Microfinance is as a financial system conceived
to provide poor families with very small loans
(microcredit) to help members begin or sustain
income-generating activities. It refers to a sustainable
lending model that targets the poor. Microcredit
gained prominence in the 1970s, through the efforts
of Mohammad Yunus, a microfinance pioneer and
founder of the Grameen Bank of Bangladesh. In
2006, Prof. Yunus and Grameen Bank were awarded
a Nobel Peace prize “for their efforts to
create economic and social development from below.”
The definition of microfinance has broadened,
and includes savings, insurance, and money transfer
vehicles.
Microcredit has largely been directed by the non-profit
sector, but there are a growing number of ‘for-profit’
MFIs like Ujjivan in India. For profit microfinance
institutions are referred to as Non-Banking Financial
Companies and are regulated by the RBI.
Microfinance plays an important role in fighting
poverty. Microfinance increases household income,
which leads to ancillary benefits: increased food
security, the building of assets, and an increased
likelihood of educating one’s children.
Microfinance is also a means for self-empowerment.
It enables the poor, especially women, to become
economic agents of change - they increase income,
become business-owners and reduce their vulnerability
to external shocks (illness, weather, etc)
A microfinance institution is an organization
that offers financial services to low income populations.
The primary activity of most MFI’s is micro-credit,
however many also offer other services like insurance,
deposit, etc. Various types of institutions offer
microfinance: NBFCs, NGOs, SHGs, cooperatives,
private commercial banks and sectors of government
banks.
Some NGOs offer microcredit as one slice amongst
a host of non-financial development activities.
Ujjivan mainly focuses on loan disbursement but
also provides microfinance plus services like
healthcare through its partner Parinaam Foundation.
Providing financial services to poor people is
expensive. This cost is one of the most important
reasons why banks don't make small loans. The
cost of servicing a Rs. 6000 loan is the same
as servicing a Rs. 1,00,000 loan.
Microfinance is a business that works on the principle
of high customer contact. The process of setting
up operations to provide access to credit in an
area is an intense process. First Ujjivan CRS
must perform area surveys to assess the viability
of an area, this is followed by projection meetings
to evaluate potential interest. The projection
meetings are followed by training of members on
credit discipline, group formation. After centers
are set up, the CRS has to travel on a weekly
basis from center to center to collect repayment
and disburse loans. The CRS also meet with customers
on non-repayment or disbursement weeks to keep
the group in contact and to maintain the cohesiveness
which is vital to the group guarantee principle.
All this leads to high personnel and administration
costs.
In addition, we must borrow from commercial sources
to lend to our members. This cost of lending is
anywhere from 10-12%. Added to this cost are the
high personnel/administration costs, loss of repayment
percentage and a sustainable profitability margin.
However, it is the lowest possible interest we
can charge to cover our costs.
Microcredit is best-suited to those with entrepreneurial
capability and opportunity. This translates to
economically active poor who can undertake activities
that generate stable incomes.
However, the poorest are unable to qualify for
microcredit under the current structure. The main
reason is that extremely poor people (destitute
and homeless) lack a stable income. Without a
stable income, it is difficult to make the weekly/monthly
repayments that microcredit requires.
Programs have been developed to address the needs
of the poorest of the poor. At Ujjivan, we are
developing an Urban Poorest program that is a
grant based program for the poorest. The program
aims to help its members develop a steady source
of income and break the cycle of extreme poverty.
Microfinance has gained popularity in recent years
for multiple reasons. Firstly it is a much better
alternative than the informal financial sector
(mainly moneylenders or pawn brokers). In India,
moneylenders charge rates of 36-120% annually.
MFIs are a source of constant cheap credit for
the poor and customers realize this. Secondly,
MFIs like Ujjivan provide microfinance plus services
like insurance, health camps which address vital
needs of customers and helps increase their productivity.
Also, as MFIs mainly focus on women, this helps
empower them. This access to finance allows women
to increase income, which benefits the entire
household.
Social development studies have demonstrated that
women are better borrowers in terms of repayment
and utilization. They are much more likely to
reinvest income into the household, for the benefit
of the entire family.
Ujjivan is a Non-Banking Financial Company (NBFC),
and is therefore regulated by the Reserve Bank
of India (RBI). RBI regulations do not allow NBFCs
to hold savings deposits.
Microfinance is a growing field as economies become
more complex and wealth disparities become more
acute. Depending on your interest and availability
you can participate in this growing industry as
a worker or as a donor. For more information see
our Get Involved section.
• Microfinance Gateway www.microfinancegateway.com
• Consultative Group to Assist the Poor
(CGAP)
• Unitus
• Grameen Bank
• National Bank for Agriculture and Rural
Development (NABARD) http://www.nabard.org
• Sa Dhan: Association of Community Development
Finance Institutions http://www.sa-dhan.org
• South Asian Microfinance Portal http://www.microfinancesouthasia.net
• Microfinance Information eXchange (MIX)
http://www.themix.org
• World Bank http://www.worldbank.org
• Microfinance.com http://www.microfinance.com
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