hence poverty eradication.
 It promote economic growth; that is through the provision of
loans and other financial services to the poor it facilitate the
economic growth because those poor people are being able to
invest in different economic sectors like in agriculture sector
and business sector.
 Women empowerment; As many of clients in microfinance are
women then then this had facilitate much to the empowerment
of women as through the microfinance women are able to get
loans and use it to invest in different economic activities and
hence good standard of living.
 Entrepreneur skills development; some of the poor people they
have skills but they fail to access the capital to invest in their
ideas but through the microfinance institutions they are in
position to access capital and put their ideas into practice.
 Risk management; it helps in diversification.
Why poor people needs financial services;
 For life cycle needs; like birth expenses, healthcare,

marriage food and education expenses.

 For investment purpose; to start a new business, to

acquire property, to pay rent

 For emergence purpose; health cost, disasters

 For retirement and physical disability.

PRODUCTS AND SERVICES OF
MICROFINANCE.
PRODUCTS OFFERRED BY MICROFINANCE
Microfinance offer mainly four products which are;
(A)Micro credit
(B)Micro saving
(C)Micro insurance
(D)Payment services

(A) MICRO-CREDIT/MICRO-LOANS
Credit refers to the amount of funds borrowed by the customer
from the bank with a specific terms of payment. Normally paid
with interest rate at a given collateral.
 STRUCTURE/COMPONENT OF CREDIT
 Interest rate - This is the cost of borrowed fund (the price of loan).

Interest rate is an opportunity of holding cash.

Interest rate can be charged on the principle loan amount or
outstanding loan amount depending on the policy of that particular
financial institution (Policy – the manner on how to charge interest rate.
 Collateral - This refers to the asset set aside for loan repayment

incase of default. Example; land, building, machinery etc.

 Loan Duration – loan period (the period of time that loan is expected

to remain outstanding.) But in case of Micro-Finance Loan term

range from three months to one year or above. Group Loans usually
tend to have short maturity given they are normally small and
provided to client without credit history so the longer the period the
higher the risk in this case microfinance provider prefer short period
and a risk management technique.
  Size of loan – amount of loan. usually loan size vary depending on need of
the customer. Loan should not Increased simply as a function of continued
borrowing but loan size can Increase over time based on: Client needs,
Debt capacity and Credit History.
 Repayment Terms

Most Micro-Credit are designed to be repaid in periodic (Often equally)

Installments over the Loan term or loan period.
 Lending Methods

Refers to method use by Micro-Finance institutions to provide Credit products

to the poor people and their micro enterprise. We have two popular Methods.
 Individual Loans

 Group Loans

MICROCREDIT DEFINITION;
Microcredit refers to the small amount of funds borrowed by the customer
from the microfinance institutions especially the poor people(un bankable
people) who excluded by the mainstream financial institution.
 USES OF CREDIT
 For investment purpose, loan can be used to finance business as a
source of finance.
 For working capital purpose, the credit can be used for expansion
of the business as the customer can acquire it and use as a capital
in there businesses.
 For diversification needs.
 Risk management purpose, also the loan can be used to reduce the
risk because it will enable the customer to invest in different
economic sectors like in agriculture or in business sector and
hence risk diversification.
 Emergence cases; like fire, accident, illness.
 For Consumption smoothing – Managing day to day consumption.
 For procurement purpose; acquiring or Purchasing Productive
Assets which can be used to generate income.
 QNS; Advantages of credit?
 QNS; Why most of the client in microfinance are women?
 QNS; why commercial bank are the main supplier of microfinance
while in the past they are ignored them?

WAY IN WHICH MICRO – CREDIT IN MICROFINANCE INSTITUTIONS

DIFFER WITH OTHER FINANCIAL INSTITUTIONS IN LENDING BUSINESS
 Mainly microfinance targets to the poor people.

 Microfinance provide free collateral loans.

 Microfinance provides small size loans.

 Microfinance Charge high interest rate on credit.

 Mode of loan repayment in microfinance is more frequency.

