Micro-Financing: concept, models, and its role in poverty alleviation Microfinance Defined

Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and, their microenterprises Microfinance has evolved as an economic development approach intended to benefit low-income groups. The term refers to the provision of financial services to low-income clients, including the self-employed. Financial services generally include savings and credit, and some microfinance organizations also provide insurance and payment services.

HISTORY OF MICROFINANCE

The concept of microfinance mainly started after the initiated by Nobel winner for peace Prof ens !n "#$%, famine struc& 'angladesh. (t the time, )r. Muhammad ens was a professor of economics at the *niversity of +hittagong. )isillusioned by the elegant theories of economics that could not e,plain the thousands of poor people dying of starvation on the streets- he was determined to find a practical way to help the poor. )uring a visit to the nearby village of .erboa, he was astounded to find that a sum of /0$ could radically change the lives of %0 people in the village. This was the sum of money they collectively needed to buy bamboo to ma&e the stools they sold to ma&e a living. 1e too& /0$ from his poc&et and made %0 loans to the stool ma&ers in this tiny village. They were able to pay him bac& with interest and ta&e a step towards lifting themselves out of poverty. This simple idea that the poor could use credit to lift themselves out of poverty, led )r. ens to create The 2raeme 3ural 'an& in "#45. 6ince its inception, it has made over /4.#7 billion in loans to over eight million borrowers. !ts methodologies have become the cornerstone of the microfinance industry. !n 0887, The 2raeme 'an& and )r. ens were awarded the Nobel Peace Prize.

SCOPE:
Micro Financing has greatest scope in the world especially in developing countries li&e Pa&istan. 'ecause mostly people don9t have high income and low purchasing power and MF institutions target mar&et as low income group and it is common impression that poor people need and use

a variety of financial services including deposits, loans etc. they use financial services for some reason li&e seize business opportunities, improve homer and living standard, deal with large cope with emergencies.

SERVICES PROVIDE BY MICRO FINANCE BANK:

6o many services provide by MF!. Providing loans- car financinghome financing, personnel loans, taleemi loans.

o PROVIDING LOANS:
The important service is provided by Mf is given loan. These loans are provided from some productive activities li&e- starting new business, e,pansion of business- improving life etc.
MFI also assist those people who cannot pay total amount at once. So, these MFI gave them car on installments like UBL car financing scheme is too popular and too many people taking advantage from this scheme.

o CAR FINANCING:

o HOME FINANCING:
Pa&istan is a poor country. Purchasing power of Pa&istan is very low. 6o many people are living on rent. They cannot have too many amounts to purchase homes. MF!9s provide loans be considering their :ob stability and ta&e security for it.

o PERSONNEL LOANS:
MF! also obtain personnel loans. Those people who have permanent employment and stable :obs. This credit facility depends on the income of an individual.

o TALEEMI LOANS:
MF! also provide financial aid to the students who cannot bare educational e,penses but want to study. MF! assist them in return of some security and it would have to pay after completing the education.

CHALLENGES AND OPPORT NITIES OF MICRO FINNACING:

The 2overnment has indicated its willingness to speed up the pace of structural reforms to meet the ma:or challenges of
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The basic motto of the government to eliminate the poverty and bring prosperity in the country. MF! providing small loans and other

credit facilities to the poor and low-income groups- which are beginning positive changing li&e their standard of living group and earning have increased
o

IMPROVING SOCIAL INDICATORS:

!nade?uate 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 difficuilt. 6o, by providing small loans and credit facilities they can over come this issue and can improve social indicators.

IMPROVING THE FISCAL AND BALANCE OF PAYMENTS POSITIONS:

Pa&istan is a poor country whose balance of payment always in deficit, because of low productivity, lac& of resources and lac& of productive men9s power. !f M!F provide loans new business can be established. (nd e,port of Pa&istan can be improved which create balance of payments.

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)ue to poor economy of Pa&istan investors are hesitating to invest their money in Pa&istan but MF!9s can boost up. 'ecause provide loans to local people new business will stable. ;conomy will go up and this situation may motivate to them for investing their funds.

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(nother ob:ective of MF! is that to achieve high development and bring innovation in the economy, which improve 2)P of the country and give sustained to the economy.

NEED FOR MICROFINANCE

!ndia has one of the largest networ&s of ban& branches in the world, but the hundreds of millions of poor in the country are largely out of it. 'an&s were nationalized three and half decade ago with the hope and promise that their products and services would reach the poor. 'ut that goal is not even close to being met today. @ith B0888 commercial ban& branches, "0B00 branches of regional rural ban&s and "88888 cooperative ban& branches, the country is teeming with institutions that should be able to meet the credit needs of the people.

