pg.

1

CHAPTER 1 :INTRODUCTION OF MICROFINANCE

Microfinance is a source of financial services for entrepreneurs and small
businesses lacking access to banking and related services. The two main mechanisms for
the delivery of financial services to such clients are: (1) relationship-based banking for
individual entrepreneurs and small businesses; and (2) group-based models, where
several entrepreneurs come together to apply for loans and other services as a group.
For some, microfinance 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." Many of those who promote microfinance generally believe that such
access will help poor people out of poverty, including participants in the Microcredit
Summit Campaign. For others, microfinance is a way to promote economic development,
employment and growth through the support of micro-entrepreneurs and small
businesses.
Microfinance is a broad category of services, which includes microcredit.
Microcredit is provision of credit services to poor clients. Microcredit is one of the
aspects of microfinance and the two are often confused. Critics may attack microcredit
while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the
broad range of microfinance services, it is difficult to assess impact, and very few studies
have tried to assess its full impact.
[2]
Proponents often claim that microfinance lifts
people out of poverty, but the evidence is mixed. What it does do, however, is to
enhance financial inclusion.
1.1 Origin of micro finance
Mainly after 1970s, some personal attempt had been made to build microfinance
institution, like ACCION, Grameen bank etc. Before that, several institutions had been
working in many countries but the effect was too small.
pg. 2

In the later 1970s the concept of micro finance had evolved. Although, micro finance has
a long history from the beginning of the 20
th
century here, had been established by a law
student of Latin America to help the poor people residing in the rural and urban areas of
the Latin American countries. Today, in 2008, it is one of the most important
microfinance institutions of the world. Its network of lending partner comprises not only
Latin America but also US and Africa.
The inception and growth of micro finance and the micro finance institution in
India, can be traced back to 1972, when in Ahmadabad district of Gujarat, a self
motivated group of women entrepreneurs started a movement for economic independence
by setting up an organisation called SEWA (Self Employed Womens Association).
During the early and mid 1990s various credit institutions had been formed in
Europe by some organised poor people from both the rural and urban areas. These
institutions were named credit Unions, peoples bank etc. The main aims of these
institutions were to provide easy access to credit to the poor people who were neglected
by the big financial institutions and banks.
1.2 History of microfinance
The history of micro financing can be traced back as long to the middle of the
1800s when the theorist Lysander Spooner was writing over the benefits from small
credits to entrepreneurs and farmers as a way getting the people out of poverty. But it was
at the end of World War II with the Marshall plan the concept had an big impact.
The today use of the expression micro financing has it roots in the 1970s when
organizations, such as Grameen Bank of Bangladesh with the microfinance pioneer
Mohammad Yunus, where starting and shaping the modern industry of microfinancing.
Another pioneer in this sector is Akhtar Hameed Khan. At that time a new wave of
microfinance initiatives introduced many new innovations into the sector. Many
pioneering enterprises began experimenting with loaning to the underserved people. The
main reason why microfinance is dated to the 1970s is that the programs could show that
people can be relied on to repay their loans and that its possible to provide financial
pg. 3

services to poor people through marketbased enterprises without subsidy. Shorebank was
the first microfinance and community development bank founded 1974 in Chicago .
The year 2005 was proclaimed as the International year of Microcredit by The
Economic and Social Council of the United Nations in a call for the financial and
building sector to fuel the strong entrepreneurial spirit of the poor people around the
world.
The International year of Microcredit consists of five goals:
Assess and promote the contribution of microfinance to the MFIs
Make microfinance more visible for public awareness und understanding as a very
important part of the development situation
The promotion should be inclusive the financial sector
Make a supporting system for sustainable access to financial services
Support strategic partnerships by encouraging new partnerships and innovation to build
and expand the outreach and success of microfinance for all
The economics professor Mohammad Yunus and the founder of Grameen Bank were
awarded the Nobel Prize 2006 for his efforts. The press release from nobelprize.org
states:
1.3 Objectives of Microfinance:
Transform the lives of the under-privileged from chronic poverty by creating jobs,
stimulating small business, and strengthening communities.
Use group dynamics to inculcate spirit of self-support for each others efforts for
economics self-advancement.
Provide sustainable access for the poor and deprived to financial services.
pg. 4

Encourage innovation and new partnership by promoting and supporting strategic
partnerships to build and expand the outreach.
Channelizing the skills of those deprived from opportunities due to lack of
financial access, by encouraging them to build their own small business.
To provide alternative opportunity to under-served masses, ineligible for
traditional loans.
Save people from exploitation of loan sharks providing loans at exorbitant rates of
interest.
1.4 Features of microfinance:
Microfinance involves loans without collateral security; it enables the poor and
small entrepreneur to access to finance and financial services.
Microfinance is useful tool in building the capacity of the poor in management of
sustainable self employment opportunities.
It empowers the vulnerable sections of the society especially the women.
The transaction cost of banks and other financial institutions can be lowered
significantly.
It is relevant that microcredit helps borrowers to overcome the poverty by
improving their financial and economic position.
Increase in savings reduces the dependence on external sources of funds and helps
in continuity and sustainability.
Create awareness regarding health care, sanitation, family planning, insurance,
literacy, energy conservation, management of common resources etc.
Loans for income generation through market-based self employment empowering
poor and women especially.
Enabling the rural poor to participate, in planning and deciding their own destiny.
pg. 5