 BASIC MICROFINANCE
METHODOLOGIES
MICRO-CREDIT METHODOLOGIES
Refers to the methods used by the microfinance institution to deliver
small loans to the poor households and their micro enterprises who are
excluded by the main stream financial institution.
Two methods used by the micro finance institutions to deliver micro
credit to their targeted customers.
(i) Group lending method
(ii) Individual lending method
(i) Group lending method
Refers to the provision of small loans to the poor and their
microenterprises who are member of the group.
In that case you can access loan from the microfinance institutions
provided that you’re the member of the group. So it can be individual as
individual in the group or the loan can be provided to the group and
then the members can distribute it to each one within the group.
 CHARACTERISTICS OF GROUP LENDING
 Group lending involves formation of group.
 Members of the group know each other.
 Joint liability, in case of default of one ,member in the group
the whole group will be liable.
 Generalized payment problem, as most of the poor people are
doing activities which are similar so incase the business is not
succeeded it will affect the whole group.
 Collateral free, this leads to the joint liability.
 Mandatory saving condition, mandatory saving refers to the
partial type of collateral in which the client is not allowed to
withdraw till the end of the loan period. So it stands as the
collateral in case of default.
 Leads to group insurance.
 Advantages of group lending
 Saving mobilization; It create saving habit to the client, and that shows
how you can manage your finance as saving habit express your
financial management.
 Collateral free loan; as joint liability is the most suitable to the poor
people or low income earner.
 Credit accessibility without collateral to the poor people.
 Large economic coverage; through the group lending in microfinance
institutions it covers many numbers of clients with low cost.
 Administrative cost reduction, Group lending leads to Loan
administration cost to the lender because of low Loan monitoring and
supervision cost.
 It facilitate resources utilization, Tiny physical and financial resources
can be utilized as collective collateral and capital for poor individual
members.
 Reduction of risks due to group monitoring and peer pressure
Disadvantages/critics of group lending
 Small amount of loans that are being provided to the clients.

 Joint liability

 Group formation takes longtime, so the problem is money

value also changes with time.

 Mandatory saving. As some of the people may lack that

amount of money for saving it.

 Occurrence of the generalized repayment problem.

 It is more cost to the borrower, as it shift all cost to the client

due to transport cost (to the meeting) and opportunity

cost( due to sacrifices he made in his days economic
activities).
 Potential weakening of group if group leader departs.
 (ii) Individual lending
Refers to the provision of small loans to the individual customers.
So in this case of individual lending it is basically base into base on
a customer characteristic assessment(credit worthiness of the
customer) and cash flows analysis.
 Therefore all the procedures for assessing the customer is

necessary. And the criteria that may be used for assessing the
credit worthiness of the customer tend to includes
-character (credit history, willingness and behavior of payment)
-condition (economic condition of the individual borrower).
-collateral (simple type of security are used eg;house furniture but
which is marketable).
-capacity (capacity to pay and above 18 years).
- capital ( loan amount depend with the capital that customer have)
 CHARACTERISTICS OF INDIVIDUAL LENDING
 Collateral is required
 Loan size depends on the eligibility and capacity to pay.
 Individual borrower is responsible for loan repayment
 Loan size is large compare to the group lending
 It is tailor made services. (type of lending that satisfies the
needs and preference of the borrower.
 Past credit history is required. For reference issues e.g.; from
the local lenders, land lords.
 Lending to Individual only
 Advantages of the individual lending
 Individual lending increases compliances with contractual loan
obligations
 Easy and faster delivery of the services
 Facilitate increase in number of clients in the microfinance institutions.
Individual lending attract more clients to join in the microfinance
institution.
 It is tailor made (facilitate provision of loans that fit the clients needs.
 Loan size is large, so it is easy for the client’s business to grow fast than
in individual
 Disadvantages of individual lending
 Collateral requirement
 Increase administrative cost
 Complex procedures in accessing loans
 Low economic coverage
 Individual bear risk alone
 Reasons for Individual Lending
 Customer retention strategy; To cater to the matured customers
who have Improved their economic status.
 Tailor made service; To provide services addressing the needs
and preferences of customers with good credit record and
growing Orientation.
 Risk diversification; To diversify risks associated with Credit
risks in group Lending from the group lending point of view one
of the risk is that all member are involved in similar activities
hence like of diversification
 To reduce loan administration cost; To save time and effort of
matured customers who have graduated over a period of time.
 To help the services provider in increasing the volume of
services which can further improve the sustainability of the
organization.
 (B)MICRO SAVING
Saving refers to the postponement of the current consumption for the
future use or investment purpose.
 it is among the microfinance services offered by the Microfinance

institutions and perhaps the most important one.

