Microfinance: Fundamentals and Evolution

L1: Fundamentals of Microfinance & Financial Inclusion

• Microfinance aims to provide affordable financial services like bank accounts, loans, savings, and insurance to low-income individuals.
• It aims to help people manage money, build financial security, and improve their quality of life.

Microfinance Basics: Evolution

• Microfinance's early origins were in the 1800s in Germany and Ireland.
• Some origin examples include the Jonathan Swift Irish Loan Fund and credit/community-based savings funds.
• Modern microfinance origins are in the 1970s-1980s.
• Grameen Bank of Bangladesh pioneered microfinance under Muhammad Yunus.
• From 1990-2000 microfinance institutions (MFIs) proliferated and introduced new products like savings, insurance, and remittances.
• It went through commercialization and diversification from 2000-2010s, introducing mobile banking, digital payments, and the International Year of Microcredit (2005).
• From 2010 - present microfinance institutions saw a digital transformation and Covid-19 response with mobile apps, agent banking, and FinTech partnerships and more focus on financial resilience.

Microfinance: Goals, Principles and Trends

• Microfinance goals include poverty reduction, empowerment, and financial inclusion.
• Financial inclusion ensures that everyone, especially low-income individuals, has access to affordable and useful financial services.
• Core goals include access to financial products, bridging the gap for underserved populations, affordable financial products, gender equality, and supporting small and medium enterprises.
• Principles are a client-centered approach, sustainability, and risk management.
• Financial inclusion trends include global and local technology and policy.
• Microfinance fosters community development.
• Key stakeholders include borrowers, MFIs, NGOs, and government agencies.
• Microfinance initiatives face challenges like over-indebtedness and sustainability.

L2: Microfinance vs. Commercial Banks & Microfinance Products

• Microfinance focuses on providing financial services to low-income people, especially in rural areas.
• Commercial banks serve businesses and individuals with a wider range of financial needs.
• Microfinance targets low-income individuals, while commercial banks target diverse clients.

Lending Methodologies and Applications

• Lending involves providing money or property to someone with the expectation of repayment with interest.
• Lending methodologies include group lending (joint liability), individual lending (credit assessment, collateral issues), character-based lending, and community-based screening.
• Microfinance products meet the needs of low-income clients.
• Interest rates, loan terms, and repayment structures ensure sustainability.
• Microfinance impacts community development and entrepreneurship.

L3: Microfinance Impact & FinTech Integration

• Poverty limits access to essential services and resources.
• Causes of poverty include lack of education, unemployment, overpopulation, and limited access to healthcare.
• Microfinance alleviates poverty through economic empowerment, job creation, and improved living standards.

FinTech in Microfinance

• Financial technology improve and automate the delivery and use of financial services (digital banking, mobile money, e-wallets)
• Key areas include robo-advisors, payment apps, and peer-to-peer lending platforms.
• Trends include digital wallets, AI chatbots, biometric authentication, contactless payments and BNPL (Buy Now, Pay Later).
• FinTech enhances microfinance service delivery through cost reduction, broader outreach, and efficiency gains.

Challenges & Opportunities for Microfinance Institutions

• Over-indebtedness, financial literacy, and technological barriers pose challenges.
• Digital innovations expand access to remote or underserved areas.
• Partnerships among MFIs, governments, NGOs, and private tech companies are opportunities.

L4: Funding Sources & Accounting in Microfinance

• Funding sources for MFIs include shareholder's equity (ownership stake, long-term stability) representing the total amount of capital in a company that is directly linked to its owners.
• Funding can also come from grants and donations (non-repayable funds, donor restrictions).
• Grants are financial awards that organizations, governments, or institutions give to support specific projects, activities, or programs.
• Donations are voluntary contributions made by individuals, corporations, or foundations to support a cause or organization without expecting any compensation or return.
• Bank loans require collateral, and repayment terms and constitute a financial agreement in which a bank provides money to an individual to be repaid with interest.
• Crowdfunding is when capital is raised for a project or business online by soliciting small donations.
• Private equity investment refers to stock in a private company that does not offer stock to the general public.
• Peer-to-peer lending occurs when individual lenders lend or borrow money from other individuals directly through online platforms.

Role of Accounting in Microfinance

• Budgeting includes planning and allocating resources and forecasting income and expenses.
• Accounting functions include financial reporting (balance sheets, income statements).
• Other functions are performance evaluation (efficiency, portfolio quality, social impact) and compliance with regulatory standards (transparency, accountability).
• MFIs balance social mission and financial viability.
• They also focus on accurate record-keeping, audits, and risk management.
• How proper accounting builds stakeholder trust and attracts investors.