'ut if you are poor, you are also probably out of luc& with ban&s- it is tough persuading them to even let you open a ban& account. The conse?uences have been devastating. +onsider these numbers> $B million households in !ndia depend on money lenders to meet financial needs- almost #8 percent of the people in the rural !ndia have no access to insurance- B8 million households are landless and need small credit to start some economic activity. (nd even families earning 3s %888-B888 a month in urban areas spends huge portions of their earning to service their ever continuous debt.

Models of microfinance
". The 612-'an& Ain&age Model 0. Partnership Model

PRINCIPLES OF MICRO FINANCE

1. Poor !eo!"e need a #arie$% of financia" &er#ice&' no$ ()&$ "oan& .

Ai&e everyone else, the poor need a range of financial services that are convenient, fle,ible, and affordable. )epending on circumstances, they want not only loans, but also savings, insurance, and cash transfer services.
2. Microfinance i& a !o*erf)" $oo" $o fi+,$ !o#er$% .

@hen poor people have access to financial services, they can earn more, build their assets, and cushion themselves against e,ternal shoc&s. Poor households use microfinance to move from everyday survival to planning for the future> they invest in better nutrition, housing, health, and education.
3. Microfinance i& a-o)$ -)i"din+ !er.anen$ "oca" financia"

in&$i$)$ion&.

Finance for the poor re?uires sound domestic financial institutions that provide services on a permanent basis. These institutions need to attract domestic savings, recycle those savings into loans, and provide other services. (s local institutions and capital mar&ets mature, there will be less dependence on funding from donors and governments, including government development ban&s.
4. Micro credi$ i& no$ $,e -e&$ $oo" for e#er%one or e#er% &i$)a$ion .

)estitute and hungry people with no income or means of repayment need other &inds of support before they can ma&e good use of loans. !n many cases, other tools will alleviate poverty betterCfor instance, small grants, employment and training programs, or infrastructure improvements. @here possible, such services should be coupled with building savings.
5. T,e ro"e of +o#ern.en$ i& $o ena-"e financia" &er#ice&' no$ $o

!ro#ide $,e. direc$"%.

National governments should set policies that stimulate financial services for poor people at the same time as protecting deposits. 2overnments need to maintain macroeconomic stability, avoid interest rate caps, and refrain from distorting mar&ets with subsidized, high-default loan programs that cannot be sustained.
6. T,e /e% -o$$"enec/ i& $,e &,or$a+e of &$ron+ in&$i$)$ion& and

.ana+er&.
Microfinance is a specialized field that combines ban&ing with social goals. 6&ills and systems need to be built at all levels> managers and information systems of microfinance institutions, central ban&s that regulate microfinance, other government agencies, and donors. Public and private investments in microfinance should focus on building this capacity, not :ust moving money.

F NCTIONS OF MICRO FIANANCE

6mall loans, typically for wor&ing capital!nformal appraisal of borrowers and investments(ccess to repeat and larger loans based on debt capacity and repayment performanceo 6ecure savings products. o To provide financing facilities, with or without collateral 6ecurity o To accept deposits o o o

o To encourage investments in such cottage industries and income generating pro:ects for poor persons as maybe prescribedo To mobilize and provide financial and technical assistance and training to micro enterprises o To invest in shares of any body corporate, the ob:ective of which is to provide microfinance services to poor persons

NET0ORK MICRO FINANCE BANK

The MFN has played an important role in helping the industry develop and improve upon &ey 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 and drive to provide the best services possible to the wor&ing poor, the members of the Microfinance Networ& are playing a fundamental role in revolutionizing the process of poverty alleviation. 'y providing microfinance practitioners and institutions with a forum for information e,change to ta&e place

o SEMIANN AL INSTIT TIONS:

The number of registered N2<s is estimated at "0,888 to 08,888, two thirds of which are in urban areas in inverse relation to population and poverty distribution. Most rural N2<s are single community or village-based groups registered as community-based organizations. <f the "88 that seem to supply some Microfinance they are the primary promoters of micro financing in Pa&istan and demand of MF in Pa&istan is ?uoted B.7 m household while nearly "D could get these facilities The N2<s providing MF can be broadly classified into two categories> o Multi sect oral N2<9s engaged in composite services> li&e education, health, infrastructure, and community development. These N2<s offer micro credit as a minor program component. o <ther types of N2<6 provide core activity li&e provide "8$,888 active loans with aggregate loans outstanding of *6/ "4.5 million EPF3 "." billionG, and savings of *6/ "#.B million EPF3 "."$ billionG.

o INFORMAL SO RCES:

!nformal sources account for about 45D of the credit supply. Three principal informal sources of credit are EiG +ommercial creditors lin&ed with mar&eting intermediaries, commission agents, village traders, and shop&eepersEiiG Aand-based credit arrangement e,tended by landlords to farmers for inputs and to meet consumption needs- and EiiiG 6ocially based arrangements of friends and family Ethe most numerousG. 'oth in rural and urban areas, mainly supply short-term credit at terms that reflect the wea& bargaining power of the poor, particularly for land-based credit arrangements and provide loans for fulfill their consumption needs with out interest

FORMAL SO RCES
Formal refers to an organized, registered and regulated system of institutions providing microfinance services. The involvement of formal sources in microfinance has increased during the last two decades. This greater involvement has "07 stemmed from "G The e,pansion of the scope of formal institutions into microfinance through downscaling Efor e,ample, 2overnment 6avings 'an&, ThailandG0G ;stablishment of lin&age programmers with semi-formal sources of different types E6elf-help 2roup-'an& Ain&age Programme, !ndiaG5G The emergence of formal institutions focused on microfinance Efor e,ample, 2raeme 'an& of 'angladesh and Fhushhaliban& in Pa&istanG%G EdG 3eforms of state-owned financial institutions Efor e,ample, unit degas of 'an& 3a&yat !ndonesiaGBG EeG The introduction of microfinance programmers by the governments through non-financial institutions Efor e,ample, =iet Nam @omen9s9 *nionG- and 7G EfG ;ntry of private sector institutions Efor e,ample, 'aden &redit-desas owned by

$G !ndonesian villagersG. +ooperatives are also playing a significant role as financial intermediaries in the region, particularly in !ndia, 6ri Aan&a, Thailand and =iet Nam. 4G 1owever, the formal operations concentrate mostly on providing credit facilities, and savings mobilization has yet to receive ade?uate attention' with few e,ceptions.

SCENARIO OF MICROFINANCE IN INDIA

!ndia9s population is more than "888 million, around5B8 million, are living below poverty. <nly 08D access loan from formal sources and 48D from the informal sources. <ut of that 08D only "8D have access to micro finance. (nnual credit demand by the poor is estimated to be about rs 78888 crore. (nd only "0,888 crore are disbursed .E(pril 8#G +ustomers of micro finance are Hsmall and marginal farmersI, Hrural artisansI and Heconomically wea&er sectionI.

MICRO1FINANCE REACH IN INDIA

Microfinance in !ndia through its two ma:or channels J 612 Ain&age and MF!s J served over 55 million !ndians, up by # million over F 0887-8$ % out of B microfinance clients in !ndia are women.

 Micro-credit portfolio of !ndia Microfinance was 3s. 00,888 core $BD are accounted for by 612 Ain&age, 08D by large MF!s and BD by medium and small MF!s 612 Ain&age reports over 3s. 5,B88 crore savings, only MF! 'an&, F'6 'an& reports about 3s. %8 crore savings portfolio MF!s operate in 08# out of 55" districts of the country, 04D of the new clients are from urban areas.

DEMAND OF MICRO1FINANCE SERVICES IN INDIA

Through all channels, reach is only 58 million 0B8 million people live below poverty line 3upee <ne la&h per individual needed for livelihood promotion, hence trillion of 3s needed Penetration of life insurance services in rural !ndia is K"8D. (sset, health, weather and other general insurance services are still nascent.

S0OT ANALYSIS OF MICRO FINANCE

S$ren+$, helped in reducing the poverty huge networ&ing available 0ea/ne&& not properly regulated high number of people access to informal sources of finance. concentrating on few people only and mainly in urban areas.

 O!!or$)ni$% huge demand and supply gap. employment opportunity huge untapped mar&et. opportunity for pvt.ban&s, N'F+s, foreign ban&s to enter this business segment.

MICRO1FINANCE INSTIT TIONS

o formal institutions, such as rural ban&s and cooperativeso semiformal institutions, such as nongovernmental organizations- and o informal sources such as money lenders and shop&eepers

FORMAL INSTIT TIONS

". Fhushali 'an& 0. The First Micro Finance 'an& Atd 5. Networ& Micro Finance 'an&

THE FIRST MICRO FINANCE BANK LTD2

(lmost 78-$8D of the population in Pa&istan is deprived of financial services with the ma:ority of them being poor. The management of FMF' believes that this large segment of the population is very much ban&able and access to microfinance services can bring substantial positive change in their lives. FMF' is loo&ing ahead to cover as many of this poor segment of the population through its micro finance services with a ma:or focus on women the service which are being provided by this ban& are
o o o o

Microfinance !ntermediation - Aoan Products, 6aving Products, Micro !nsurance Products, and other Financial 6ervices6ocial !ntermediation J 2roup Formation for building human and social capital for sustainable financial intermediation;nterprise )evelopment 6ervices J non-financial services that assist micro-entrepreneurs6ocial 6ervices J non-financial services that focus on well being of micro entrepreneurs. This includes health, nutrition, education and literacy trainings.

