Understanding Microfinance

• Microfinance, also known as microcredit, offers banking services to unemployed or low-income individuals lacking financial access due to poverty
• It includes savings, loans, insurance, money transfers, and other services
• It targets unemployed and low-income individuals, providing banking services and allowing responsible small business loans with ethical lending

History of Microfinance

• The Irish Loan Fund system introduced by Jonathan Swift, aimed to improve conditions for impoverished Irish citizens, marking the first microlending occurrence
• Modern microfinancing gained popularity in the 1970s
• In 1976, Muhammad Yunus started the Grameen Bank in Bangladesh, the first organization to gain attention
• Yunus and Grameen Bank were awarded the Nobel Peace Prize in 2006 for microfinance system development

Period Breakdown

• 1970s to mid-1980s: The government provided highly subsidized credit to the rural poor through directed credit programs (DCPs), which had limited success and were unsustainable. Credit players didn't reach intended markets, leading to poor repayment and high costs
• Late 1980s: The Philippines was among the first countries to replicate Grameen banking, with legitimate non-government organizations (NGOs) implementing microfinance programs
• 1990s: Government policies reformed to encourage private sector participation, resulting in the National Strategy for Microfinance in 1997 that reinforced market-oriented credit policy
• 2000s: The BSP was mandated to recognize microfinance as legitimate and set rules/regulations
• Microcredit expanded with housing, micro-agri loans, and microfinance plus options
• Microdeposit and microinsurance were developed
• Present: Microfinance is fully mainstreamed, evidenced by increased providers, products, and outreach

Benefits

• Inclusion of the poor into financial systems and providing opportunities to start-up
• Lower interests rates are offered compared to local money lenders
• Provides self-employment and opportunities for education and community development

More Benefits

• Entrepreneurs create jobs, trade, and economic improvement
• Women's empowerment leads to more stability and prosperity for families
• The World Bank estimates that over 500 million people have benefited either directly or indirectly from microfinance
• The International Finance Corporation (IFC) estimates that over 130 million people have directly benefited as of 2014
• Only 20% of the world's poor (3 billion) can access these operations

Key Features

• Lends to the poor, without requiring collateral
• Encourages saving over borrowing and offers small short-term loans
• Features cost covering interest rates and group appraisal/guarantee for women

Target Groups

• Developing countries
• Unemployed / Low - income individuals
• Women

Services

• Credit facilities and saving accounts
• Loans for small investments and money transfers
• Remittance and insurance

Where Is It More Famous?

• Microfinancing is available worldwide
• The majority of microfinancing operations occur in developing nations
• It is more common in Uganda, Indonesia, Philippines, Serbia, Bangladesh, India, Nepal and Honduras
• Many microfinance institutions (MFIs) focus on helping women

Microfinance in Uganda

• Uganda has had remarkable economic development over the past decade.
• Uganda's economy has more than doubled with average growth rates of about 6% per annum.
• Uganda ranked second in 11 Sub-Saharan Africa in terms of GDP growth since 1990.
• Inflation reduction occurred from 240% pa in 1986/87 to <10% in the last five years

Microfinance in India

• India's SKS Microfinance serves a large number of poor clients
• Formed in 1998, it has grown to become one of the biggest microfinance operations
• SKS works in a similar fashion to the Grameen Bank, pooling all borrowers into groups of five members who work together to ensure loan repayment

Microfinance in Bangladesh

• Bangladesh's microfinance sector was first established in the 1970s, its main goal was reducing rural poverty
• Microcredit accounted for a 10 percent reduction in rural poverty in Bangladesh
• MFIs lifted some 2.5 million Bangladeshis from the ranks of the poor
• Bangladesh's MFIs cover some 32 million members and give out more than $7.2 billion annually
• Modern microfinance in Bangladesh has expanded its scope from home-based activities and self-employment to savings and insurance
• Includes microenterprises and productive employment
• Microcredit helped diversify borrowers' economic activities, boosting incomes
• Household income grew over the study period, driven by rising non-farm income
• Two of Bangladesh's top MFIs (Grameen Bank and BRAC) are among the world's most efficient microfinance institutions
• Microfinance also encourage individuals to invest in small business, provide self-employed training and also provide resources to establish business

Summary

• Microfinance works as banks for low-income/unemployed individuals especially where banks are not available
• Major objectives are to minimize poverty and unemployment
• It plays a vital role to develop nation's economy