INTRODUCTION AND HISTORY

Most of the world’s poor lack access to basic financial services that would
help them manage their assets and generate income. This is especially true
for the 900 million extremely poor people who live in rural areas of
developing countries. Good management of even the smallest assets, such as
livestock, can be crucial to very poor people, who live in precarious
conditions, threatened by lack of income, shelter and food. To overcome
poverty, they need to be able to borrow, save and invest, and to protect their
families against adversity. With little income or collateral, poor people are
seldom able to obtain loans from banks and other formal financial
institutions.
The object behind the concept of microfinance is to generate financial
service for those people which are away from financial services and to help
poor people to pull out from the vicious circle of poverty. The idea behind
the microfinance is very naive to generate appropriate change in financial
systems all over the world. As the traditional financial system provided
benfits and safety to the rich segment of the society, the main object of
microfinance is to lift the poor segment of the society from the circle of
poverty and able them to contribute and participts in the economic activities
and development.
The microfinance campaign started when Professor Muhammad Yonus
(Bangladeshi economist) first time granted a few dollars to an impecunious
(basket maker) in the year of 1974. These little loans granting campaign to
the poor persons able them to run there small businesses that would have
helped them to come out from the poverty circle. The Grammen Bank is one
of the successful example which provides loans for the poor to uplift from
the poverty. In this reorganization Professor Muhammad Yonus was
awarded the noble prize in the year of 2007.
It is well documented that microfinance is the most appropriate and better
corridor to empower the poor people and rise their income generating ability
(Pakistan institute of poverty reduction program 2001). The significance of
microfinance is increasing with the passage of time not only Pakistan but
across the boarder as an instrument to eliminate poverty. This sector faces
many problems and challenges in Pakistan as well as other underdeveloped
countries because of additional scope of this sector The thought behind the
microfinance services is to provide financial help to the poor persons and
people at their doorstep at very easy terms and conditions (Wahid Ur
Rehman 2007). At this juncture microfinance has drawn special attention not
only at the academic level but also in the area of policy designing.
Microfinance is one way of fighting poverty in rural areas, where most of
the world’s poorest people live. It puts credit, savings, insurance and other
basic financial services within the reach of poor people. Through
microfinance institutions such as credit unions, financial non-governmental
organizations and even commercial banks, poor people can obtain small
loans, receive money from relatives working abroad and safeguard their
savings.
The microfinance revolution started with the recognition that poor people
needed access to loans and that they could use these funds productively. It
has also changed the perception that poor people are not credit worthy.
Records have shown that, instead, they are a good risk, with higher
repayment rates than conventional borrowers. In some of the most successful
microfinance institutions, repayment rates are as high as 98 per cent.
As microfinance has evolved, there has been an increasing recognition of the
importance of savings, often referred to as the “the forgotten half of
microfinance”. During the 1990s we came to realize that there was a pattern
emerging in how poor people were using the very large microfinance
networks. In the networks that offered both credit and savings services, there
were often as many as five savers for each borrower. While credit is
important, it is only one of the many different kinds of financial services that
poor people need to improve their lives.
For example, the Unit Desai of Bank Rakyat Indonesia, which has been one
of the most successful providers of microfinance services in the region,
counts more than 28 million savers, for only three million borrowers. The
large financial cooperative networks in West Africa also have many more
savers than borrowers among their members.

It has been argued that savers in those institutions are usually not the poorest
people. Although this is true in many institutions, evidence has shown that
even the poorest people value and need access to some form of savings.
What characterizes the poorest is not only their very small income but also
the irregularity of this income. This can actually discourage very poor
people from taking a loan that comes with the obligation of a regular
repayment schedule. Conversely, data gathered from money collectors
around the world show that the poorest people often use their services to
save, even when it comes at a high cost – demonstrating the importance that
poor people attach to saving.