 Saving facility is provided by financial Institution by allowing client to

deposit their surplus for various purposes.

 Saving can be either in cash or in kind.

 Save in kind; Example A person can hold gold to save in kind.

 QN; why people save?

-Future use; like after retirement or emergencies(sickness, accident
or disaster).
- Future investment; like starting of business, acquisition of assets,
for education purpose, expansion of business.
-For other life circle needs; for food, marriage.
Characteristics of a good saving
 High liquid; Easy to be converted in cash, and that is what differentiate

saving in cash and saving in kind as saving in kind is not near cash.
 Accessible; client can access it at anytime in demand.

 Safety; we prefer to save money in area with security.

 Return/ income; it must generate return which gives income.

Generally in microfinance institutions saving is divided into two groups;

 Mandatory saving/ compulsory saving.

 Voluntary saving.

Mandatory saving
This refers to the type of saving in microfinance institution which client is
required to save a certain amount of money as a condition to access a
credit facility. The amount saved is not allowed to be withdrawn until the
loan is paid it is a partial collateral. It is used by borrowers.
 Advantages of compulsory savings
◦ Serve as additional guarantee to ensure repayments of
Loans.
◦ Demonstrate ability of Microfinance Client to manage
money.
◦ Help to build asset base of clients
Voluntary saving
 This refers to the type of saving that is not subject to the
credit facility. It is used by both borrowers and non-
borrowers.
Basically saving facility help;
 MFIs to provide their services much better
 MFIs to reduce their cost of Capital
 Accumulate resource for expansion
Challenges facing MFIs in offering saving services
 Competition from commercial bank especially for matured customers.

 Lack of experience; the MFI’S they don’t have experience on how to

handle saving product and mobilizing of saving compare to

commercial bank.
 Confidence; most of people they don’t have confidence with

microfinance institutions so incase of saving public prefer to save to

the commercial bank.
 Returns; most of MFI’S they use to offer either nothing or small rate of

interest so people will prefer to save in commercial bank rather than

in MFI’S
 Lack of good management of information system; as the size of their

capital is small there fore this makes this MFI’S to be unable to

manage software, and technological equipment due to low capital.
 Lack of competence; as in the side of management it becomes cost

fully for them to hire competent staff.

 IMPORTANCE OF MICRO-SAVING FACILITY
 Allow low income – household to save or accumulate funds for

future investment such as purchase of Cow, land or meet their

emergencies(Build saving habit)
 Saving give them opportunity Self-Investment in a real positive

return
 Enable consumption smoothening

 Enhance ability to face external shocks through providing

resources driving the Period of Crises.

 Reduce need to borrow from money lenders at high Interest rate.

 Enable purchases of Productive assets

 Increase Economic growth

 Enable taking Advantages of Profitable investment opportunities.

 Providing clients with a secure place to save, smooth
consumption patterns, hedge against risk, and accumulate
assets while earning higher real returns than they might by
saving in the household or saving in kind.
 Enhancing clients’ perception of “ownership” of a MFI and thus
potentially their commitment to repaying loans to the MFI
 Encouraging the MFI to intensify efforts to collect loans due to
market pressure from depositors (especially if they lose
confidence in the MFI)
 Providing a source of funds for the MFI, which can contribute
to improved loan outreach, increased autonomy from
governments and donors, and reduced dependence on
subsidies?
 Reasons for saving
 For investment purpose; e.g. expansion of

