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INDEX 1. What do you mean by Micro finance 2. What are the problem faced by the Micro Finance 3. Case Study of Micro finance

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MICRO FINANCE ITS PROBLEMS AND CASE STUDY

Microfinance is the provision of financial services to low-income clients or solidarity
lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. As the name suggests, microfinance is the provision of financial services (loans, savings, insurance) to people on a small scale, such as businesses with low or moderate incomes Loans of micro value are one of the better known means of helping small business owners in developing countries move out of poverty. The definition for according to The Asian Development Bank (ADB) is any financial service targeted toward the poor, such as: deposits finance schemes or loans up to $3,000 payment services money transfers insurance to poor and low-income households and their micro-enterprises Microfinance Institutions (MFIs) provide loans and savings services through a variety of lending models, while micro entrepreneurs use these services. The theory is that if the poor have access to these services, their financial lives will be more stable, predictable and secure, allowing them to plan and improve their livelihoods through education, healthcare and empowerment. In other words, microfinance converts poverty into an economic opportunity that evades the idea of exploitation More broadly, it 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

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fund transfers."[1] Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is endemic in public discourse. Critics often 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 More broadly, microfinance refers to a movement that envisions a world in which lowincome households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance income-producing activities, build assets, stabilize consumption, and protect against risks. These services include savings, credit, insurance, remittances, and payments, and others. The industry began by providing small loans to emerging entrepreneurs to start or expand businesses. Opportunity International was one of the first nonprofit organizations to recognize the benefits of providing capital to people struggling to work their way out of poverty. Over the years, with Opportunity leading the way, the microfinance sector has expanded its financial service offerings to better meet client needs. Along with providing more flexible loan products and business and personal development training, Opportunity offers savings and insurance to help clients effectively navigate the daily hardships they face. Without these services, clients are continually at risk of slipping back into poverty because of unforeseen circumstances Microfinance organizations make it a priority to serve the particular needs of women, since a staggering 70 percent of all those living in extreme poverty are female. Women are often excluded from education, the workplace, owning property and equal participation in politics. They produce one half of the worlds food, but own just one percent of its farmland. Nearly 85 percent of Opportunitys loan clients are women. While Opportunity gladly extends loans to men, the organization believes the greatest opportunity for interrupting cycles of extreme poverty come from microfinance programs that target female entrepreneurs. When women improve their circumstances, they also improve the lives of their children. By investing in nutrition and education, they help to create a better future for their children and their communities. Despite the success of life-transforming microfinance services, the World Bank says that the industry is not close to meeting the demand. Five hundred million people living in poverty could benefit from a small business loan and only one-third of the worlds population has access to any kind of bank account. The lack of access is particularly severe in sub-Saharan Africa where the World Bank estimates that microfinance is
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reaching only a small percentage of the economically active population. In sub-Saharan Africas poorest countries, less than 10 percent of the population has an account with a financial institution. In response, Opportunity has committed to building scalable, sustainable and accessible banks throughout the developing world to provide loans, training, savings and insurance products tailored to the specific needs of each region. As the microfinance industry continues to mature, there is a danger that it will drift toward a more secure client base. It is critical that microfinance organizations continue to focus on those with the greatest needsthose who have been displaced, those in rural areas, those who traditional institutions consider unbankablethe most marginalized people. Maintaining that focus, microfinance can help create a world in which the underserved have fair access to economic opportunities and the hope to move beyond poverty.

Problems Faced by Microfinance

Despite good intentions, microfinance still has several hurdles to face: perceived high risk of lending to the poor (the loan may be misused easily) technology-related hurdles, such as the high costs involved in small loan transactions for microfinance providers (Read about technology-related solutions) lack of awareness about sources of funds for microfinance providers to pass on to the poor the poors inability to offer marketable collateral for loans to MFIs difficulty in measuring the social performance of MFIs (Read about tools to help measure the social impact of microfinance) mixing of charity with business by microfinance providers (this is an issue of poor governance) high interest rates of loans made to the poor (to cover various costs and risks) lack of customized solutions/ microfinance models for the poor inappropriate targeting of poor households by microfinance programs lack of microfinance training for MFIs poor distribution system of MFIs, i.e. a need to spread out loan facilities into rural areas lack of information about microfinance investment opportunities (Possible solution through AppLab) poor institutional viability of microfinance ventures dual mission of MFIs to be financially sustainable as well as development oriented