K,)&,a"i Ban/
Fhushhali 'an& is the countryLs first ma:or initiative to bridge the demand for microfinance services. !ntegral to microfinance services is the intensive and sustained social support for mobilization, management and development of all clients of the ban& and their access to basic infrastructure services. (s a for-profit, commercial microfinance institution, our purpose is to> ". ;stablish a sustainable, scalable pro-poor financial services platform with retail delivery capacity to reach 788,888 poor households by the 0887. 0. +atalyze an enabling environment, within which the microfinance sector can develop in Pa&istan. 5. (ssist the central ban& in setting up an appropriate and responsive regulatory framewor& within which microfinance institutions can operate on sustainable grounds, thereby e,panding outreach to the poor. %. Promote transparency, financial rigor and good governance as leading indicators of e,cellence within the microfinance sector in Pa&istan.

SE OF FINANCE IN DIFFERENT FIELDS:

POVERTY:
Microfinance has emerged as one of the most effective instruments of fighting poverty. The Fhusshali 'an&, which is now entering third year of its operations, has opened branches in 5B districts. 6o far it has disbursed 3s.".5 billion to about $B,888 poor borrowers. 'ranches of Fhusshal 'an& will be opened in all the districts of the country. Pa&istan Poverty (lleviation Fund EPP(FG, which was set-up to provide wholesale credit to microfinance institutions, including N2<s, has significantly, increased overall lending. 6o far it has provided loans of about 3s.478 million for on lending to 40,48B beneficiaries through various N2<s in all parts of the Pa&istan.

FINNACIAL DEVELOPMENT AND POVERTY ALLEVIATION

( 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 accumulation of capital among our people and has been shown to reduce vulnerability to e,treme poverty. ( large amount of research and practice has shown that the permanent deepening of financial mar&ets to provide access to the poor can achieve the following outcomes> ;conomic growth and :ob 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 LsmoothingL the income of the poor, and so reducing their vulnerability to financial and economic shoc&s. These factors are &ey in building viable communities and contributing to the sustainable livelihood strategies of poor households. 6ocial e,clusion, of which the apartheid system was a most e,treme form, can be overcome as the divide between financial LinsidersL and LoutsidersL is eradicated.

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The &ey to alleviating poverty is how effectively the tools of food, shelter, basic education, opportunities for employment, health and medical services, financial services, infrastructure, mar&ets and communication are deployed either singularly or severally to the poor. Poverty is a pervasive problem in our society. 6panning across the world, poverty e,ists in different levels and various forms. (t the current threshold of /".0B a day, the @orld 'an& estimates that around 0BD of the population in developing regions lives below the poverty line. This figure translates to ".5 billion people living in poverty, or about 08D of the global population <ne such poverty alleviation tool is microfinance, which has gained worldwide recognition since the "##8s and has been proven to have positive effects on poverty levels in developing countries. Microfinance is the provision of financial services to the poor, aiming to empower low-income populations by providing them with access to credit and other financial services. Through microfinance institutions EMF!G, the poor can obtain collateral-free loans at relatively low interest rates and use the money for creating micro enterprises Esmall businesses owned by poor peopleG, funding children9s education, and improving homes, among others. (side from micro credit, MF!s have also developed numerous financial products, such as microinsurance and micro-mortgage that are designed to accommodate the poor9s financial needs.

CONCL SIONS
The landscape of microfinance is changing as a result of increasing understanding of how the poor use money and their diverse demands for financial services. +orrespondingly, the microfinance industry is evolving

into an increasingly commercial operation to serve a larger segment of the potential mar&et. ( number of challenges need to be overcome to facilitate and accelerate this process to realize the vast potential of microfinance. This call for a comprehensive approach, as outlined above that ta&es cognizance of the diversity of microfinance development issues across countries. ()' interventions in support of microfinance pursue this approach to catalyze the development of sustainable microfinance systems in the region. @ith a view to leveraging its support, ()' is coordinating with other funding agencies involved in microfinance and enhancing the involvement of its private sector operations in microfinance.

http://www.adb.org/gender/practices/microfinance/default.asp www.adb.org http://www.anc.org.za/ancdocs/pubs/umrabulo/umrabulo23/micro-finance.html www. ita !u-u.ac."p #$%&' http://www.pa istaneconomist.com/database2/pa ban s.asp www.unescap.org #$%&' www.sbp.org.p #$%&' http://www. hushhaliban .com.p / http://www.mfb.com.p