business or starting the new business, purchase of

machinery etc.
 Emergencies purpose; e.g. accidents

occurances,sicknesses, Fire,Death,Disasters like

floods.
 For retirement and dis-ability purpose

 Other life cycle needs such as; Marriage, birth

expenses.
QN; Why poor people needs financial services?
 (C ) MICRO INSURANCE
Insurance refers to the contract between insured person
and insurer(insurance company) where by the insurer
agree to compensate the insured person on the happening
of the specified event.
So insurance this is the protection against risk.
NOTE; micro insurance services is provided to the poor
people because they are highly exposed to the risk than
wealthier people such of those risks are like agriculture
losses, disasters occurrence, sickness or disabilities thus
why the microfinance institutions recognize that is very
important to provide the micro insurance services to the
poor people to protect them against risk.
OR Insurance can be defined as an arrangement by
which a company or the state undertakes to provide a
guarantee of compensation for specified loss,
damage, illness, or death in return for payment of a
specified premium.
Insurance premium; refers to an amount of money
paid periodically to the insurer by the insured person
for covering his risk.
so it is an insurance fees that is been paid for the
insurance policy to the insurance company.
 Purpose of insurance
To return the property in its original position. So
insurance is risk protection technique as it protect the
insured person from the unforeseen events.
MICRO INSURANCE DEFINITION;
Micro – Insurance is the protection of low income
people against risk in Exchange for regular periodic
payment called Premium. It is therefore to help low
income people to manage their risk better.
 Informal means used by low income house-hold to
manage their risks includes
◦ Spreading their financial resources across several
Income generating activities( Diversifications)
◦ Borrowing from friends and family which tend to
cover portion of their Loss.
 Micro-Insurance is emerging as a Complementary
tool to help Low Income people managing risk
more – effectively.
 The term Insurance refers to general risk prevention and
Management technique For Example savings set-aside for
emergency purposes might be referred to as an Insurance
fund.
 Or Insurance means A risk pooling element which allow larger
groups of ensured entities to share the Loss resulting from
the occurrence of Uncommon events.
 An insured entities such as
◦ Persons Are protected from Risk
◦ Business in Exchange for a fee
◦ House holds know as
◦ Countries Premium
 Those in the Risk pool who do not suffer a Loss during a
Particular period essentially pay for the loss experienced by
others.
Importance of insurance;
 Reduce risks of Potential Losses.

 Reduce impact of external shocks.

 Increase Investments.

 Greater security.

Alternative tools of risk management available to the

poor apart from the insurance;
 Saving

 Access to emergence loan

 Diversification of economic activities.

 Possession of more liquid assets(that are easily to be

converted to cash and solve the problem)

 Challenge facing Micro-Insurance Product
 Un awareness among the poor people; Educating
the market as many poor persons are not
interesting for pay the Premium for the product
which future benefit may never be claimed.
 MFI’S focuses mostly in large clients; As Amount of
premium depends on the value of property ensured
most insurance Companies encourage the sales
person to focus on Large and more profit clients.
 Not tailor made service to the poor people; In the
market there is no insurance product which meets
the specific needs of the working poor especially
the irregular cash flow of Poor – Household.
QN; what are the objective of microfinance insurance.
TYPES OF INSURANCE
 Voluntary Vs Mandatory insurance.

 Group Vs individual insurance.

 Voluntary insurance;

Refers to the type of insurance in which the person can buy

the insurance freely according to his/her demand and
willingness. Example; business insurance, fire insurance.
 Mandatory insurance;

Refers to the type of insurance in which the person can buy

it as a results of the certain condition. Example credit life
insurance, health insurance.
  Group insurance
Refers to the type of insurance which covers more than one person.
It is more applicable in group lending ( group insurance).
 Individual insurance

