A Microfinance is the provision of financial services to low-income clients, including

consumers and the self-employed, who traditionally lack access to banking and related
services. More broadly, it is a movement whose object is "a world in which as many poor
and near-poor households as possible have permanent access to an appropriate range of
high quality financial services, including not just credit but also savings, insurance, and
fund transfers. Those who promote microfinance generally believe that such access will
help poor people out of poverty.

More broadly, microfinance refers to a movement that

envisions a world in which low-income households have permanent access to a range of
high quality financial services to finance their income-producing activities, build assets,
stabilize consumption, and protect against risks. These services are not limited to credit,
but include savings, insurance, and money transfers.

Microfinance clients are poor and low-income people that do not have access to other
formal financial institutions. Microfinance clients are usually self-employed, household-
based entrepreneurs. Their diverse “micro enterprises” include small retail shops, street
vending, artisanal manufacture, and service provision. In rural areas, micro entrepreneurs
often have small income-generating activities such as food processing and trade; some
but far from all are farmers.

Need

Most poor people manage to mobilize resources to develop their enterprises and their
dwellings slowly over time. Financial services could enable the poor to leverage their
initiative, accelerating the process of building incomes, assets and economic security.
However, conventional finance institutions seldom lend down-market to serve the needs
of low-income families and women-headed households. They are very often denied access
to credit for any purpose, making the discussion of the level of interest rate and other
terms of finance irrelevant. Therefore the fundamental problem is not so much of
unaffordable terms of loan as the lack of access to credit itself The lack of access to credit
for the poor is attributable to practical difficulties arising from the discrepancy between
the mode of operation followed by financial institutions and the economic characteristics
and financing needs of low-incomehouseholds. For example, commercial lending
institutions require that borrowershave a stable source of income out of which principal
and interest can be paid backaccording to the agreed terms. However, the income of many
self employedhouseholds is not stable, regardless of its size. A large number of small
loans areneeded to serve the poor, but lenders prefer dealing with large loans in small
numbersto minimize administration costs. They also look for collateral with a clear title :
- which many low-income households do not have.

History
In 1974, famine struck Bangladesh. At the time, Dr. Muhammad Yunus was a professor
of economics at the University of Chittagong. Disillusioned by the elegant theories of
economics that could not explain the thousands of poor people dying of starvation on the
streets, he was determined to find a practical way to help the poor. During a visit to the
nearby village of Jorba, he was astounded to find that a sum of $27 could radically
change the lives of 42 people in the village. This was the sum of money they collectively
needed to buy bamboo to make the stools they sold to make a living. He took $27 from
his pocket and made 42 loans to the stool makers in this tiny village. They were able to
pay him back with interest and take a step towards lifting themselves out of poverty.
This simple idea that the poor could use credit to lift themselves out of poverty, led Dr.
Yunus to create The Grameen Rural Bank in 1983. Since its inception, it has made over
$983 million in loans to over seven million borrowers.¹ Its methodologies have become
the cornerstone of the microfinance industry. In 2006, The Grameen Bank and Dr. Yunus
were awarded the Nobel Peace Prize.

Microfinance goes Mainstream

In the early years of microfinance, most organizations lending to the poor were funded by
private or government grants. In the1990s, it became apparent that microfinance
institutions would be unable to sustain their rapid growth rates if they depended solely on
grants for funding. Many microfinance institutions started to restructure their operations
to make themselves attractive to investors.
In recent years, many institutional and high net worth investors have begun to invest in
microfinance. Attracted by the high growth rates, funds focused on lending to
microfinance institutions were created. Today, major banks such as Morgan Stanley,
Deutsche Bank and Citigroup have begun to offer products and services that enable
investments in microfinance.
With MicroPlace, investment in microfinance truly goes mainstream. Everyday people
now have the opportunity to participate in this new industry by purchasing investments
that earn a financial return while making a positive social impact on the world.

Microfinance help the poor

The impact of microcredit has been studied more than the impact of other forms of
microfinance. Microcredit can provide a range of benefits that poor households highly
value including long-term increases in income and consumption. A harsh aspect of
poverty is that income is often irregular and undependable. Access to credit helps the
poor to smooth cash flows and avoid periods where access to food, clothing, shelter, or
education is lost. Credit can make it easier to manage shocks like sickness of a wage
earner, theft, or natural disasters. The poor use credit to build assets such as buying land,
which gives them future security. Women participants in microcredit programs often
experience important self-empowerment.

Empirical studies on the impact of credit are difficult and expensive to conduct and pose
special methodological problems. Most impact studies to date have found significant
benefits from micro credit. However, only a few studies have made serious efforts to
compensate for the methodological challenges. In fact, many studies would not be
regarded as meaningful by most professional econometricians. A new wave of
randomized trial studies is now in process, which should yield a more definitive picture.
Even so, there is a strong indication from borrowers that micro credit improves their
lives. They faithfully repay their loans even when the only compelling reason is to ensure
continued access to the service in the future.