The Microcredit Summit Campaign has the ambitious objective of reaching

100 million of the world’s poorest families by the year 2005. By the end of
2001, more than 2000 microfinance institutions were involved in the
campaign, providing financial services, mostly loans, to almost 55 million
individuals or groups. More than 21 million of those clients were women.
There is an urgent need for microfinance institutions to improve their ability
to reach the poorest families and to satisfy their growing demand for a range
of financial services. This includes the safe and flexible savings services that
poor people need and value. One way to meet the objectives of the
Microcredit Summit Campaign is to help microfinance institutions that are
legally authorized to provide simple savings services ensure that these
services are available to very poor people.
Although the amounts involved may be small, the loans, savings and
insurance options that microfinance offers can give millions of rural men
and women an opportunity to find their own solutions.
The common mistakes or misconception are found among the people is that
the microfinance is the modern shape of charity. But there is an apparent
difference between microfinance and charity.Normally charity is given for
fulfillment of needs while microfinance facilities is given to the poor to start
business and generate own source of income and became economically
independent Microfinance and micro credit is firstly used in 1970 and it is
an innovation in the field of finance. “Prior to then, from the 1950s through
to the 1970s, the provision of financial services by donors or governments
was mainly in the form of subsidised rural credit programmes”.
“These often resulted in high loan defaults, high loses and an inability to
reach poor
rural households The difference between microcredit and the subsidised
rural credit
programmes of the 1950s and 1960s was that microcredit insisted on
repayment, on
charging interest rates that covered the cost of credit delivery and by
focusing on clients
who were dependent on the informal sector for credit”
1980 was the important year in the history of microfinance service because
in that year most of MFI (microfinance institute) and Grameen Bank came
into existence and started their work in the field of microfinance and issuing
small loans and savings services at the large scale.
1990 was also very important year for microfinance in this year a good
number of microfinance institute came into existence. microfinance
converted or turned into industry. (1999). “The development in micro credit
institution, attention changed from, just the provision of credit to the poor
(micro credit) to the provision of other financial services such as savings and
pensions”
PRODUCTS OF MFB’S
1-MICRO SAVINGS:
IT IS hard for people in the rich world to imagine what it is like to live on $2
a day. But for those who do, the problem is often not just a low income, but
an unpredictable one. Living on $2 a day frequently means living for ten
days on $20 earned on a single day. The prbblem arises when these people
want money in emergency in a case of large funds.
For the solution of this problem microfinancing savings is introduced.
That they can borrow at all is partly due to the rapid growth of microfinance,
which specialises in lending small amounts to poor people. Several big
microfinance institutions (MFIs) also offer savings accounts. The ability to
save through an MFI is often linked to customers’ willingness to borrow
from it. Of 166 MFIs surveyed in 2009 by the Microfinance Information
Exchange, a think-tank, all offered credit but only 27% offered savings
products.
A majority of more than 400 MFI managers surveyed last March by
the Consultative Group to Assist the Poor (CGAP), a microfinance group
based at the World Bank, said that they had faced liquidity problems during
the crisis. This, together with rising financing costs and exchange-rate
fluctuations for those MFIs that rely on external finance, has prompted many
“credit-only” MFIs to warm to the idea of funding at least part of their
lending activity using local savings.
2-MICRO INSURANCE:
Micro-insurance is a service that protects poor people against certain risks in
return for a fee (premium). The service, which can be offered through a
variety of microfinance models, is offered to low-income individuals and
businesses (usually called micro entrepreneurs and micro enterprises,
respectively) and is characterized by:
• Low insurance premiums – this is a regular fee paid by a client
(policy holder) to the insurance firm for the guarantee that the insurance firm
will cover the client’s expenses or losses in case they occur (e.g. a cow gets
stolen). Micro-insurance needs low premiums to make it affordable to
micro-entrepreneurs.
• Low coverage limits – this is the maximum amount of expenses a
micro-insurance firm will cover in case of a certain event or over the life of a
policy. Any costs beyond the coverage limit must be paid for by the client.
For example, if a farmer’s total loss goes up to $200 because his crop field
got destroyed as a result of a drought, the micro-insurance firm may only
compensate him for half this amount.
Large commercial insurance firms steer clear of the low-income group
because of high associated risks and transaction costs associated with micro-
insurance. But by reducing the size of exposure (premiums, limits) the risk
faced is greatly reduced.
Why Do Poor People Need Insurance?
According to Micro-insurance Academy, the lives of poor people are highly
uncertain. Not only are they vulnerable to the smallest of economic shocks,
they also worry about the onset of illnesses (the recovery of which often
demands that they borrow money, cut their consumption or sell their assets)
or the sudden death of a breadwinner.
Despite this, the market is under served. Micro-insurance helps reduce
uncertainty in the lives of micro-entrepreneurs so they can plan ahead and
grow their businesses, thereby moving above and beyond the poverty line.
What Risks Do Poor People Face?
The risks faced by poor people are similar to those faced by the rich, but the
frequency and severity of the risks are much higher for the poor (CGAP).
Here are some risks covered by micro-insurance:
• Damage or loss of crops/livestock through theft, fire, droughts,
disease, etc.
• Risk of loss of income for family after death of bread earner
• Risk of climate change, from which the poor suffer most
• Risk of default on loan at death
• Damage to property caused by natural disasters, such as earthquakes,
volcanic eruptions, droughts and floods, etc.
Health deterioration or the onset of a disability
Sources of Micro-insurance
We can broadly divide micro-insurance providers into three groups:
• Formal sources of micro-insurance: commercial insurance firms and
microfinance institutions, or MFIs
• Semi-formal sources of micro-insurance: utility companies and
cooperatives
• Informal sources of micro-insurance: retail stores and churches.
• 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, and Anelik. On the
surface they may seem like small money transfers, but when one considers
that such transactions take place millions of times around the world each
week, the numbers start to become impressive. According to the World
Bank, the annual global market for remittances – money transferred home
from migrant workers – is around 167 billion US dollars. The estimated total
is closer to 230 billion dollars if one counts unregulated transactions.
Remittances are also an important source of income for many developing
countries including India, China and Mexico, all of which receive over 20
billion dollars each year in remittances from abroad.
MOBILE BANKING
The widespread use of mobile phones by poor people in developing
countries may provide one answer. People in Kenya, for instance, already
use a successful text-message-based service called M-PESA to transfer
money electronically to other mobile users. And a new microinsurance
scheme uses M-PESA to offer Kenyan farmers protection against bad
weather.
But there are challenges for MFIs seeking to enter mobile banking.
Ignacio Mas of the Gates Foundation points out that ensuring secure text-
message transactions will often require an agreement with a mobile operator,
which controls access to the phone’s SIM card. That may be simple in places
like Bangladesh, where MFIs also provide mobile services. In others, mobile
operators may want to go it alone.
Banks and other financial institutions may also now find it easier to provide
branchless banking for the poor. In its simplest form, a bank could appoint
someone like a shopkeeper or mobile-airtime reseller as an agent who
collects deposits and pays out withdrawals. A business model like this—
making use of mobile phones—could massively reduce transaction costs.
For all this to happen, banking regulations in many countries need
to become more flexible about who can accept deposits. MFIs are also
interested in becoming bank agents, especially in places where they are not
legally permitted to take deposits.

Mobile Banking Extends the Mission of Microfinance

A recent revolution, mobile banking is the provision of banking services
through mobile phones using the SMS facility or a downloadable mobile
money application. This collaboration between the financial and telecom
sector is an ideal solution for microfinance because ‘there are about 1 billion
people across Asia, Africa and Latin America who do not have a bank
account but do have a cell phone’ (CNN). These markets have other features
that make them suitable for mobile banking as well.
Mobile banking (also known as M-Banking, SMS Banking, branchless
banking) is quickly gaining momentum in
• Kenya (mobile banking through Safaricom’s M-Pesa – read the
reasons behind its success and how it impacts the daily lives of Kenyans)
• Brazil (mobile banking through Banco de Brasil)
• India (mobile banking through FINO’s MITRA:
• Pakistan (mobile banking through Telenor’s Easy Paisa)
• Philippines (mobile banking through Smart Telecom’s
SmartMoney),and
• South Africa (mobile banking through South African Bank of Athens’
Wizzit).
The following basic microfinance services are offered to meet every day
needs of micro entrepreneurs and other clients:
• Cash deposits and withdrawal, through microfinance bank branches
and other agents (read best practices for supply chain management in mobile
banking)
• Micro loans provision and collection through mobile phones (clients
are starting to give their feedback through surveys as well)
• Payment services for utility or other bills through mobile phones
• Money transfers between accounts, specifically remittances through
mobile technology
Convenience, savings on transport costs, and security are the biggest
advantages marketed to consumers by mobile banking (read marketing best
practices in mobile banking), while MFIs get the benefit of reduced
transaction costs and improved rural market penetration rates, which are
difficult to access as it is.
Mobile banking Challenges and Risks
Like every new technological solution, mobile banking services face a few
problems and risks too. Some common impediments identified by CGAP
and Microfinance Focus are:
• Difficulty in maintaining cash float: mobile money franchise operators
(agents) often find it difficult to maintain enough cash to serve customers in
rural areas who withdraw money after receiving electronic funds.This can be
solved through adopting best practices in supply chain management in
mobile banking.
• Consumer-related issues: fraudulent activities as well as hidden
charges are emerging concerns for mobile banking and you can read an
informative article by CGAP about this. On the other hand, because of the
simplified process of registering for mobile banking services, it is often
difficult to establish the authenticity of customers.
• Regulatory hurdles: Central Banks are often wearing of allowing non-
bank entities (mobile money telecom franchise operators) to receive or make
payments on behalf of banks. This limits the service offering where a non-
bank microfinance model is followed for mobile banking, such as Western
Union’s partnership with mChek.
• Trust issues: consumers in less developed countries take time to get
used to new mobile technology, especially since it involves trusting
someone else with their money.
These are similar to the challenges faced by microfinance today.
Future of Mobile Banking
Best practices in mobile banking are quickly emerging, and the nature of the
industry is changing. Currently, mobile network operators (MNOs) are using
mobile banking as a competitive edge and guarding their market by limiting
the provision of these services to clients registered to their network only.
This will change in the future as MNOs collaborate through technology
sharing initiatives such as Nokia Money and other microfinance information
systems will encourage the interoperability of mobile connection providers.
Kiva (the peer-to-peer micro-lending website) is also set to join this race
with it’s API, Build Kiva.
Even though mobile money was off to a good start, some leaders feel there is
a lack on innovation in the sector. However, the advent of mobile banking
isn’t limited to microfinance anymore. Grameen Foundation’s recent
initiative, AppLab, takes it to a new level.
Providing Education
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.
IMPORTANT CONCEPTS IN MICROFINANCE:
Group Lending
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.
Emphasizing Women
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.