Refers to the type of insurance which covers only single person. It is

more expensive than group insurance. Example life insurance policy.
Types of Insurance Suitable to Poor and Microfinance operational
(a) Credit life Insurance is a life insurance policy designed to pay off
a borrower's debt if that borrower dies before repayment of loan.
 The face value of a credit life insurance policy decreases

proportionately with an outstanding loan amount as the loan is

paid off over time until both reach zero value.
 In this case lender is the beneficiary. It pays the lender a

specified amount if the borrower dies before full repayment of

the loan.
 (b) Health Insurance
A type of Insurance which provide cover against health costs of Low-
income people. It is in big demand because health risks occur
frequently and cost can be higher. Health problem cause expenses for
treatment but also result into loss of income due to reduced
productivity
(c )Property Insurance
Type of Insurance that provide coverage for tangible assets such as
housing and contents as well as machinery and other equipment.
(d )Agriculture insurance
Agricultural insurance protects against loss of or damage to crops or
livestock. It has great potential to provide value to low-income farmers
and their communities, both by protecting farmers when shocks occur
and by encouraging greater investment in crops.
In rural areas concerns about drought death of Lives tocks and other
Agriculture risks, tend to be high for low income – households.
 Various forms of insurance available to the
poor
 Business insurance
 Life Insurance
 Fire Insurance
 Accident Insurance
 (D) PAYMENT SERVICES
Payment refers to the transfer of the value or
ownership from one part to another can be from
individual – individual, individual- company, or
company-company.
 Payments service refers to the electronics transfer

of funds, some time called Money Transfers.

Payment services or simply Money transfer means
manually or electronic transfer of Funds between
two parties the other party can; Individual Person, A
business Government or Any other organization.
 Instruments / Mechanisms used to Deliver
Payments
 Cheque
 Bankers draft
 Mobile Phone
 Credit cards
 Mobile Branches
 Payment terminal – A sand alone terminal

Similar to ATM.
 PROPERTIES OF GOOD PAYMENT SYSTEM
 Safe
 Speed
 Reliable(at anytime)
 Economy
 Convenience ( at any place)
FACTORS/ISSUES/MAJOR COMPONENTS OF PAYMENT SYSTEM
(i )The process
Referring to time and action take to accomplished certain
payment transaction.
UNDER THE PROCESS THERE IS;
 Infrastructure, which allow that payment to take place; telecom

providers(network) and electricity (energy providers).

 Technology, these includes availability of computer and modern

equipment.
(ii) Payment instrument
A medium which allow payments transaction to take place. Eg cheque,
bankers draft and credit cards.
(iii)Financial intermediaries or financial institutions this includes both
commercial bank and other financial institutions includes clearing house,
central bank, insurance company, pension fund.
 Sources of Funds to Microfinance Institution
 Savings from Clients
 Borrowed Money from financing Company

like Commercial Banks and other financial

Institutions
 Equity – Contribution made by owners of the

MFIs (owners contribution)

MICRO CREDIT- THE ROLE OF LOAN
OFFICER – NOT YET
As microfinance mainly deals with providing the
the financial services to the poor includes micro
credit(the provision of small loan size to the
poor)
Therefore the middle man between the
microfinance institutions and the clients in
loans provision is the loan officer.
Loan officer is the middle man between the bank or
financial institution and client.
 So is an employee of financial institutions which helps

the bank in executing the credit transaction from the

birth of loan to the recovery(death of the loan).
 A loan officer is a representative of a bank, credit union

or other financial institution that finds and assists

borrowers in acquiring loans. Loan officers can work with
a wide variety of lending products for both consumers
and businesses. They must have a comprehensive
awareness of lending products as well as banking
industry rules, regulations and required documentation.
 Duties of loan officer
 Marketing

This is the first duty of the loan officer to market the

products of microfinance institutions.(credit is by product
of microfinance institutions.
 Initial screening

You have to screen the customers whose are turn up or

respond on the marketing done that who is bankable and
who is not bankable so as to get potential customers.
 Lounge application form

Help the customer to fill the application form.(the loan

that taken to fill customer must be for productive purpose)
 Collect data/collect relevant data
The loan officer have to do research and collect relevant data that
will assist manager to make credit decisions. Include verification
of the information supplied in the loan application form.
 Credit analysis/credit evaluation

Base on the information collected the credit evaluation is done to

determine the credit worthiness of the loan applicant include
financial analysis(ratio analysis)
 Recommendation

If the customer is credit worthiness the customer recommend to

the credit committee or to the management on the size and type
of facility.
Approval of the credit committee and the officer is the member
of the credit committee.
 To inform the customer either is loanable or not loanable.
 Credit documentation

This involves the issues of mortgage(transfer of ownership/

legal ownership from borrower to the lender.
 Loan disbursement
 Loan administration and monitoring

It is the work of loan officer to monitor the clients, credit

file, visiting of clients regularly.
Through monitoring the loan officer can get the sign if it is
a good loan or not.
 Loan recovery

To chase arrears, the customers who defaulted the loan.