1.5 Principles of Micro Finance:
Poor people borrow from informal moneylenders and save with informal
collectors. They receive loans and grants from charities. They buy insurance from state-
owned companies. They receive funds transfers through formal or
informal remittance networks. It is not easy to distinguish microfinance from similar
activities. It could be claimed that a government that orders state banks to open deposit
accounts for poor consumers, or a moneylender that engages in usury, or a charity that
runs a heifer pool are engaged in microfinance. Ensuring financial services to poor people
is best done by expanding the number of financial institutions available to them, as well
as by strengthening the capacity of those institutions. In recent years there has also been
increasing emphasis on expanding the diversity of institutions, since different institutions
serve different needs.
Some principles that summarize a century and a half of development practice
were encapsulated in 2004 by CGAP and endorsed by the Group of Eightleaders at the
G8 Summit on June 10, 2004.
Poor people need not just loans but also savings, insurance and money
transfer services.
Microfinance must be useful to poor households: helping them raise income, build
up assets and/or cushion themselves against external shocks.
"Microfinance can pay for itself."
[18]
Subsidies from donors and government are
scarce and uncertain and so, to reach large numbers of poor people, microfinance
must pay for itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor people into a
country's mainstream financial system.
"The job of government is to enable financial services, not to provide them."
"Donor funds should complement private capital, not compete with it."
pg. 6

"The key bottleneck is the shortage of strong institutions and managers." Donors
should focus on capacity building.
1.6 Effects of microfinance
Comprehensive impact studies have demonstrated that:
Microfinance helps very poor households meet basic needs and protect against
risks;
The use of financial services by low-income households is associated with
improvements in households economic welfare and enterprise stability or growth;
By supporting womens economic participation, microfinance helps to empower
women, thus promoting gender-equity and improving household well-being;
For almost all significant impacts, the magnitude of impact is positively related to
the length of time that clients have been in the programme.
Poor people, with access to savings, credit, insurance, and other financial services
are more resilient and better able to cope with the everyday crises they face. Even
the most rigorous econometric studies have proven that microfinance can smooth
consumption levels and significantly reduce the need to sell assets to meet basic
needs. With access to micro insurance, poor people can cope with sudden
increased expenses associated with death, serious illness, and loss of assets.
1.7 Microfinance products
Offering financial services to poor people in developing countries is expensive
business. The cost is one of the biggest reasons why traditional banks dont make small
loans, the resources requierd for a 50$ loan is the same as for a 1000$ loan.
MFIs also have big personnel and administration costs. Field staff managers must
perform village surveys before entering a village, conduct interviews with potential
borrowers, educate the borrowers in credit discipline, travel to the villages every week to
collect interest and distribute loans and control that the loans are being used for the given
purpose.
pg. 7

In the microfinance sector theres other services expanding as well. The poor need,
like all of us, a secure place to save their money and access to insurance for their homes,
businesses and health. Microfinance institutions are now innovating new products to help
meet these needs, empowering the worlds poor to improve their own lives. Products
common used in the microfinance sector today is:
Micro savings:
A possibility to save money without no minimum balance. Allows people to retain
money for future use or for unexepected costs. In SHGs the members save small amounts
of money, as little as a few rupees a month in a group fund. Members may borrow from
the group fund for a variety of purposes ranging from household emergencies to school
fees. As SHGs prove capable of managing their funds well, they may borrow from a local
bank to invest in small business or farm activities. Banks typically lend up to four rupees
for every rupee in the group fund;
Micro insurance:
Gives the entrepreneurs the chance to focus more on their corebusiness which
drastically reduces the risk affecting their property, health or workingpossibilities. The is
different types of insurance services like life insurance, property insurance, healt
insurance and disability insurance. The spectrum of services in this sphere is constantly
expanded, as schemes and terms of providing insurance services are determined by each
company individually;
Micro leasing:
For entrepreneurs or small businesses who cant afford buy at full cost they can
instead lease equipment, agricultural machinery or vehicles. Often no limitations of
minimum cost of the leased object.

pg. 8

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.
1.8 Use of Finance in Different Fields:
POVERTY:
Microfinance has emerged as one of the most effective instruments of fighting
poverty. The Kushali Bank, which is now entering third year of its operations, has opened
branches in 35 districts. So far it has disbursed RS.1.3 billion to about 75,000 poor
borrowers. Branches of Khushali Bank will be opened in all the districts of the country.
Pakistan poverty Alleviation Fund (PPAF), which was set-up to provide wholesale credit
to microfinance institutions, including NGOs, has significantly, increased overall lending.
So far it has provided loans of about rs.860 million for on lending to beneficiaries
through various NGOs in all parts of the Pakistan.
FINANCIAL DEVELOPMENT AND POVERTY ALLEVIATION
A central aspect of this programme is the development and transformation of the
financial sector. Financial sector development is critical because access to financial
services is an important factor in the vulnerability to extreme poverty.
pg. 9

A large amount of research and practice has shown that the permanent deepening of
financial markets to provide access to the poor can achieve the following outcomes:
Economic growth and job creation can be stimulated, as small business
development and access to housing finance generates new cycles of accumulation
and contributes to higher levels of effective demand.
Poverty can be reduced, as access to finance, in the form of savings and credit in
the hands of the poor, can enable them to build assets; while these and other
services, such as insurance, can play a vital role in smoothing the income of the
poor, and so reducing their vulnerability to financial and economic shocks.
These factors are key in building viable communities and contributing to the
sustainable livelihood strategies of poor households.

1.9 Challenges and Opportunities of Micro Financing:
The government has indicated its willingness to speed up the pace of structural
reforms to meet the major challenges of micro financing-
Reducing Poverty:
The basic motto of the government to eliminate the poverty and bring prosperity
in country. MFI providing small loans and other credit facilities to the poor and
low-income groups; which are beginning positive changing like their standard of
living group and earning have increased.
Improving Social Indicators:
Inadequate access to productive resources and social services has resulted low
social indicators and low employment opportunities. This situation is
compounded in rural areas; where access is more difficult. So, by providing small
loans and credit facilities they can overcome this issue and can improve social
indicators.


pg. 10

Improving The Fiscal Balance Of Payment Position:
Pakistan is a poor country whose balance of payment always in deficit, because
of low productivity, lack of resources and lack of productive mens power. If MFI
provide loans new business can be established. And exports that can be improved
which create balance of payment.