CREDIT BUREAUES IN MICROFINANCE:

Pakistan Microfinance Network (PMN) recently announced it will setup a
credit bureau for microfinance providers so information about the credit
histories of borrowers can be used to cautiously expand loan portfolios. The
need was felt as a result of rising delinquency levels faced by microfinance
banks (MFBs) that followed aggressive expansion strategies in recent years.
Greater competition fueled this dilemma because if a client defaults, he can
simply visit the next MFI and borrow more money.
Several countries, such as India, Peru, and Tajikistan have already setup
microfinance credit bureaus and offer benchmarks for organizations such as
PMN.

Purpose of a Microfinance Credit Bureau

A microfinance credit bureau helps distinguish between good (low risk) and
bad (high risk) borrowers by looking at their professions, skills, loan and
repayment histories. The effort will encourage microfinance providers to
join hands instead of compete so the industry as a whole can limit default
rates, check multiple borrowing and meet its social and financial objectives
while ensuring institutional sustainability.
Operational Elements of a Microfinance Credit Bureau (Examples from
Pakistan and Other Countries)
• Identifying all borrowers – Each borrower’s credit history can be
linked to his/her unique identity number (e.g. in Pakistan, it can be tied to
the National Identity Card or Voter ID, or in USA, it can be tied to the
Social Security Number).
• Gathering data – A credit bureau builds credit histories by seeking
data from the computerized financial and operating software used by
microfinance banks, which is required by the central bank in Pakistan and
most other countries. MFIs will need to overcome a fear of relinquishing
internal, competitive data about borrowers and trust an independent entity to
handle and secure it. Utility companies that are involved in mobile banking
services (e.g. Easy Paisa in Pakistan, or M-Pesa in Kenya) can also be
approached to get records of prompt or delayed bill payments.
• The perfect software – Technology plays a central role in assimilating,
processing and distributing accurate data to MFIs in a timely manner. Data
about loan payments can be stored on a smart card that is unique for each
borrower, or the ‘Mobile Wallet’ accounts (a feature of Easy Paisa in
Pakistan) and link these to a central database.
• Access to the database – MFIs will only have indirect access to a
central database; full control will belong to credit bureau officers.

FUNDING SOURCES OF MICROFINANCE

INSTITUTIONS:
Capital availability for microfinance is hardly a problem for mature markets,
as sources are ample and diverse. Despite this, many microfinance providers
are unaware of the multiple sources of funds available to them. Here are
some external sources for MFIs:
Saving Deposits in Microfinance
Micro-saving products, also known as retail deposits, offered by MFIs serve
as a low-cost source of funding and are a common practice in Philippines,
Uganda, Pakistan, Peru and Kenya. Since safekeeping the public’s money is
risky, most governments only allow microfinance banks to offer this
product. However, some NGO MFIs with large equity pools may be allowed
to accept deposits as well. Potential pitfalls here include too much or too
little liquidity of cash .
Commercial Debt Capital in Microfinance
Short-term loans (available easily) and long-term debt (available in large
quantities) can be acquired from commercial banks. Additionally,
international investment funds, also known as microfinance investment
vehicles (MIVs), act as intermediaries between investors and MFIs, by
selling securitized debt. Some famous examples are:
Triodos Microfinance Fund, Oiko Credit, Blue Orchard, Microvest, Fund for
South East Europe (EFSE)
Even though loans from commercial source are generally priced at the
market rate, which new and small MFIs may find expensive, debt capital is a
popular source of funds for microfinance providers.
Soft Loans and Grants in Microfinance
Concessionary/soft loans (low-cost debt) or grants may be sourced by
microfinance providers from socially responsible investors, which include
national and regional development banks, aid agencies, international NGOs,
non-profit corporations, charitable trusts, or funds held by donor and
development agencies, such as:
Grameen Trust, Swedish International Development Agency(Sida), USAID,
United Nations Capital Development Fund (UNCDF), ADB, World Bank,
Bill and Melinda Gates Foundation, Ford Foundation, IMF, ACCION,
CARE.
Some development agencies only interact with governments, but their funds
can be accessed indirectly by MFIs.
Individual Philanthropic Sources in Microfinance
Non-profit investors, such as individuals interested purely in the social
impact of microfinance, often lend their own money to MFIs through peer-
to-peer online platform, the most famous of which are Kiva and MicroPlace.
However, raising funds through the internet is a tricky business,. Similarly,
high net worth individuals who are interested in philanthropy often give
away great sums of money to MFIs, in an act known as ‘venture
philanthropy‘.
Equity Capital in Microfinance
Equity capital, which acquired through the sale of ownership shares, via
capital markets, is the most expensive source of capital for MFIs, but most
attractive for investors because of high returns prevalent in the microfinance
sector. This source of funds is the subject of widespread criticism because
some public MFIs seem to lose track of their social objectives, as Bank
Compartamos did.

