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MICRO FINANCE

by SBI
What is Microfinance?

Microfinance is the provision of a broad


range of financial services such as
deposits
loans
payment services
money transfers
insurance to poor and low-income
households and their micro enterprises
Micro finance
An effective poverty reduction
strategy
Microfinance consists of making small
loans to individuals, usually women.
Microfinance, the Grameen way, includes
several support systems that contribute
greatly to its success
An equally important part of microfinance
is the recycling of funds
Three Types of Sources of
Microfinance
formal institutions - i.e. rural banks and
cooperatives

semiformal institutions - i.e.


nongovernmental organizations

informal sources - i.e. money lenders and


shopkeepers
Approaches to mFinance
 The poverty approach
Targets very poor clients who are very costly to
serve. Like relief efforts, it measures success by
how well it fulfills the needs of the poorest in the
short term.
The self-sustainability approach
Targets less-poor clients on the fringes of the
Formal financial system. Like development
efforts, it measures success by how well it
expands the frontier of the mainstream economy
in the long term
THE BEGINNING OF MICRO
FINANCE
The idea of microfinance was developed as a
survival strategy for the poor.
Ela Bhatt established the Self-Employed
Women's Association (SEWA) in India in 1974.
Ela Bhatt's first loan was $1.50 to a woman who
sold herbs
In 1976 Mohammed Yunus founded the
Grameen Bank project in Bangladash.
Mohammed Yunus' initial outlay was a total of
$27 to forty-two poor people.
Microfinance Models
 MFI around the world follow a variety of
different methodologies for the provision of
financial services to low-income families.
 The focus of such services is on women,
based on the observation that in financial
matters, they are more responsible than
men particularly since their mobility is
restricted by family responsibilities.
Self-help Group (SHG)
The SHG is the dominant microfinance
methodology in India.

The operations of 15-25 member SHGs are


based on the principle that savings precede
borrowing by the members .

. In many SHG programmes, the volume of


individual borrowing is determined either by the
volume of member savings or the savings of the
group as a whole.
Individual Banking Programmes
IBPs entail the provision of financial services to
individual clients – though they may sometimes
be organized into joint liability groups, credit and
savings.
The model is increasingly popular for
microfinance particularly through cooperatives.
Creditworthiness and loan security are a function
of cooperative membership within which
member savings and peer pressure are
assumed to be a key factor
Grameen Model
This model was initially promoted by the well
known Grameen Bank of Bangladesh.
These undertake individual lending but all
borrowers are members of 5-member joint
liability groups which, in turn, get together with 7-
10 other such groups from the same village or
neighborhood to form a centre
. Savings are a compulsory component of the
loan repayment schedule but do not determine
the magnitude or timing of the loan.
Common Characteristics of
Microfinance Models
Attendance of regular weekly (fortnightly or
monthly) meetings of her group.

Training in ‘loan utilization’ or participation in


discussions of developmentally relevant issues
such as social discrimination, gender
awareness, health, sanitation and education

Repayment of fixed amounts as instalments on


any loan she obtains from the MFI or from her
group.
The Benefits of Microfinance
Continued access to funding to low
income clients
Fast and easy procedure
Accompanying non financial services
Direct contact with clients
Product tailored to clients needs
The Negative aspects of
Microfinance
Maintaining a sustainable small loans
program is costly, and the high interest
rates take their toll on borrowers,
Business training and support is important
so that loans can be effectively used.
Running a business has added to their
workload and changed their role in the
family, sometimes putting a strain on their
marriage
Thank u

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