Restoring Investor Confidence:
Due to economy investors are hesitating to invest their money but MFIs can
boost up. Because provide loans to local people new business will stable.
Economy will go up and this situation may motivate to them for investing their
funds
Achieving higher growth on a sustainable basis:
Another objective of MFI is that to achieve high development and bring
innovation in the economy, which improve GDP of the country and give
sustained to the economy.














pg. 11

Chapter 2 : Introduction of Micro Finance Institutions
2.1 Micro Financial Institutions
Poverty is the main cause of concern in improving the economic status of
developing countries. 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.
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
pg. 12

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.
pg. 13

A microfinance institution (MFI) is an organisation that provides microfinance
services, ranging from small non-profit organisations to large commercial banks.
FORMAL INSTITUTIONS
1. Khushali Bank
2. The First Micro Finance Bank Ltd
3. Network Micro Finance Bank
1. Khushali bank
Khushali Bank is the countrys first initiative to bridge the demand for
microfinance services. Integral to microfinance services is the intensive and sustained
social support for mobilization, management and development of all clients of the bank
and their access to basic infrastructure services.
As a for-profit, commercial microfinance institution, our purpose is to:
Establish a sustainable, scalable pro-poor financial services platform with retail
delivery capacity to reach 600,000 poor households by the 2006.
Catalyze an enabling environment, with which the microfinance sector can
develop in Pakistan.
Assist the central bank in setting up an appropriate and responsive regulatory
framework within which microfinance institutions can operate on sustainable
grounds, thereby expanding outreach to the poor.
Promote tranperancy, financial rigor and good governance as leading indicators of
excellence within the microfinance sector.

2. The First Micro Finance Bank Ltd.
Almost 60-70% of the population in Pakistan is deprived of financial services
with the majority of them being poor. The management of FMFB believes that this large
pg. 14

segment of the population is very much bankable and access to microfinance services can
bring substantial positive change in their lives.
FMFB is looking ahead to cover as many of this poor segment of the population
through its microfinance services with a major focus on women the service which are
being provided by this bank are:
Microfinance Intermediation - Loan products, Saving products, Micro Insurance
Products and other Financial Services;
Social Intermediation - Group formation for building human and social capital
for sustainable financial intermediation;
Enterprise Development Services - Non-financial services that assist micro
entrepreneurs;
Social Services Non financial services that focus on wellbeing of micro
entrepreneurs. This includes health, nutrition, education and literacy training.
3. Network Micro Finance Bank
The MFN has played an important role in helping the industry develop and
improve upon key issues in microfinance. This special group of institutions is committed
to transparency in their operations, thus advancing the standards of performance in
microfinance. Through their vision an drive to provide the best services possible to the
working poor, the members of the Microfinance Network are playing a fundamental role
in revolutionizing the process of poverty alleviation. By providing microfinance
practitioners and institutions with a forum for information exchange to take place.
2.2 Fundamentals of micro financing
The managers at the MFIs are careful to ensure the borrower success and informs about
the risks involved, that makes in general the borrower performing better. This leads often
to earned dignity and lasting self-confidence associated with responsible loan repayment.
To have a sustainable growing economy it takes high entrepreneurship and energy in
order to develop the world and fight poverty. Independet and responsible entrepreneurs
pg. 15

are valuable resources which can take advantage of the microfinance industry. They will
not take big risks and must be supported by predictable financing.
Normal bankoperations suits better to large transactions which is more profitable, the
traditional operating philosophy is to invest in facilities and they have costly operating
structures. The traditional financing industry must either change themselves or stay out of
the microfinance business. A new generation of banking institutions is growing in a
market of very small transactions and less affluent clients. With lowered transactions
costs through institutional specialization and innovation in delivery systems, they will be
able to operate profitable in this market serving the poor with financial services.
The poor entrepreneurs are the future representing the population who will become
successful in the nearby future. They have the same will and skills as the toughest
business operators. The are economical, dont take big risks and repay debts as scheduled
to maintain possibility borrowing money in the future.
This require a totally new ground breaking banking system with scale economics.
Modifying the standard system will simply not be enough, the poor people will continue
stay outside their countrys economy. Building up microfinance institutions serving poor
people is a relatively costeffective use of subsidies for economic development compared
to other supporting strategies for welfare.
2.3 Stages In Microfinance:
Micro-finance programs and their need for funds can be considered in three stages of
their growth. They are;
Start up stage
Scaling up stage and
Sustainable stage
Start up stage
pg. 16

This is stage when one faces the real test of starting everything from scratch;
identifying and organizing the poor, learning the techniques, raising fund, recruiting and
training staff, providing credit, mobilizing saving, avoiding default, setting discipline and
creating a foundation for growth. At this stage, the initial funding may come from the
pocket of the one who is initiating the project, or from other as donation or equity. It may
also come from organizational source like donors, social investor, development
foundations etc.
Scaling up the stage
Scaling up stage may be understood in both narrow and broad senses. In narrow sense it
may initially be the scaling up of branch operations, and the going for institutional
scaling up on branch by branch level. In broad sense it may be scaling up of operations
on fast track approach. Operating a number of branches at a time, recruiting all the staff
at the beginning and developing them as professionals to undertake the challenging task
operating on sustainable basis.
Scaling up of funds may be generated from different sources like equity, grants, savings,
social investors, apex institutions, whole sale funds, foundations, banks and other
sources.
Sustainable stage
A sustainable operation is a precondition for maximizing the outreach and optimizing the
impact on poverty reduction. To operate on a basis, a minimum scale of operation in
terms of outreach, amount of loan outstanding; loan loss reserve, accumulated profits and
saving balance is needed.

2.4 Microfinance Industry Structure

pg. 17




Financial institutions-
Many banks and financial institutions have been pioneering the microfinance program.
They are listed through the MFIs.