At Present following microfinance institutions are functioning in Pakistan:

Micro Finance Institutions
• ??Akhuwat
• ??Asasah
• ??Community Support Concern
• ??Development Action for Mobilization and Emancipation
 • ??Kashf Foundation
• ??Orangi Pilot Project
• ??Sindh Agricultural and Forestry Workers Cooperative Organization
• Micro Finance Banks
• ??Kashf Microfinance Bank
• ??Khushhali Bank
• ??Network Microfinance Bank Limited (NMBL)
• ??Pak-Oman Microfinance Bank Limited (POMFB)
• ??Rozgar Microfinance Bank Limited
• ??Tameer Microfinance Bank Limited
• ??The First Micro Finance Bank Limited (FMFB)
• Rural Support Programmes
• ??Lachi Poverty Reduction Project
• ??National Rural Support Programme
• ??Punjab Rural support Programme
• ??Sarhad Rural Support Programme
• ??Thardeep Rural Development Programme
Others
• ??BRAC
• ??Centre for women Cooperative Development
• ??Jinnah Welfare Society
• ??Narowal Rural Development Programme
• ??Organization for Participatory Development
• ??Rural Community Development Society
• ??Save the Poor
• ??Sindh Rural Support Program
• ??Sungi Development Foundation
• ??Swabi Women’s Welfare Society
• ??Taraqee Foundation
• ??Bank of Khyber
• ??CRX Leasing Pakistan Limited
COMMERCIALIZATION OF MICROFINANCE
Microfinance was initially a form of voluntary help to the most deprived
populations.
However today, it also represents a market solution to the mitigation of
poverty. The success rates and achievements of microfinance fueled the
interest of various institutions, NGOs, banking groups and governments
throughout the years and continue to do so. However, in order to
accommodate this interest, microfinance needs to become a structured,
transparent and regulated industry where everyone can find a role for
themselves. Individuals who have been working in microfinance for a long
time express their discontent about the commercialization aspect, of the
notion of profit entering the field. Nevertheless, the increase in the
participation to microfinance, whether it is on behalf of a non-profit
organization or a bank, is the only factor that can make a significant change
in the alleviation of poverty.
What the poor have always needed is the extension of the formal
financial sector for their use, what is now being called the commercialization
of microfinance.

THE NEED FOR COMMERCIAL BANKS:

By definition, commercial banks are banks “that offer a broad range of
deposit accounts,
including checking, savings, and time deposits, and extend loans to
individuals and
businesses”and they are well suited to play a role in microfinance for the
following reasons.
• First of all, they are regulated and supervised. Indeed, the sources of
capital that are obtained reside in an entity independent from the MFI. This
is a very important factor that guarantees the flow of funds to microfinance
as it installs trust in donors.
• Secondly,banks can offer a wider range of financial services to the
poor, a trend that can already be observed in the goal of MFIs today.
Another reason concerns the volume of capital they are able to attain.
Commercial banks have a wide network for getting funds and can
consequently increase the loan numbers offered or the size. Furthermore,
through their branches, they can facilitate the access to their services through
more efficient transactions and thus allow a better supervision of loans and
projects.
• Thirdly,another advantage for a bank involved in microfinance is the
reinforcement of its public image: engaging in the alleviation of poverty will
build more trustfor the bank in the formal financial sector.
• Fourthly why commercial banks are more suited to provide
microfinance concerns the nature of their ownership. In this respect, under a
private status, the owner would want to make profit and therefore
systematically seek success in their projects. The financial institutions would
therefore be strongly committed to the achievement of certain goals, such as
financial viability. This point can be considered problematic for some
advocators of microfinance from an ethical point of view. I believe that if
changes are to be made for a better financial prospect for everyone, then
there needs to be a sense of viability instituted in society: microfinance
should be an ordinary service that everyone has a right to access.
Nevertheless, this is not to suggest that there is no room for both non-profit
voluntary help and commercial banks in microfinance to coexist.
Poverty is at such levels today that many individuals around the world
struggle to find water and food every day of their life: such sufferings can
only be mitigated through voluntary help that is most urgently needed. In
this respect, microfinance represents a subsequent level of help, a stage of
integration for the deprived populations, a phase of adaptation to the norms
of society with respect to basic needs and a means of becoming self-
sufficient.