Marketing of microfinance products
in microfinance industry
Marketing is among the duties played by the loan officer in the
microfinance institutions.
Market refers to the any medium which allow the buyers and sellers to
interact.
Marketing refers to the systematic process of finding the needs and
wants of the customers and satisfying the needs and wants of the
customer.
Under microfinance institutions there are eight P’s marketing tools.
 Pricing

Things to consider when pricing your products includes; competitive

advantages, cost incurred and profitability.
 Promotion

This it has something to do with creation of awareness like; bontures

and advertisement.
 Place/location

This refers to the distribution point it might be; an office, website,

online system. So there must be potential area where the customers can
 People
here referring to the staff who are involved in the process of
delivering the microfinance institutions services or products. Like
employees and for this to be successful the MFI’S must recruit the
right people (deals with recruitment process include training)
 Physical appearance

This have something to do with general out look of the building,

staff’s member so that to maintain the confidence of the bank’s
customers. Its how banks looks out, arrangement, brochures so it
all about appearance.
 Process

time and period covered to complete A certain transaction.

Most of the client prefer a short term transaction eg; in issue of
the loan processing time, cheque processing time.
 Positioning

It has something to do with mind, perception of

the client (that how customer positioning them
either positively or negatively).
 Product development

The effort made by the management of

organization to develop or create new product.
(creativity and innovation)
 Challenges of providing financial services to the
poor
 Physical challenge

Most of the poor people live in remoteness areas

and to reach them needs high cost.
 Economic challenge

opportunity cost and subject to deposit.

 Most of the client are illiterate(lack education)
 Mostly poor people are highly exposed to risk
 Most of the poor people participate in

undiversified economic activities.

CORE PRINCIPLES FOR MICROFINANCE/BASICS OF
MICROFINANCE

 The poor needs access to appropriate financial services

 The poor has the capability to repay loans, pay the real
cost of loans and generate savings
 Microfinance is an effective tool for poverty alleviation
 Micro-credit is not always the answer, most of the poor
people are illiterate so they need other enabling
environment like how to manage their business, how to
do marketing and how to keep their records.
 Microfinance service must be tailor made
service( must suit the needs of the poor
people).
 Microfinance is the powerful instrument

against poverty.
 Government role as enabler rather than

directs provider of microfinance service.

 Microfinance means to build financial service

that serves the poor.

Risk that microfinance institutions clients faces
 Agricultural loss
 Disasters(both internal and external disaster)
 Illness
 Emergences
COSTS RELATED TO EACH MICRO-FINANCE SERVICE
Under micro loans we have the cost associated to micro
loans
In microfinance institution point of view or lender point of
view;
 Cost of money

If it is borrowed capital then have to pay the interest.

 Transactions cost

These includes loans administration cost such as loan

processing cost like stationery, travelling and
communication.
 Loan default cost

It is a cost to the lender.

To the client point of view
 Interest attached on the loan

To the customer that is expense(debit p&l)

 Opportunity cost

If the client access loan through the group.

 Up front cost

Example; loan application cost

 Insurance cost

To purchase insurance policy, e.g. credit life

insurance.
 CLIENTS OF MICROFINANCE INSTITUTIONS
 Micro – enterprise

Includes; street seller, road side seller, repairer, vender.

 Microfinance institution

Includes formal institutions, informal institutions and

semi-formal institution.
 Donors

 Government

Important stakeholder in the area of the regulation and

supervision. Example BOT, Ministry of trade and
industry.
Additions to teach
 Micro finance out reach
 poverty