Donors-
Donors focused on providing subsidized credit to small and marginal farmers, in hopes of
raising productivity and incomes through the MFIs.
Private Equity-
Highest interest and repayment rates make MFIs profitable. Private equity investments
MFIs are leads to increase in investment flow. Private equity firms have shown particular
interest in investing in MFIs in which they see possibility f good returns.
Microfinance institutions-
Microfinance institutions can broaden their resources base by mobilizing savings,
accessing capital markets, loan funds and effective institutional development support
through SHGs. microfinance institutions could not also serve as intermediaries between
pg. 18

borrowers and the formal sector and on-lend funds backed by a public sector guarantee
MFI around the world follow a variety of different methodologies for the provision of
financial services to low income families
Self Help Groups (SHGs)-
Self Help Groups (SHGs) form the basic constituent unit of the microfinance movement
in India. An SHG is a group of few individuals- usually poor and often women- who pool
their savings into a fund from which they can borrow as when necessary. Such a group is
linked with bank- a rural, cooperative or commercial bank through MFIs- where they
maintain the group account. They provide their service to group of poor people.
2.5 Microfinance Problems- Challenges for Micro Entrepreneurs
Although the important of microfinance in the process of poverty eradication is realized,
it faces multiple problems. Offering financial services to people individual (the definition
of microfinance) is a complex process and that in itself leads to various challenges.
All these challenges divided into two sets; problem faced by micro entrepreneurs (this
article) and problems/challenges faced microfinance providers (another article).
1) The poors inability to offer marketable collateral for loans
Microfinance clients are either very small businesses or poor individuals who
usually have a few assets, non-existent credit histories, and low income levels.
This problem because it means these clients have cannot offer any collateral to
microfinance providers against loans. As a result, microfinance institutes (MFIs)
may either raise their interest rates or turn down hundreds of applications (read
10 determinants of interest rates in microfinance).
2) Lack of knowledge about sources of microfinance services
Many micro entrepreneurs live in far off rural areas, often remote villages,
which is a problem because it means they have no access to microfinance
services offered by MFIs. This issue was also mentioned in the article about
challenges faced by microfinance providers, because has a natural consequence;
loan providers cannot target these potential clients.
pg. 19

3) Shortage of Financial Capital or Misallocation
Under 10 million of the 500 people who run micro and small enterprises have
access to financial support for their business. Data Snapshot, The Virtual Library
on Microcredit.
As a result of the above three problems, a fourth arises for micro entrepreneurs- a
lack of funds, which can be solved if MFIs build up their capital base by
accessing various sources of funds. Without money the micro ventures cannot
grow and take advantage of opportunities. Since, 20% of the worlds population
accounts for 86% of consumption (Global Issues Websites), one can deduce that
the problem isnt related to the shortage, but rather, misallocation of funds.


4) Inability to exploit growth opportunities
The last point is a contributor t this problem, because a lack of access to funds
means micro entrepreneurs cannot inject money into their business (say, to
buymore resources or hire more people) to grow them after observing a surge in
demand. Moreover, the remote location of micro businesses means they have litte
information pertaining to their markets, such as customer needs and competitor
strength and weaknesses and so on. As a result, many critics may find faults with
the idea of microfinance, not realizing that this isnt really a problem, but just a
challenge that can be overcome as the business grows and increase its capital
base.
5) Few organizational resources and poor governance
Micro entrepreneurs have limited skills, qualifications and exposure to
handling businesses, while they need to be trained through capacity building
initiatives by th MFIs, many micro entrepreneurs may not grow as planned
because of these problems. For instance, they may borrow more money than
needed, or mis-allocate it in their business and end up bearing the burden of large
interest payments instead of enjoying the fruits of their business. Again, critics
may say microfinance is an ineffective way of alleviating poverty but this isnt
pg. 20

true. The flip side of this problem is linked to the governance issues faced by
MFIs, which is discussed in the first part of this article.

6) Low bargaining power
In case micro entrepreneurs operate in competitive markets, their individual
bargaining power is diminished when dealing with customers because of their small size.
However, at the other end of spectrum, there still isnt respite because micro
entrepreneurs deal with MFIs on an individual basis, which also erodes their bargaining
power. This isnt really a problem for microfinance, but rather micro entrepreneurs.
2.6 Working Method For Microfinance Institutions:
The Grameen Bank of Bangladesh has developed a joint liability model that its MFIs are
using suited for local conditions.
When choosing a village the MFI conduct a comprehensive survey to brief the potential
for operations and the local conditions in a village. The MFI are evaluating some key
factors like village population, degree of poverty, road accessibility, political stability and
safety. When a village has been selected, the MFI introduces its mission, methodology
and the services they are offering.
After the informational presentation interested women are gathered in group formations.
They have to be in the age between 18 and 59. The women put them self together in
groups of five to serve as guarantors for each other. Earlier experience has shown that a
group of five persons is small enough to create group pressure between the members,
enforcing them to be loyal to each other. In case someone of the group members are not
able to repay the loan the group is big enough to help with the payments. The company
does not influence the selection of group members nor the decision regarding the income
generation activity nor the loan amount they intend to take. Group members must live
close to each other and cannot be related to each other.
pg. 21


If a borrower defaults on her loan, the entire group
typically is penalized and sometimes barred
altogether from taking further loans. This peer
pressure encourages borrowers to be very selective
about their peer group members and to repay loans in
full and on time.