The role of banks in microfinance

Commercial banks can engage in microfinance in many different ways,
ranging from direct relations with borrowers to a more indirect participation
through the raising of capital.
1- Direct lending
Firstly, banks can directly lend to micro entrepreneurs. Usually, a
participation of this sort is observed in banks founded with the aim of solely
serving the microfinance sector. The pioneer in this field is the Grameen
Bank founded by Muhammad Yunus in 1976, with the sole goal of helping
the impoverished through the provision of small loans to a group of
borrowers. Group lending consists of the attribution of a loan to each person
in the group, but the loans are not renewed to anyone in the group if ever one
borrower defaults on the loan. Consequently, through social pressure, the
group lending method gives individuals incentives to be financially
disciplined and to repay their loans. Another example is the ProCredit group
which provides loans to small and medium-sized enterprises through its 19
development oriented banks in Africa, Europe and Latin-American.
2- A microfinance subsidiary
Secondly, banks may choose to separate their microfinance operations
through the creation of a new subsidiary. Primarily, such subdivisions can
help banks mitigate the levels of risks associated with lending to the poor.
Nevertheless, it can also be seen as a necessary step for banks providing
both consumer finance and microfinance, as each sector requires a different
approach to business and a distinct training of the employees. Furthermore,
from the perspective of the borrower, separating the microfinance services
from the consumer finances might generate more trust and
acknowledgement of the bank’s commitment to the goal of reducing
poverty. In this respect, Sogesol is the microfinance subsidiary of the
commercial bank Sogebank, the largest commercial bank in Haiti. The many
years of experience of Sogebank, bring some important advantages to
Sogesol. The loans that originate from the microfinance subsidiary can be
repaid through the branches of Sogebank. Furthermore, the parent company
also provides other types of support to Sogesol such as human resources,
legal affairs, auditing and marketing.
3- Partnership with a microfinance institution
Thirdly, banks can build partnerships with microfinance institutions. Banks
can lend to
microfinance institutions in the form of wholesale banking, and in turn,
MFIs can employ the capital to lend to the poor. In the partnership, the bank
usually provides the loan funds, the technology and evaluates the pricing and
the levels of risk involved with the loans. On the other hand, the MFIs
undertake the origination, monitoring and collection of the loan. Indeed,
there are a lot of advantages for MFIs in engaging in partnerships with
banks. With the greater amount of capital comes the increase in loan sizes,
and the more branches a bank has, the greater the outreach achieved through
geographical expansion. Furthermore, the bank’s personnel can also provide
mentoring to MFIs in terms of improving the operational efficiencies of the
organization and making it aware of standardized international practices in
the world of finances if the bank has reached such a standard. One such
example is the case of ICICI Bank in India which currently has partnerships
with 72 MFIs throughout the country and aims to increase the number of its
alliances to 200 by 2010. This kind of partnership can be the most beneficial
and efficient for both the bank and the MFI.
4- A microfinance fund: securitization
Fourthly, commercial banks can raise funds in domestic or international
capital markets for the lending operations of microfinance institutions. These
funds can be raised in the form of bonds in domestic markets such as the
Mibanco bond of $6 million issued in December 2002. Mibanco (Banco de
la Microempresa S.A), a private bank established in 1992 in Peru, is seeking
to diversify its funding sources through such bonds. Lucy Conger, in her
article “To Market, To Market” suggests that these bonds are being bought
by high net worth individuals or institutional investors, which suggests that
microfinance is slowly becoming an integral part of the formal financial
system. One role, large banking groups can play in microfinance was
exemplified by Citigroup which placed and sold the Mibanco bond through
a “Dutch auction”. Currently large commercial banks such as Citigroup,
Deutsche Bank and Rabo bank have microfinance funds that provide capital
to MFIs. Deutsche Bank is involved in microfinance through the Deutsche
Bank Microfinance Development Fund (DB MDF). The bank’s strategy is
“to encourage and establish relationships between local commercial
financial institutions and MFIs by providing highrisk catalytic funds as
collateral for leveraged loans from local financial institutions.” The fund
makes loans with “very low-cost financing (1 percent to 3 percent a year)
with maturities of one to five year”7 to the MFI which earns market interest
rates on this deposit in US dollars. The institution obtains the equivalent sum
in the local currency which can then be lent out to micro-entrepreneurs.
Indeed, the loans “may not be used as working capital or as6 Deutsche Bank
Microcredit Development Fund, Report of Activities, page 2 7 Deutsche
Bank Microcredit Development Fund, Report of Activities. funds for direct
lending”8. Consequently, the capital provided by Deutsche bank becomes a
form of collateral for the MFI, a form of securitization.

WHY BANKERS HAVE NOT OFFERED MICROFINANCE

SERVICES:
Most bankers have not regarded microfinance as a genuine option, however,
because they have believed it unprofitable. When asked why they do not
pursue microfinance, traditional commercial bankers have typically
expressed three basic concerns:
1. Too Risky: Bankers perceive small businesses and microenterprises as
bad credit risks.
Many insolvent state-owned agricultural banks seemed to prove that small
farmer clients
could not or would not repay their loans. The perception is that small clients
do not have
stable, viable businesses for which to borrow and from which to generate
repayment.
Moreover, these potential clients lack traditional collateral to guarantee their
loans. Finally,
banks no doubt also recognize they do not have appropriate lending
methodologies to serve
these clienteles (that is, correct screening mechanisms to separate good from
bad credit risks).
2. Too Expensive: Bankers also believe that because microloans are small
and have short
terms, bank operations will be inefficient and costly. It takes the same
amount of time and
effort (if not more) to make a US$1,000 loan as a US$100,000 loan, but the
return on the
larger loan is much greater. So why make a small loan?
3. Socio-economic and Cultural Barriers: According to bankers, micro
and small enterprise clients have difficulty approaching a bank because they
lack education and do not possess business records to demonstrate cash
flow. In many developing countries, social, cultural, and language barriers
do not allow for an easy relationship with a modern banking institution. It is
hoped, however, that with a more widespread diffusion of innovations in
financial methodologies, reducing the risks and costs of microlending, more
banks will begin to incorporate microentrepreneurs into their portfolios.

COMPARATIVE ADVANTAGES OF COMMERCIAL

BANKS
IN MICROFINANCE
At first glance, banks appear well positioned to offer financial services to
ever-increasing numbers of microfinance clients and to earn a profit. Banks
have several advantages over nonbank, microlending NGOs:
• They are regulated institutions fulfilling the conditions of ownership,
financial disclosure, and capital adequacy that help ensure prudent
management.
• Many have physical infrastructure, including a large network of branches,
from which to expand and reach out to a substantial number of microfinance
clients.
• They have well-established internal controls and administrative and
accounting systems to keep track of a large number of transactions.
• Their ownership structures of private capital tend to encourage sound
governance structures, cost-effectiveness, and profitability, all of which lead
to sustainability.
• Because they have their own sources of funds (deposits and equity capital),
they do not have to depend on scarce and volatile donor resources (as do
NGOs).
• They offer loans, deposits, and other financial products that are, in
principle, attractive to microfinance clientele. All of these advantages could
give banks a special edge over microlending NGOs in providing
microfinance services.
OBSTACLES FOR COMMERCIAL BANKS IN
MICROFINANCE
Banks lack, however, some key ingredients - most of all, the financial
methodologies to reach a low-income population. They also face thorny
internal constraints that must be overcome before they can produce a large,
successful microfinance program.
Our study of banks in microfinance identified at least six key related issues
banks need to resolve to enter the microfinance market successfully:
• Commitment: the commitment of commercial banks (particularly the
larger banks) to microenterprise lending is often fragile, and generally
dependent on one or two visionary board members rather than based solidly
in its institutional mission.
• Organizational structure: Microfinance programs need to be inserted into
the larger bank structure in such a way that they have relative independence
and, at the same time, have the scale to handle thousands of small
transactions efficiently.
• Financial methodology: Banks need to acquire an appropriate financial
methodology to service the microenterprise sector — financial innovations
that permit a cost-effective analysis of creditworthiness, the monitoring of a
large number of relatively poor clients, and the adoption of effective
collateral substitutes.
.
• Human resources: Given that microfinance programs differ so radically
from traditional banking, banks must recruit and retain specialized staff to
manage these programs. Issues of recruitment, training, and performance-
related incentives require special consideration.
• Cost-effectiveness: Microfinance programs are costly because of the small
size of their loans and because banks cannot operate them with their
traditional mechanisms and overhead structures. Strategies must be found to
minimize processing costs, increase staff productivity, and rapidly expand
the scale of their microenterprise portfolios — that is, increase the number of
loans. Banks must cover the costs of microfinance operations and
specialized training through scale economies.
• Regulation and supervision: Banks must communicate with banking
authorities to ensure that reporting and regulatory requirements take into
account the specialized nature of microfinance programs.
 ISLAMIC MICROFINANCING
273) ِ‫ن الّتَعّفف‬
َ ‫غِنَياء ِم‬
ْ ‫ل َأ‬
ُ ‫جاِه‬
َ ‫سُبُهُم اْل‬
َ‫ح‬ْ ‫ض َي‬
ِ ‫لْر‬ َ ‫ضْرًبا ِفي ا‬ َ ‫ن‬ َ ‫طيُعو‬
ِ ‫سَت‬
ْ ‫ل َي‬
َ ‫ل‬ ّ ‫لا‬ِ ‫سِبي‬
َ ‫صُروْا ِفي‬ ِ ‫ن ُأح‬
َ ‫) ِلْلُفَقَراء اّلِذي‬
‫عِليٌم‬
َ ‫ل ِبِه‬ّ ‫نا‬ّ ‫خْيٍر َفِإ‬
َ ‫ن‬ ْ ِ‫حاًفا َوَما ُتنِفُقوْا م‬
َ ‫س ِإْل‬
َ ‫ن الّنا‬
َ ‫سَأُلو‬
ْ ‫ل َي‬
َ ‫سيَماُهْم‬
ِ ‫َتْعِرُفُهم ِب‬