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These problems can be grouped according to whether theyre caused by MFIs or caused by micro entrepreneurs. Just like any other new venture, microfinance too faces obstacles that will eventually be ironed out as governments alter their priorities, and as the commercial sector understands the economic viability of the development sector, considering the relative immunity of the microfinance sector to the global financial meltdown. Already, a few encouraging trends have emerged in the microfinance sector. As Kofi Annan once put it, microfinance not only recognizes the needs of the poor, it also empowers them and taps into their remarkable reservoir of energy and knowledge. In short, microfinance has tremendous potential, its time is now and is here to stay. You can read other articles about microfinance theory and practice here. Although the importance of microfinance in the process of poverty eradication is realized, it faces multiple problems. Offering financial services to the poor individual (the definition of microfinance) is a complex process and that in itself leads to various challenges. Weve divided all these challenges into two sets; problems faced by micro entrepreneurs (this article) and problems/challenges faced microfinance providers (another article).

Microfinance Problem 1: The poors inability to offer marketable collateral for loans
Microfinance clients are either very small businesses or poor individuals who usually have few assets, non-existent credit histories, and low income levels. This is a 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 (which are already high for small loan transactions) or turn down hundreds of applications (read 10 determinants of interest rates in microfinance).

Microfinance Problem 2: Poor institutional viability of micro enterprises

Poorly constructed business ideas with a lack of consideration of demand and costs render the micro venture unsustainable, and microfinance may incorrectly get the blame for it. For instance, in the case of micro crop farming, farmers often fail to account for their personal consumption between the sowing and harvesting periods and realize they face a shortage of money. As a result, they often end up using the loan for personal matters. The problem arises when its time to pay back the loan the farmer is forced to take up a second loan to pay the original loan. This may lead to a vicious cycle where the farmer gets inundated with
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debt. You may want to see how this problem was addressed as a challenge by MicroCrop Loans in Philippines.

Microfinance Problem 3: Lack of knowledge about microfinance services

Many micro entrepreneurs live in far off rural areas, often remote villages, and have little formal education which lead to two issues:

a lack of knowledge about the existence of financial services for the poor, (solution financial literacy campaigns) little access to microfinance services offered by MFIs.

This issue was also mentioned in the post about challenges faced by microfinance institutions because a natural consequence of this is that loan providers face difficulty in targeting these potential clients.

Microfinance Problem 4: Shortage of Financial Capital Or Misallocation?

Under 10 million of the 500 million people who run micro and small enterprises have access to financial support for their businesses As a result of the above three problems, a fourth problem arises for micro entrepreneurs a lack of funds. Without credit, the micro ventures may not grow or quickly take advantage of opportunities. Since, 20% of the worlds population accounts for 86% of consumption one can deduce that the problem isnt related to the shortage, but rather, mis-allocation of funds.

Microfinance Problem 5: Inability to exploit growth opportunities

The last point is a contributor to this problem, because a lack of access to funds means micro entrepreneurs cannot inject money into their businesses (say, to buy more resources or hire more people) to grow them after observing a surge in demand. Moreover, the remote locations of micro businesses means they have little information pertaining to their markets, such as customer needs and competitor strengths 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 increases its capital base.

Microfinance Problem 6: Few organizational resources and poor governance

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Micro entrepreneurs have limited skills, qualifications and exposure to handling businesses. While they need to be trained through capacity building initiatives by the 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 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.

Microfinance Problem 7: 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 the spectrum, there still isnt any 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.

Microfinance Problem 8: Vulnerability to economic shocks

Micro entrepreneurs are particularly susceptible to sudden changes in customer demand, or the weather because their businesses cannot sustain losses owning to their small size (low capital). This may be a problem for the social objectives of microfinance providers but MFIs ensure their economic performance is untarnished by charging high interest rates to compensate this risk. Most problems faced by micro entrepreneurs are caused by their small size, varied locations and improper skills. Naturally, once the venture secures a loan and begins to grow, these problems will eventually subside. One may think the problems at the MFIs end, therefore, need greater attention but that wouldnt be correct because poverty eradication is a very socially-integrated endeavor. Despite all this, one can say with great certainty that the prospects of microfinance are still great so these issue are certainly worth solving.

Microfinance Challenge 9: Perceived High Risk of Micro Entrepreneurship and Small Businesses
Micro entrepreneurs usually have no collateral to offer to microfinance providers against loans, they usually lack an alternate source of income, and have little, if any, formal education or training in the area of their business. As a result, commercial banks attribute a high credit risk to micro entrepreneurs and steer clear of this sector. Microfinance institutes (MFIs) are compelled to compensate for this risk by charging interest rates on loans
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Microfinance Challenge 10: High Costs Involved in Small Transactions/Microlending

The small size of micro enterprises increases the transaction cost for MFIs because they cannot process loans in bulk . This denies MFIs the benefit of economies of scale, hence, they are forced to cover their costs through high interest rates on loans. According to a study conducted by Asian Development Bank, microfinance providers in the Asia-Pacific region charge interest rates on micro-sized loans ranging from 30 to 70% a year, which is much higher than rates offered by commercial banks (Fernando, 2006). However, there are instances where the interest rate charged were too low for the MFIs sustainability. There is, however, a possible solutions to this problem by improving the technology model used by microfinance institute, their operational costs can be significantly lowered and efficiencies may be gained during automated loan processing.