Then the group training begins, usually as a five day program. The purpose is to educate
the members in the procedures of the financial products, delivery methods, calculation of
interest rates, business development skills and how to sign their names. The members are
also taught in quality management, to identify an income generation activity, how to set
prices and how to market. They field staff also build a culture of credit discipline and
collective responsibility. The field staff makes sure the members qualifies for the
program and collect data for future analysis. Within the village, a center is created
collecting the groups. The center is responsible for the payments of all groups, enabling a
dual liability system. When the villagecenter is created the financial transactions can
begin.
The groups meet weekly in the villagecenter where they can discuss new loan
applications, loan utilization, and community issues. The field staff of the MFIs conduct
the meetings with rigid discipline in order to sustain the credit discipline of the group. All
financial transactions are conducted during the meetings.
Microfinance is a relatively new segment of the market economy that is why institutions
created in this segment have short experience in their activities, and their personnel is not
sufficiently experienced and qualified. Taking this into consideration, staff of these
institutes is recommended to follow the internationally recognized principles of
microfinance:
thorough examination of potential clients of the microfinance institution;
thorough estimation of business viability and also factors which can positively or
negatively affect the results of work in specific conditions;
pg. 22

thorough registration of documents and contracts related to loan issuance and
microfinance services providing;
keep in touch with client in combination with monitoring of the terms of paying a
credit, interests payments and with the aim to find out potential and real problems;
setting of interest rates for microfinance services compatible with market ones;
quick reaction to any problems which can complicate the perspectives of getting
of issued credit payed back.

2.7 Using IT and technology to reach scale in Microfinance
A key factor to be more successful in scaling the microfinance industry efficient is to use
the power of IT technologies which already thousands of MFIs recognized. Technology
is essential to reach new people, controlling risks make the business sustainable and more
effective due to the costs. With mobile phones, ATM machines and other new
innovations the possibilities are unlimited to provide financial services more efficient to
poor people. Once improved the technology more unbankable are reached. Despite the
big potential, there are still not enough MFIs reaching scale.


Access to affordable telecommunications simply does not exist for millions in the
developing world. For some, placing a phone call can require traveling over six
pg. 23

miles from their homes. This can mean leaving work and losing out on
desperately needed income. Cut off from easy access to communications, these
communities are at both an enormous economic and social disadvantage
Tool using in MFIs.
Point Of Sale (POS) terminals can be computers, bank card readers or even mobile
phones. Already many MFIS are using those tools to conduct business with their clients.
POS terminals enables money transfers, bank transactions from balance inquiries, bill and
loan payment, cash withdrawal and deposits.


Using POS terminals Is much more cheaper than building brick and mortar
branches everywhere in order to reach the huge demand. Although they need staff
to operate the terminal, its cheaper than staff a bank office. The technology is
already something we can use today, it does not have to be innovated. The mobile
phone is the most used tool today, villages that dont even have a telephone line
now can be reached. Thats why the most applications for microfinance also are
innovated to work together with mobile phones. Solar energy systems are
developed to charge the mobile phones in the villages where they even lack
traditional power grid
pg. 24

ACCION International are using a system called PortaCredit and the Mifa
system innovated by Grameen aiming to make heavybusiness transactions to
clients cost less and be more efficient.
While the client always in the end have to pay for all costs, microfinance need to
bring costs down even though its enabling and empowering with personal contact
with the clients. Their time has to be used effective to improve the process. MFIs
want to provide their financial services to clients with the same quality of
products and services that clients receive from other service providers.
2.8 Micro Financial Institution Grading Scheme:
NABARD in partnership with CRISIL (credit rating information services of India Ltd.)-
lending credit rating institution in India) has developed a methodology for grading the
MFI and NGOs which have microfinance programmers among their key activities. The
main objective of this initiative of NABARD is to facilitate increased flow of bank credit
to MFI in India. Under the scheme NABARD would reimburse 75% of the professional
fees paid by scheduled commercial bank to CRISIL for obtaining grading of an MFI.
Benefits of Grading
Grading helps MFI in accessing cost effective funds from banks/FIs and also get
donations from donors.
It helps MFIs in identifying their weakness and take suitable measures to improve
upon.
Banks can increase their wholesale on- lending to MFIs which is not similar to
other lending scheme of the banks.
Grading scale
CRISILs grading is a current opinion on the ability of an MFI to conduct its operations
in a scalable and sustainable manner. It is a measure of the overall performance of an
MFI based on broad range of parameters under CRISILs MICROs framework.
pg. 25

This grading does not signify about the timely repayment of loans by MFI. It is also not a
recommendation to purchase, sell or hold any debt instrument issued by MFI. The
grading does not involve audit by CRISIL. The grading should not be used by MFIs in
their external communication.

2.9 MFIs Focus on Women:
Microfinance programs have generally targeted poor women.
By providing access to financial services only through women-making women
responsible for loans, ensuring repayment through women, maintaining savings accounts
for women, providing insurance coverage through women-microfinance programs send a
strong message to households as well as to communities. It also has been observed that
giving women the control and the responsibility of small loans raises their socio-
economic status, which is seen as a positive change to many of the current relationships
of gender and class.
The most important means of achieving improvement in the status of women would be to
secure for them a fare share of employment opportunities. A major step to be taken to
promote female employment would be to expand and diversify the education and training
opportunities available to women.
The women in rural areas can undertake
Handicrafts, horticulture, floriculture, poultry, bee-keeping, Seri-culture, seed bank,
cultivation of medicine plants, sheep keeping, etc. Such societies are of immense benefits
to women as they get employment and render services to needy women.
Many microfinance institutions are focus completely on women borrowers. Like pro.
Mujer, SKS microfinance etc.
2.10 Role of Apex Financial Institutions in Microfinance
Since the emergence of microfinance sector in India, role of AFIs has become significant.
pg. 26