273. " (Charity is) for the poor who are restrained in
the way of Allah, and are unable to move about in
the land. The unaware consider them wealthy
because of their restraint (from begging). You shall
recognize them by their countenance - they do not
beg people importunately. And whatever of good
things you give, then Allah is All-Knowing of it."

The basic principles of Islam and Islamic finance

For Muslims, the Holy Quran and the Sunnah constitute the primary sources
of knowledge: the Holy Quran confirms what was revealed to earlier
messengers of God and serves as the criterion of what is right and what is
wrong while the Sunnah is collected in books which are separated from the
Holy Quran and are known as Hadith5 books. While the Holy Quran is
considered totally as the “word of God revealed to the
Prophet”, not every hadith is considered authentic In Islamic societies; the
Sunnah constitutes the second most important source of jurisprudence after
the Quran.
The economic systems that were set in Muslim countries have generally
followed the blueprints of the developing world. The banking system, in
particular, strongly reacted to these changes: in the 1980s and 1990s Muslim
bankers and religious leaders developed ways to integrate Islamic law on
usage of money with modern concepts of ethical investing.
A number of researchers suggest that the underlying causes of the genesis of
modern Islamic economics was based more on the desire to reflect beliefs
about Islamic identity than to establish a more ethical or religiously sound
banking system

The principles of Islamic banking

Islamic banking, based on the Quranic prohibition of charging interest, has

moved from being a theoretical concept to embrace more than 100 banks
operating in 40 countries with multi-billion dollar deposits world-wide.
Islamic banking is widely regarded as the fastest growing sector in the
Middle Eastern financial services market.
It is important then to understand the principles of Islam that underpin
Islamic finance.
The Shariah consists of the Quranic commands as laid down in the Holy
Quran and the words and deeds of the Prophet Muhammad. The Shariah
disallows Riba and there is now a general consensus among Muslim
economists that Riba is not restricted to usury but encompasses interest as
well. The Quran is clear about the prohibition of Riba, which is sometimes
defined as excessive interest. "O You who believe! Fear Allah and give up
that remains of your demand for usury, if you are indeed believers." Muslim
scholars have accepted the word Riba to mean any fixed or guaranteed
interest payment on cash advances or on deposits. Several Quranic passages
expressly admonish the faithful to shun interest.
In general, the principles of Islamic banking are:

A. Al Zakat (the 4th pillar of Islam). One of the most important principles
of Islam is that all things belong to God, and that wealth is therefore held by
human beings in trust. The word zakat means both 'purification' and
'growth'. Our possessions are purified by setting aside a proportion for those
in need.
B. The prohibition of taking interest rates (Al Riba).Within the Islamic
scholars, there are two interpretations on what Riba means:
- A modernist view, according which reasonable interest rates are allowed
- A conservative view, which states that any kind of fixed interest is wrong
C. the prohibition of unproductive speculation or unearned income as well
as gambling
D. freedom from excessive uncertainty
E. the prohibition of debt arrangements - most Islamic economic institutions
advise participatory arrangements between capital and labor. The latter rule
reflects the Islamic norm that the borrower must not bear all the cost of a
failure, as "it is Allah who determines that failure, and intends that it fall on
all those involved."
While the banning of interest is rooted in Muslim theology, proponents of
Islamic finance provide strong motivations to support the ban of interest
rate. First of all, in an Islamic profit sharing contract the return on capital
will depend on productivity and the allocation of funds will be primarily
based on the soundness of the project, improving the capital allocation
efficiency. Second, the Islamic profit sharing system will ensure more
equitable distribution of wealth and the creation of additional wealth to its
owners.
Third, the profit sharing regime may increase the volume of investments and
hence create more jobs. The interest regime accepts only those projects
whose expected returns are higher than the cost of debt, and therefore filter
out projects which could be acceptable under the Islamic profit sharing
system
(Zahier, Hassan).

The Islamic financing contracts

Since Islamic Banking can be rather complex, Sharia principles are governed
by Islamic
experts or ‘Ulama’. It is always essential to obtain the approval of the Sharia
advisor of
the bank on the forms of the financing contracts, in order to ensure their
compliance
with the principles of Islamic Sharia. These contracts in fact are exposed to
high risks
and arise a problem of moral hazard. In fact, they require substantial trust
between the
banks and their customers in terms of honesty, integrity, management and
business
skills. Equally problematic is the aspect of monitoring and supervision.
Given the fact
that both mudharabah and musharakah are equity financing in character,
collateral is not
a prerequisite12.
Tarek S. Zaher and M. Kabir Hassan (2001) define five basic Islamic
financing
contracts:
- Murabaha (Financing Resale of Goods)
- Ijara and Ijara wa-Iqtina (Lease financing)
- Istinsa
- Mudaraba (or Modaraba – participation financing)
- Musharaka