Other microfinance services like savings, insurance, and money transfers have developed
more recently, and there is less empirical research on their impact. Client demand
indicates that poor people value such services. MFIs that offer good voluntary savings
services typically attract far more savers than borrowers.

Functions of microfinance banks

Microfinance institutions provide many functions for some of the poorest people on the
planet. At the most basic level, they provide access to cheap capital. The cheap capital
can be used to start a business, expand a business or buy in bulk, allowing entrepreneurs
to enjoy improved margins and higher profitability. Microfinance institutions don't only
provide access to cheap capital, they also look to improve communities.

Group Lending
1. No collateral and low interest rates seem like the way to high delinquency rates,
but most microfinance institutions actually have lower default rates than major
commercial banks. To help ensure repayment, many microfinance institutions
require borrowers to form groups. These groups provide a support network for
each other, and each member guarantees the debt for every other member. Doing
so allows the microfinance institution to achieve two things: It creates an instant
support group for when a borrower has a problem and it creates efficiencies for
the bank when collecting the weekly payments.

Providing Education
2. In addition to lending to groups, microfinance institutions also provide basic
education on running a business and managing money . Quite often they will
 mandate that borrowing groups must complete the education before they are
eligible for loans.

Emphasizing Women
3. A lot of research has gone into the effects of lending to women. The research
shows that lending to women is better for the broader community. It was observed
that the profits a woman made as a result of the loan were more frequently
invested back into her family. Women were more likely than men to use the
proceeds to pay for an education for her kids, make improvements to the home or
buy better quality food for the family. The other benefit to lending to women
experienced by microfinance institutions around the world is the empowerment
and the strides toward gender equality that have been achieved in the household
and the local community.

Connecting the World

4. Microfinance institutions were originally founded to alleviate poverty and
improve local communities. That mission hasn't changed, but due to the ever-
present need for money to fund the microloans, some organizations have figured
out a way to connect ordinary donors in the developed world with microcredit
borrowers in the Third World. Kiva.org was one of the leading pioneers; it has
created a platform that allows anyone to lend $25 to an individual or group in
need of capital. Lenders don't earn interest, but they do get progress updates along
with the repayment of their money. For most people, knowing they helped change
a life is worth forgoing the interest they could have earned elsewhere.

Not Just Credit

5. Microfinance organizations don't only provide money, they also provide access to
ideas, technology and new business ventures for their members. One of the best
examples is the introduction of cell phones to rural villages in Bangladesh.
Communication between families in different villages and among suppliers and markets
in different areas were very difficult. Days were often wasted traveling back and forth
to get information. To fill the need, Yunus's Grameen Bank leased a cell phone to one
 woman in each village. the women made money by charging a small fee for use of the
phone. This allowed the women to make a living and made communication easier
among villages. Introducing cell phones is just one of many examples of non-lending
efforts made by microfinance institutions to improve the lives of their community's
impoverished citizens.

Microfinance institutions
A microfinance institution is an organization that offers financial services to low income
populations. Almost all give loans to their members, and many offer insurance, deposit
and other services. A great scale of organizations is regarded as microfinance institutes.
They are those that offer credits and other financial services to the representatives of poor
strata of population (except for extremely poor strata). Microfinance is increasingly being
considered as one of the most effective tools of reducing poverty. Microfinance has a
significant role in bridging the gap between the formal financial institutions and the rural
poor. The Micro Finance Institutions (MFIs) accesses financial resources from the Banks
and other mainstream Financial Institutions and provide financial and support services to
the poor.
MFIs are the pivotal overseas organizations in each country that make individual
microcredit loans directly to villagers, microentrepreneurs, impoverished women and
poor families. An overseas MFI is like a small bank with the same challenges and capital
needs confronting any expanding small venture but with the added responsibility of
serving economically-marginalized populations. Many MFIs are creditworthy and well-
run with proven records of success, many are operationally self-sufficient.
Various types of institutions offer microfinance: credit unions, commercial banks, NGOs
(Non-governmental Organizations), cooperatives, and sectors of government banks. The
emergence of “for-profit” MFIs is growing. In India , these ‘for-profit’ MFIs are referred
to as Non-Banking Financial Companies (NBFC). NGOs mainly work in remote rural
areas thereby providing financial services to the persons with no access to banking
services.
The term “transformation,” or commercialization, of a microfinance institution (MFI)
refers to a change in legal status from an unregulated nonprofit or non-governmental
organization (NGO) into a regulated, for-profit institution. Regulated, transformed
organizations differ from nonprofits in that they are held to performance and capital
adequacy standards and are supervised by a financial authority, typically the central bank
of the country where they are registered. A transformed MFI also attracts equity
investors. The equity investors want to ensure that the values of their investments are
maintained or enhanced and elect Board members who share a common vision for the
new for-profit institution. Among transformed MFIs, varying classifications of regulated
institutions exist, the strictest being banks — rural banks and thrift banks — followed by
non-bank financial institutions. Different countries have varied names for these regulated
MFIs.
The microfinance sector consistently focuses on understanding the needs of the
poor and on devising better ways of delivering services in line with their requirements,
developing the most efficient and effective mechanisms to deliver finance to the poor.
Continuous efforts towards automation of operations is steady improving in efficiency.
The automated systems have also helped accelerate the growth rate of the microfinance
sector.
The goal for MFIs should be:
• To improve the quality of life of the poor by providing access to financial and support
services;
• To be a viable financial institution developing sustainable communities;
• To mobilize resources in order to provide financial and support services to the poor,
particularly women, for viable productive income generation enterprises enabling them to
reduce their poverty;
• Learn and evaluate what helps people to move out of poverty faster;
• To create opportunities for selfemployment for the underprivileged;
• To train rural poor in simple skills and enable them to utilize the available resources and
contribute to employment and income generation in rural areas.
Many institutions practice microfinance, or raise funds for microfinance, including the
following:

Various kind of Microfinance Institutions

1. Informal financial service providers
These include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs,
ASCAs and input supply shops. Because they know each other well and live in the same
community, they understand each other’s financial circumstances and can offer very
flexible, convenient and fast services. These services can also be costly and the choice of
financial products limited and very short-term. Informal services that involve savings are
also risky; many people lose their money.
2. Member-owned organizations
These include self-help groups, credit unions, and a variety of hybrid organizations like
'financial service associations' and CVECAs. Like their informal cousins, they are
generally small and local, which means they have access to good knowledge about each
others' financial circumstances and can offer convenience and flexibility. Since they are
managed by poor people, their costs of operation are low. However, these providers may
have little financial skill and can run into trouble when the economy turns down or their
operations become too complex. Unless they are effectively regulated and supervised,
they can be 'captured' by one or two influential leaders, and the members can lose their
money.

Self help groups: self-help group (SHG) is a village-based financial intermediary usually
composed of between 10-15 local women. Most self-help groups are located in India,
though SHGs can also be found in other countries, especially in South Asia and Southeast
Asia.

Members make small regular savings contributions over a few months until there is
enough capital in the group to begin lending. Funds may then be lent back to the
members or to others in the village for any purpose. In India, many SHGs are 'linked' to
banks for the delivery of microcredit.

CVECA: Is is a self-reliant village savings and credit bank (from the French Caisse
Villageoise d'Epargne et de Crédit Autogérée). CVECAs are designed to operate in
rural areas with clients who are primarily subsistence farmers, with minimal non-farm
income. While most banks have less than 250 members, they achieve service flexibility
and economies of scale through networking together into regional federations. "Each
bank is managed by 2 part-time local staff and a board composed of members, all of
whom have minimal education." CVECAs are member-based microfinance
intermediaries inspired by external technical support. Structurally they lie between
informal financial market actors like moneylenders, collectors, and ROSCAs on the one
hand, and formal actors like microfinance institutions and banks on the other. Other
organizations in this transitional zone in financial market development include self help
groups, ASCAs, rural credit co-operatives, village banks and financial service
associations.

3. NGOs
The Microcredit Summit Campaign counted 3,316 of these MFIs and NGOs lending to
about 133 million clients by the end of 2006.[23] Led by Grameen Bank and BRAC in
Bangladesh, Prodem in Bolivia, and FINCA International, headquartered in Washington,
DC, these NGOs have spread around the developing world in the past three decades;
others, like the Gamelan Council, address larger regions. They have proven very
innovative, pioneering banking techniques like solidarity lending, village banking and
mobile banking that have overcome barriers to serving poor populations. However, with
boards that don’t necessarily represent either their capital or their customers, their
governance structures can be fragile, and they can become overly dependent on external
donors.

Grameen Bank : The Grameen Bank is a microfinance organization and community

development bank started in Bangladesh that makes small loans (known as microcredit or
"grameencredit") to the impoverished without requiring collateral. The word "Grameen",
derived from the word "gram" or "village", means "of the village". The system of this
bank is based on the idea that the poor have skills that are under-utilized. A group-based
credit approach is applied which utilizes the peer-pressure within the group to ensure the
borrowers follow through and use caution in conducting their financial affairs with strict
discipline, ensuring repayment eventually and allowing the borrowers to develop good
credit standing. The bank also accepts deposits, provides other services, and runs several
development-oriented businesses including fabric, telephone and energy companies.
Another distinctive feature of the bank's credit program is that a significant majority of its
borrowers are women.