NABARD initiated the process of microfinance in India through linkage programme of
SHGs under Automatic Refinance Scheme.
SIDBI is second important player in microfinance, providing bulk lending to MFIs.
RMK is the third player providing loans to NGOs for on lending to the women SHGs.
These are the major AFIs in India. Each has different approach in Microfinance sector.
While NABARDs emphasis is entirely on SHGs linkage programme by mobilizing their
own savings also, SIDBI is focusing on building and creating larger MFIs and RMK is
money to smaller NGOs as well. Taking into consideration the growth and potential of
microfinance sector in India, other organization and international agencies have also
made their entry in microfinance sector by providing loans and grants to NGOs for
different income in the service delivery projects of social development.
The important names among them are:-
HUDCO,
NBCFDC (National Backward Classes Finance Development Corporation),
National Handicrafts Development Corporation (NHDC),
OXFAM (Oxford Committee for Famine & Relief),
IDA ( Canadian International Development Agency),
Action aid,
CARE India
International Fund for Agriculture Development (IFAD),
UNDFEM ( United Nations Development Fund for Women),
British Department of Foreign and International Development (DFID)





pg. 27











CHAPTER 3: MICRO FINANCE SYSTEM
3.1 Microcredit
The word "microcredit" did not exist before the seventies. Now it has become a buzz-
word among the development practitioners. In the process, the word has been imputed to
mean everything to everybody. No one now gets shocked if somebody uses the term
"microcredit" to mean agricultural credit, or rural credit, or cooperative credit, or
consumer credit, credit from the savings and loan associations, or from credit unions, or
from money lenders. When someone claims microcredit has a thousand year history, or a
hundred year history, nobody finds it as an exciting piece of historical information.

I think this is creating a lot of misunderstanding and confusion in the discussion about
microcredit. We really don't know who is talking about what. I am proposing that we put
labels to various types of microcredit so that we can clarify at the beginning of our
discussion which microcredit we are talking about. This is very important for arriving at
clear conclusions, formulating right policies, designing appropriate institutions and
pg. 28

methodologies. Instead of just saying "microcredit" we should specify which category of
microcredit.

Let me suggest a broad classification of microcredit :

Classification can also be made in the context of the issue under discussion. I am arguing
that we must discontinue using the term "microcredit" or "microfinance" without
identifying its category.

A) Traditional informal microcredit (such as, moneylender's credit, pawn shops, loans
from friends and relatives, consumer credit in informal market, etc.)
B) Microcredit based on traditional informal groups (such as, tontin, su su, ROSCA,
etc.)
C) Activity-based microcredit through conventional or specialised banks (such as,
agricultural credit, livestock credit, fisheries credit, handloom credit, etc.)
D) Rural credit through specialized banks.

E) Cooperative microcredit (cooperative credit, credit union, savings and loan
associations, savings banks, etc.)
F) Consumer microcredit.
G) Bank-NGO partnership based microcredit.
H) Grameen type microcredit or Grameen credit.
I) Other types of NGO microcredit.
J) Other types of non-NGO non-collateralized microcredit.

3.2 Impact of Micro credit
The impact of microcredit is a subject of much controversy. Proponents state that it
reduces poverty through higher employment and higher incomes. This is expected to lead
to improved nutrition and improved education of the borrowers' children. Some argue
pg. 29

that microcredit empowers women. In the US and Canada, it is argued that microcredit
helps recipients to graduate from welfare programs.
Critics say that microcredit has not increased incomes, but has driven poor households
into a debt trap, in some cases even leading to suicide. They add that the money from
loans is often used for durable consumer goods or consumption instead of being used for
productive investments, that it fails to empower women, and that it has not improved
health or education.
The available evidence indicates that in many cases microcredit has facilitated the
creation and the growth of businesses. It has often generated self-employment, but it has
not necessarily increased incomes after interest payments. In some cases it has driven
borrowers into debt traps. There is no evidence that microcredit has empowered women.
In short, microcredit has achieved much less than what its proponents said it would
achieve, but its negative impacts have not been as drastic as some critics have argued.
Microcredit is just one factor influencing the success of small businesses, whose success
is influenced to a much larger extent by how much an economy or a particular market
grows.




3.3Grameen credit:
Whenever I use the word "microcredit" I actually have in mind Grameen type microcredit
or Grameencredit. But if the person I am talking to understands it as some other category
of microcredit my arguments will not make any sense to him. Let me list below the
distinguishing features of Grameencredit. This is an exhaustive list of such features. Not
every Grameen type programme has all these features present in the programme. Some
programmes are strong in some of the features, while others are strong in some other
features. But on the whole they display a general convergence to some basic features on
pg. 30

the basis of which they introduce themselves as Grameen replication programmers or
Grameen type programmes.
Grameen brought credit to the poor, women, the illiterate, the people who pleaded that
they did not know how to invest money and earn an income. Grameen created a
methodology and an institution around the financial needs of the poor, and created access
to credit on reasonable term enabling the poor to build on their existing skill to earn a
better income in each cycle of loans.
If donors can frame category wise micro credit policies they may overcome some of their
discomforts. General policy for microcredit in its wider sense, is bound to be devoid of
focus and sharpness.
General features of Grameencredit are:
It promotes credit as a human right.
Its mission is to help the poor families to help themselves to overcome poverty. It
is targeted to the poor, particularly poor women.
Most distinctive feature of Grameencredit is that it is not based on any collateral
or legally enforceable contracts. It is based on "trust", not on legal procedures and
system.
It is offered for creating self-employment for income-generating activities and
housing for the poor, as opposed to consumption.
It was initiated as a challenge to the conventional banking which rejected the poor
by classifying them to be "not creditworthy". As a result it rejected the basic
methodology of the conventional banking and created its own methodology.
It provides service at the door-step of the poor based on the principle that the
people should not go to the bank, bank should go to the people.
In order to obtain loans a borrower must join a group of borrowers.
Loans can be received in a continuous sequence. New loan becomes available to a
borrower if her previous loan is repaid.
All loans are to be paid back in installments (weekly, or bi-weekly).
pg. 31

Simultaneously more than one loan can be received by a borrower.
It comes with both obligatory and voluntary savings programmes for the
borrowers.
Grameencredit gives high priority on building social capital. It is promoted
through formation of groups and centers, developing leadership quality through
annual election of group and centre leaders, electing board members when the
institution is owned by the borrowers. To develop a social agenda owned by the
borrowers, something similar to the "sixteen decisions", it undertakes a process of
intensive discussion among the borrowers, and encourages them to take these
decisions seriously and implement them. It gives special emphasis on the
formation of human capital and concern for protecting environment. It monitors
children's education, provides scholarships and student loans for higher education.