A. Murabaha
This constitutes one of the most well known Islamic products, consisting in
“a cost-plus profit financing transaction in which a tangible asset is
purchased by an Islamic institution at the request of its customer from a
supplier. The Islamic institution then sells the asset to its customer on a
deferred sale basis with a mark up reflecting the institution’s profit”

B. Ijara and Ijara wa-Iqtina

These concepts are very close to the Western idea of leasing. In the first case
the financial institution leases an asset to its customer agreeing on lease
payments for a certain period of time but excluding the option of ownership
for the client.
In the second case, the client has the option ownership by buying the asset
from the financial institution.
“The conditions governing both types of leasing are that assets must have a
long/secure productive life, and must not be handled in an un-Islamic way,
meaning that the lease payments must be agreed on in advance to avoid any
speculation”

C. Istinsa
“Istinsa is a pre-delivery financing and leasing structured mode that is used
mostly to finance long term large scale facilities involving, for example, the
construction of a power plant”
D. Mudaraba
“Mudaraba is a trust based financing agreement whereby an investor
(Islamic bank) entrusts capital to an agent (Mudarib) for a project. Profits are
based on a pre-arranged and agreed on a ratio. This agreement is akin to the
Western style limited partnership, with one party contributing capital while
the other runs the business and profit is distributed based on a negotiated
percentage of ownership. In case of a loss, the bank earns no return or
negative return on its investment and the agent receives no compensation for
his (her) effort”

In this kind of contract, all the financial responsibilities rely on the business
itself: the financial institution invests on an idea, a project and shares its fate.

From the perspective of financial services, Modaraba falls under three

categories:
1. Demand Deposits:
These deposits are not restricted, payable on demand and do not share in any
profits.

2. Mutual Investment Deposits:

An Islamic Bank will combine these deposits with the Bank’s money in
order to participate in mutual investment transactions conducted by the
bank. Under these deposits, the percentage of profit is fixed at the end of the
bank’s financial year.

3. Special Investment Deposits:

An Islamic Bank will invest these deposits in a specific project or
investment upon the request or the approval of the depositor.
The depositor in this case will be entitled to receive profit and is liable for
the losses, provided that the bank is not negligent or in default. At the end of
the deposit period, the bank receives its share of profit against its
contribution of experience and management, while the depositor receives his
share of profit as a capital share contributor

4. Musharaka

This contract is very similar to a joint venture with participation financing.

“Two parties provide capital for a project which both may manage. Profits
are shared in pre-agreed ratios but losses are borne in proportion to equity
participation”18. The peculiar aspect of this contract is not the sharing the
profit and losses, but sharing the management and the decision taking
process.
ISLAMIC MICROFINANCE
Islamic convictions on the responsibility go well beyond mere profitability
goals and coincide with the renewed perception on business recently at stake
within the most advanced sectors of western business and civil societies. Far
from the limits imposed by neo-classical thought, this new wave implies
new sorts of responsibilities on behalf of the company falling under the
rubric of corporate social responsibility (Ferro, 2005).
As its ultimate goal is the maximization of social benefits as opposed to
profit maximization, through the creation of healthier financial institutions
that can provide effective financial services also as grass roots levels, some
authors (Al Harran, 1996) argue that Islamic finance, if inserted in a new
paradigm, could be a viable alternative to the socio – economic crisis lived
by the Western paradigm.
As stated before, a relatively few studies and a few experiences on the field
are concentrated on Islamic microfinance.
Between the most complete researches on the topic, Dhumale and Sapcanin
(1999) drafted a technical note in which they tried to analyze how to
combine Islamic banking with microfinance. They took into consideration
the three main instruments of Islamic finance trying to use them as tools to
design a successful microfinance program.

1. A Mudaraba model:
The microfinance program and the microenterprise are partners, with the
program investing money and the microenterpreneur investing in labor. The
microenterpreneur is rewarded for his/her work and shares the profit while
the program only shares the profit. Of course the model presents a series of
difficulties, given most of all by the fact that microentrepreneurs usually do
not keep accurate accountability which makes it more difficult to establish
the exact share of profit. As stated before the, these models are complicated
to understand, manage and handle which implies that those who are involved
need specific training on the issues. For this reason, and for an easier
management of the profit sharing scheme, the mudaraba model might be
more straightforward for businesses with a longer profit cycle.

2. A Murabaha model:
Under such contract, the microfinance program buys goods and resells them
to the microenterprises for the cost of the goods plus a markup for
administrative costs. The borrower often pays for the goods in equal
installments, and the microfinance program owns the goods until the last
installment is paid.
Range, in his paper (2004), underlines how the prohibition of Riba in
Islamic finance does not constitute an obstacle in building sound
microfinance products; on the contrary, the side effects of an Islamic
foundation could probably enhance it. These effects are: the high rate of
return (compared to a fixed interest rate), the holistic approach in supporting
businesses and productive activities, a more effective mobilization of excess
resources, a fairer society.
Prudential Regulations for MFBs
Definitions
• “Documents” include vouchers, bills,
promissory notes, bills of exchange, securities
for advances, claims by or against the MFB and
other record supporting entries in the books of
the MFB;
• “Approved Securities” shall mean registered
Pakistan rupee obligation of Federal Government
including but not restricted to Pakistan
Investment Bonds (PIBs), and Market Treasury
Bills (MTBs)
• “Equity” means and includes Paid-up Capital,
Share Premium, General Reserves and un-
appropriated profits of the MFB
• “Exposure” means Microfinance facilities
provided by the MFB including both fund based
and non-fund based
• “MFBs” shall mean companies incorporated in
Pakistan and licensed by the State Bank as
Microfinance Banks to mobilize deposits from the
public for the purpose of providing Microfinance
services
• “Deposit” means the deposit of money,
repayable on demand or otherwise, accepted by
an MFB from the public for the purpose of
providing Microfinance services;
• “Poor person” means person who has meagre
means of subsistence and whose total income
during a year is less than Rs. 150,000/-
• “Records” includes ledgers, daybooks, cash
books, supporting documents and all other
manual or magnetic/electronic records used in
the business of the
• “Contingent Liabilities” means and includes
inland letters of credit, letters of guarantee, bid
bonds / performance bonds, and advance
payment guarantees
Minimum Capital Requirement
(1) No microfinance institution shall operate unless it
has a paid up capital of not less than,-

(a) One hundred million rupees or such higher

amounts, as may be prescribed from time to time,
for microfinance institutions to whom a license to
operate in a specified district is issued.