BRAC: BRAC , based in Bangladesh, is currently (June 2009) the world's largest non-
governmental development organization.Established by Fazle Hasan Abed in 1972 soon
after the liberation of Bangladesh, BRAC is currently present in all 64 districts of
Bangladesh, with over 7 million micro-finance group members, 37,500 non-formal
primary schools and more than 70,000 health volunteers. BRAC is the largest NGO by
number of staff employing over 120,000 people, the majority of whom are women.
BRAC operates various programs such as those in microfinance and education in over
nine countries across Asia and Africa, reaching more than 110 million people. The
organization is 80% self-funded through a number of commercial enterprises that include
a dairy and food project and a chain of retail handicraft stores called ‘Aarong’. BRAC
maintains offices in 14 countries throughout the world, including BRAC USA and BRAC
UK. BRAC is a few years into their initiative to operate in ten African countries in the
next ten years

4. Formal financial institutions

In addition to commercial banks, these include state banks, agricultural development
banks, savings banks, rural banks and non-bank financial institutions. They are regulated
and supervised, offer a wider range of financial services, and control a branch network
that can extend across the country and internationally. However, they have proved
reluctant to adopt social missions, and due to their high costs of operation, often can't
deliver services to poor or remote populations. The increasing use of alternative data in
credit scoring, such as trade credit is increasing commercial banks' interest in
microfinance.With appropriate regulation and supervision, each of these institutional
types can bring leverage to solving the microfinance problem. For example, efforts are
being made to link self-help groups to commercial banks, to network member-owned
organizations together to achieve economies of scale and scope, and to support efforts by
commercial banks to 'down-scale' by integrating mobile banking and e-payment
technologies into their extensive branch networks.
NABARD: National Bank for Agriculture and Rural Development (NABARD) is an
apex development bank in India. It has been accredited with "matters concerning policy,
planning and operations in the field of credit for agriculture and other economic activities
in rural areas in India". It was established by an act of Parliament on 12 July 1982 to
implement the National Bank for Agriculture and Rural Development Act 1981. It
replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell
(RPCC) of Reserve Bank of India, and Agricultural Refinance and Development
Corporation (ARDC). It is one of the premeire agency to provide credit in rural areas.

PRIVATE FINANCING COMPANIES Microfinance companies are the financial

institutions that offer small-scale financial services in both the forms – credit and savings,
especially to the poor in rural, semi-urban and urban areas. These financial services are
meant to help them in undertaking economic activities, mitigating vulnerabilities to
income shocks, smoothening consumption, increasing savings and supporting self-
empowerment. There are a number of microfinance companies in India, which play some
pivotal roles to the development of India. Eg SKS Microfinance Companies

Explosive Growth
In the 1970s and 80s, inspired by Grameen’s success, social innovators and organizations
around the world began to experiment with different programs to bring financial services
to the poor. Microfinance institutions proved that it was actually possible to build viable
businesses through lending to the poor. The number of microfinance institutions
increased rapidly. The 2006 Microfinance Summit Campaign Report estimates that there
are now more than 3,000 microfinance institutions, serving more than 100 million poor
people in developing countries. The total cash turnover of these institutions world-wide is
estimated at $2.5 billion and the potential for new growth is outstanding.
India microfinance records 30% growth: State of the Sector report
Microfinance Focus, Oct. 26, 2009: India’s Microfinance institutions reached 76.6
million against last year’s 59 million, according to the “State of the Sector Report”
released on Monday in New Delhi.

Compiled by N. Srinivasan, the report was released as part of the annual Microfinance
India Summit 2009 at Hotel Taj on Monday morning.

Some quick highlights of the report are:

* MFI’s have recorded about 8.5 million clients during the year 2008-09, a growth of
60% over the previous year.
* More than 50 percent of low income households are covered by some form of
microfinance product
* The total outstanding microfinance loans posted a growth rate of 30% or 359.39 billion
over the last year’s level of Rs 229.54 billion.
* The overall coverage of the sector is estimated to have reached 76.6 million against 59
Million last year.
The SHG loan outstanding has increased by Rs. 71.5 billion with an addition of 6.9
million clients.
* At the current growth rates, MFIs might outstrip the SBLP in portfolio volumes soon.
* Some parts in Karnataka faced entrenched default constituting a portfolio share of less
than 0.5%.
* MFIs so far reached 234 of the 331 poorest districts identified by the government.
* SBLP regstered a decline of number of women SHGs from 82.5% in March 2007 to
80.4% in March 2008.
* The microfinance penetration index shows especially in Bihar, Madhya Pradesh,
Rajasthan and Uttar Pradesh compared to extraordinary levels reached in Andhra Prades,
Karnatana and Tamil Nadu.
While last year’s report focused on the increased risk in the sector, this years’ report takes
stock of the uninterrupted growth rate of the sector despite several internal and external
adversities.