CHAPTER 4: MICRO FINANCE AND BANK
4.1Micro Finance on the Indian Subcontinent:
Loans to poor people by banks have many limitations including lack of security and high
operating costs. As a result, microfinance was developed as an alternative to provide
loans to poor people with the goal of creating financial inclusion and equality.
pg. 32

Muhammad Yunus, a Nobel Prize winner, introduced the concept of Microfinance in
Bangladesh in the form of the "Grameen Bank". The National Bank for Agriculture and
Rural Development (NABARD) took this idea and started the concept of microfinance in
India. Under this mechanism, there exists a link between SHGs (Self-help
groups), NGOs and banks. SHGs are formed and nurtured by NGOs and only after
accomplishing a certain level of maturity in terms of their internal thrift and credit
operations are they entitled to seek credit from the banks. There is an involvement from
the concerned NGO before and even after the SHG-Bank linkage. The SHG-Bank
linkage programme, which has been in place since 1992 in India, has provided about 22.4
lakh for SHG finance by 2006. It involves commercial banks, regional rural banks
(RRBs) and cooperative banks in its operations.
Microfinance is defined as, financial services such as savings accounts, insurance funds
and credit provided to poor and low income clients so as to help them increase their
income, thereby improving their standard of living.
In this context the main features of microfinance are:
Loan given without security
Loans to those people who live below the poverty line
Members of SHGs may benefit from micro finance
Maximum limit of loan under micro finance 25,000/-
Terms and conditions offered to poor people are decided by NGOs
Microfinance is different from Microcredit- under the later, small loans are given to
the borrower but under microfinance alongside many other financial services
including savings accounts and insurance. Therefore microfinance has a wider
concept than microcredit.
In June 2014, CRISIL released it's latest report on the Indian Microfinance Sector titled
"India's 25 Leading MFI's".
[38]
This list is the most comprehensive and up to date
overview of the microfinance sector in India and the different microfinance institutions
operating in the sub-continent.
pg. 33

4.2 The Role of NGOs in Micro Finance
Self Help groups are almost always formed with outside assistance.
Development NGOs, often with considerable history of working in a particular area for
projects like literacy, sanitation etc., take to organizing SHGs, bringing together people,
explaining the concept to them, attending and helping coordinate a few of the initial
group meetings, helping them maintain accounts and linking them with the banks. Of
late, some of the rural banks themselves are being designated and nursing of SHGs.
Country-level breakdown of SHGs are formed by government agencies about 60% of
government-formed SHGs come from a single state, Andhra Pradesh, where the state
government has played a very pro-active role in SHG planning.
Over the last quarter century, a few organizations, outside the preview of the public
sector alleviation through micro-credit.
Self Employed Womens Association (SEWA) in the Western Indian state of Gujarat and
working Womens Forum in the southern state of Tamil Nadu were among the pioneers
in the effort. The sector received a major boost in the 1990s with the entry of several non-
government organizations (NGOs). Many of these NGOs have been previously
functioning in different developmental roles among the poor, and now added microcredit
to the list of services they provide .A few others, impressed by the success of
microfinance elsewhere, started off as MFIs. Self-Help Groups (SHGS) among the poor,
mostly women, have rapidly become a common rural phenomenon in many Indian states.
4.3 Role of NABARD In Microfinance:
SHG-banks linkage programmes have been put in place.
Refinancing banks/FIs who have lent microfinance.
Arranging Training Programmes to spread the concept and utility of
Microfinance
pg. 34

Provide technical support to banks to evolve suitable intermediate structures like
Farmers clubs.
Supports and helps banking institutions to take on the role of SHPIs.
Co-ordinates the microfinance efforts in India by organizing
international/national workshops, seminars and NGOs. Etc.
Identification of matured SHGs for promotion of enterprises.
4.4 Micro Finance And Social Intervention
There are currently a few social interventions that have been combined with micro
financing to increase awareness of HIV/AIDS. Such interventions like:
"Intervention with Microfinance for AIDS and Gender Equity" (IMAGE) which
incorporates micro financing with "The Sisters-for-Life" program a participatory program
that educates on different gender roles, gender-based violence, and HIV/AIDS infections
to strengthen the communication skills and leadership of women
"The Sisters-for-Life" program has two phases where phase one consists of ten one-hour
training programs with a facilitator with phase two consisting of identifying a leader
amongst the group, train them further, and allow them to implement an Action Plan to
their respective centres.
Microfinance has also been combined with business education and with other packages
of health interventions. A project undertaken in Peru by Innovations for Poverty
Action found that those borrowers randomly selected to receive financial training as part
of their borrowing group meetings had higher profits, although there was not a reduction
in "the proportion who reported having problems in their business".





pg. 35

CHAPTER 5: MICRO FINANCE SERVICES

5.1Services Provide By Micro Finance Banks
So many services provide by MFI. Providing loans; car financing; home financing,
persoonel loans, Taleemi loans.
Providing loans:
The important service is provided by MF is given loan. These loans are provided
from some productive activities like; starting new business, expansion of
business; improving life etc.
Car Financing:
MFI also assist those people who cannot pay total amount at once. So, these MFI
gave them car on instalments like UBL car financing scheme is too popular and
too many people taking advantage from this scheme.
Home Financing:
Pakistan is a poor country. Purchasing power of Pakistan is very low. So many
people are living on rent. They cannot have too many amounts to purchase homes.
MFIs provide loans be considering their job stability and take security for it.
Personnel Loans:
MFI also obtain personnel loans. Those people who have permanent employment
and stable jobs. This credit facility depends on the income of an individual.