(b) two hundred and fifty million rupees or such

higher amount as may be prescribed from time to
time, for microfinance institutions to whom a
license to operate in a specified province is issued

(c) five hundred million rupees or such higher amount

as may be prescribed from time to time,
microfinance institutions to whom a license to
operate nationally is issued.

(2) Not less than fifty-one per cent of the paid up

capital of a microfinance institution shall be subscribed
by the promoters or sponsor members and the shares
 subscribed to by the promoters or sponsor members
shall remain in the custody of State Bank and shall
neither be transferable nor encumbrance of any kind
shall be created thereon without prior permission, in
writing, of the State Bank.

It shall also maintain capital equivalent to at least 15% of its

risk-weighted assets.

Exposure against Contingent Liabilities

The Contingent liabilities of the MFB for the first three years
of its operations shall not exceed three times of its equity
and there after shall not exceed 5 times of the MFB’s equity.

Maintenance of Cash Reserve & Liquidity

(a) The MFB shall maintain a cash reserve equivalent to not
less than 5% of its Time and Demand Liabilities in a current
account opened with the State Bank or its agent
(b) In addition to cash reserve it shall also maintain liquidity
equivalent to at least 10% of its time and demand liabilities
in the form of liquid assets i.e. cash, gold and unencumbered
approved securities.

Statutory Reserve

The MFB shall create a reserve fund to which shall be

credited:
(a) an amount equal to at least 20% of its annual profits
after taxes till such time the reserve fund equals the paid-up
capital of the MFB.
(b) thereafter a sum not less than 5% of its annual profit
after taxes

Maximum Loan Size, and Disclosure of Basic

Terms & Conditions of Financial Products.
The MFB shall not extend loans exceeding Rs.150,000/- to a
single borrower. However at least 80% of loan portfolio
amount of an MFB should be within the loan limit of Rs.
100,000/- or below. The MFB shall ensure that the loan
amount commensurate with the business requirements and
repaying capacity of the borrower. The MFB shall also ensure
that the loans equivalent to the maximum limit are extended
only to those borrowers who have established track record of
satisfactory repayment. The MFB shall formulate well-
defined credit policy covering interalia maximum lending
limits, basis for loan pricing, repayment period, Collaterals.
Maximum Exposure of a borrower from MFBs /
MFIs / Other Financial Institutions
/ NGOs
The MFB shall ensure that total exposure of its clients from
banks / MFIs / MFBs / Other
Financial Institutions / NGOs etc. does not exceed
Rs.150,000/- in aggregate. For this purpose, they will obtain
a certificate from the clients regarding borrowings from
banks and other MFIs/MFBs/NGOs

Loans & Advances

The outstanding principal of the loans and advances,
payments against which are overdue for 30 days or more
shall be classified as Non- Performing Loans (NPLs). The
unrealized interest / profit / mark-up / service charges on
NPLs shall be suspended and credited to interest suspense
account. Further the NPLs shall be divided into following
categories
i. Substandard: loans in arrears (payments/installments
overdue) for 30 days or more but less than 90 days
ii. Doubtful: loans in arrears (payments/installments
overdue) for 90 days or more but less than 180 days
iii. Loss: loans in arrears (payments/installments overdue)
for 180 days or more
MFBs shall maintain a Watch List of all accounts delinquent
by 5 – 29 days. However, such accounts may not be treated
as NPL for the purpose of Classification / Provisioning.
Provisioning Requirements

i. General Provision: The MFB shall maintain a General

Provision equivalent to 1.5% of the net outstanding
advances (advances net of specific provisions).
ii. Specific Provisions: In addition to the general provision,
the MFB shall make specific provisions against NPLs at the
following rates:
a Substandard: 25% of outstanding principal net of
cash collaterals
b Doubtful: 50% of outstanding principal net of cash
collaterals
c Loss : 100% of outstanding principal net of cash
collaterals.

Credit Rating

The MFBs shall get themselves rated by any of the rating

agencies on the panel of State Bank of Pakistan or any
international microfinance rating agency with prior approval
of SBP, within three years of grant of license by State Bank
of Pakistan to operate as MFB or within one year of
commencement of deposit mobilization services which ever
is earlier.
The rating shall be an ongoing process and updated on a
continuous basis from year to year within four months of the
close of financial year after the first rating as stated in the
first paragraph. The rating report shall be submitted to State
Bank of Pakistan within 7 days of notification of the latest
rating. The rating shall also be disclosed to the public within
15 days of the notification of the latest rating by the rating
agency.

Functions and powers of MFBs

(1) A microfinance institution shall, in accordance with
prudential regulations and subject to the terms and
conditions of the license issued by the State bank,
render assistance to micro-enterprises and provide
microfinance services in a sustainable manner to
poor persons, preferably poor women, with a view to
alleviating poverty.

(2) Without prejudice to the generality of the foregoing

provisions, the powers and functions of microfinance
institutions shall be:-

(a) to provide financing facilities, with or without

collateralsecurity, in cash or in kind, for such
terms and subject tonsuch conditions as may be
prescribed, to poor persons for
all types of economic activities including housing,
but excluding business in foreign exchange
transactions;
(b) to accept deposits;
(c) to accept pledges, mortgages, hypothecations
or assignments to it of any kind of movable or
immovable property for the purpose of securing
loans and advances made by it;
(e) to buy, sell and supply on credit to poor
persons industrial and agricultural inputs,
livestock, machinery and industrial raw materials,
and to act as agent for any Organization for the
sale of such goods or livestock;
(f) to invest in shares of any body corporate, the
objective of which is to provide microfinance
services to poor persons;
(i) to provide professional advice to poor persons
regarding investments in small business and such
cottage industries as may be prescribed;
(p) to pay, receive, collect and remit money and
securities within the country;
 (s) to invest its surplus funds in Government
securities;
(t) to impose and receive fees, charges, profits or
return for its services;
(v) to undertake mobile banking to expedite
transactions and reduce costs;
(x) to receive grants from the government and
any other sources permitted by the State Bank

Restriction on certain types of transactions

The MFB shall not:
(a) allow any facility for speculative purposes;
(b) allow financing facilities and other Microfinance Services
to any of its sponsors,
directors or employees including their spouses, parents, and
children. The rule
shall not apply on loans given to employees under staff loan
policy of the MFB;
(c) without the prior approval in writing of the State Bank,
enter into leasing, renting
and sale / purchase of any kind with its directors, officers,
employees or persons who either individually or in concert
with their family members, beneficially own 5% or more of
the equity of the MFB;
(d) hold, deal or trade in real estate except for use of MFB
itself.