pg. 36

CHAPTER 6: WEAKNESSES AND STRENGTHS

6.1Weakness:
Theres not much research done on the actual effectiveness of microfinance as a tool for
economic growth. Some argue that theres too much focus on microfinance which will
motivating less spending in other helping assistances as public health, welfare, and
education.
Some are doubting microfinance really have those impacts on poverty as the practioners
would submit. Other describes micro crediting as a privatization of public safety net
programs. Theres also some microfinance institutions charging excessive interest rates.
Questions against the Grameen Bank were raised in a Wall Street Journal article. It was
regarding the repayment rate, collection methods and questionable accounting practices.
Studies of microcredit programs have found that women often act as collection agents for
their husbands and sons, such that the men spend the money themselves while women are
saddled with the credit risk. Some borrowers have become dependent on loans for
household expenditures rather than capital investments.
The key debate about microfinance is whether it should focus on improved welfare or
financial sustainability. The two different approaches are usually named as poverty
lending or the welfarist approach and the institutionist approach or financial
system approach. The welfarist approach could be for example supplying the customer
with education and health wilst the institutionists focus only on the financial service. The
reason for that is only with total focus on financial sustainability the huge demand can be
met. MFIs with the welfarist approach are for example the Grameen Bank and Womens
World Banking. Examples of institutionists are ACCION International and BRI Unit
Desa.

6.2 Strength
pg. 37

The biggest strength is bringing financial services to poor people and making it financial
sustainable by the economies of scale effect. In India the National Bank for Agriculture
and Rural Development (NABARD) finances more than 500 banks that on lend funds to
self help groups (SHG). SHGs comprise twenty or fewer members, of whom the majority
is women from the poorest castes and tribes. Nearly 1.4 million SHGs comprising
approximately 20 million women now borrow from banks, which make the Indian SHG-
Bank Linkage model the largest microfinance program in the world. Similar programs are
evolving in Africa and Southeast Asia with the assistance of organizations like
Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also
helps in the development of an economy by giving everyday people the ance to establish
a sustainable means of income. Eventual increases in disposable income will lead to
economic development and growth.
6.3 Benefits and Limitations
The benefits of microfinance are that it helps to manage the assets of the poor and
generates income. Through microfinance institutions such as credit unions, financial non-
governmental organizations and even commercial banks poor people can obtain small
loans and safeguard their savings. The limitations of microfinance are that through this
savings plan participants are losing money by having to pay a fee. The user can also pay
back their loans whenever they chose therefore encouraging a borrower to have various
outstanding loans. The lender is also vulnerable in that there is no guarantee of the loan
being repaid in the given arranged timeframe, and the consequences to defaulting are not
defined.
The benefits of microfinance are that it helps to manage the assets of the poor and
generates income. Through microfinance institutions such as credit unions, financial non-
governmental organizations and even commercial banks poor people can obtain small
loans and safeguard their savings. The limitations of microfinance are that through this
savings plan participants are losing money by having to pay a fee. The user can also pay
back their loans whenever they chose therefore encouraging a borrower to have various
outstanding loans. The lender is also vulnerable in that there is no guarantee of the loan
pg. 38

being repaid in the given arranged timeframe, and the consequences to defaulting are not
defined.
However, these initiatives are not without limitations. These limitations focus on the
same issues as stated before, but the negative consequences that may occur. For example,
while there may be mistrust in the national banking system, there can be microfinance
initiatives where the outside creator takes advantage of those participating. The money
may not end up in the right places, resulting in distrust to all who have interest in
monetary programs, and could potentially ruin the chance of any further microfinance
projects becoming successful. Secondly, when creating a microfinance project, time may
be an issue. What happens when the program is finished and the people who were
participating are still in poverty? In this case, it may be more beneficial for there to be an
on-going program. To see what would be an appropriate choice in regards of time, the
community must be assessed before the project is put in place.











pg. 39






Suggestions of Microfinance
Keeping in view the conclusions derived from the Overall Microfinance project,
following suggestions are offered to the microfinance:
As is well known, microfinance is providing service to the poor people; therefore
MFIs should have to extent their network to meet the needs of large number of
poor people.
The MFIs should try to attain more consistency and stability in its business i.e.
there should be consistent growth in savings of the MFIs.
The MFIs have to draw finance scheme by considering to the poor people needs.
MFIs main aim is to provide finance to needy and poor people, in todays keen
competition they dont want to ignore their aim.
The MFIs should install Customers Advisory Receptacle, to give due
consideration to the complaints and suggestions of the customers.
Finally, Microfinance institutions should provide microfinance effectively and
efficiently by;
Fighting competition effectively.
Adapting innovatively to survive and succeed.
Establishing a framework for continuous quality improvements.
Ensuring consistency and optimality in work allocation.

pg. 40







CONCLUSION
After completion of this particular project work, I can proudly conclude that this
particular project has and will prove beneficial to me on both, practical and theoretical
grounds, throughout my life.
The project has helped me evolve following conclusions:
As of now the microfinance is perhaps the only way to help in make happier to the
poor living below poverty line. MFIs have become financially viable.
In micro financing, the banker has truly adorned the role of a friend, philosopher and
guide for the members of SHG.
Microfinance in India is still presently too small to create a massive impact in poverty
alleviation, but if pursued with skill and opportunity development of the poor, it holds the
promise to alter the socio-economic face to the Indias poor.
In this conclusion I can also say that microfinance alone cannot substantially reduce
poverty without additional measures in the areas of education, health and infrastructure.
At the same time microfinance plays an important role to provide finance to the poor
people, which help them to meet their basic needs.
The use of financial services by low-income households leads to improvements in
household economic welfare band enterprise stability and growth.
pg. 41







BIBLIOGRAPHY

Books and other sources of information :
-D.Joel Edwinraj
-V.Frank Ratankumar
Co-operative &Microfinance
Serials publications, New Delhi


Website :
www.google.com
www.wikipedia .com
www.microfinancehub .com
www.microfinanceinfo.com
pg. 42