Microfinance Challenge 11: Lack of Debt and Equity Funds for MFIs to Pass on to the Poor
Capital availability for microfinance is hardly a problem owing to the rapid growth in the microfinance sector, which has been fueled by attention from the media and development agencies. Even though there are plenty of financing option available MFIs, there is an emerging shortage of money because of the current financial crisis across the globe. Another reason for this shortfall is the lack of awareness of funding sources by MFI managers.

Microfinance Challenge 12: Difficulty in Measuring the Social Performance of MFIs

Microfinance is delivering the economic returns its proponents promised, but there are only a handful of tools available that measure the social return of loan programs for the poor. To add to the problem, the tools use proxies to estimate the amount of poverty and social change surrounding micro entrepreneurs. This makes the gathering of funds a challenge because donors may quiestion the actual impact made my microfinance.

Microfinance Problem 13: Mixing Charity With Business

Since credit without strict discipline is nothing but charity (Professor Yunus), if microfinance providers fail to protect themselves against loan delinquency, they will, in effect, prioritize social objectives at the expense of financial sustainability.

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Improper delinquency management is a result of inadequate implementation of corporate governance principles, and formal as well as semi-formal microfinance providers often suffer from this. As a result, looser controls over microfinance deals will lead to higher default rates. Read more about the difficulty in mixing charity with business.

Microfinance Problem 14: Lack of Customized Solutions for the Poor

Inappropriate targeting of poor households by microfinance programs is a common problem because MFIs fail to understand the varied needs of micro entrepreneurs. MFIs must spend time in the field with their clients and his/her business, and then use this research to develop customized microfinance tools for each micro entrepreneur. Generalized solutions may work for large companies dealing dealing with large homogeneous customer groups, but microfinance providers need to serve the varied needs of individuals in each micro market segments.

Microfinance Problem 15: Lack of microfinance training for Human Resource in Microfinance Institutions
Working in the microfinance sector is a different ball game compared to the traditional financial sector. For instance, microfinance officers and volunteers need to talk a different language, build lasting relationships with individual micro entrepreneurs, understand the unique needs of the poor, evaluate the borrowers sustainability, and grasp the cultural nuances of the borrowers communities (Im sure Ive missed a few). Of course, all this needs to be done by large financial firms as well, but the needs and characteristics of the two markets are very different. Its no surprise microfinance providers need special training to ensure they avoid problems such as intimidating or under-serving clients.

Microfinance Problem 16: Poor Distribution System of Microfinance Institutions and lack of information about microfinance investment opportunities
There are over 10,000 MFIs across the world, but their reach is only 4% of the potential market.World Bank, 2001 Firstly, microfinance providers may be complacent with their client base in certain cities and feel no economic need (ignoring the social need to eradicate poverty) to spread out their distribution system to cater to the poorest of households. Secondly, micro entrepreneurs are sprawled over large geographical areas, often in remote places, which often makes them inaccessible to MFIs. This is a slight problem because even though
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there are over 10,000 MFIs around the world, they may not know about the existence and needs of certain micro entrepreneurs.

Microfinance Problem 17: Dual mission of Microfinance Institutions to be Financially Sustainable as well as Development Oriented
Microfinance providers tend to forget their main objective is social development and not profit creation. The principle of one micro entrepreneur one micro loan is overlooked by profit-hungry MFIs who end up targeting the same individual for many loans and cause multiple borrowing (also known as credit pollution. This is a major problem because at the end of the day, that individual gets burdened by mounting interest payments and is pushed deeper into the folds of poverty. Poor governance on the side of MFIs as well as the micro entrepreneur are to blame for this. All these problems can broadly fall into either financial and operational in nature and we can therefore see that they should not be impossible to solve as the microfinance sector moves towards it optimal performance level in the next several years. In other words, despite these problems, the prospects of microfinance are quite bright. In the coming weeks, we will look at potential solutions to all these problems, which arent difficult to adopt (a couple have been already been mentioned above).

Case Study:1 1. February, 2010

Greg Chen, Stephen Rasmussen, and Xavier Reille This Focus Note distills lessons from four microfinance markets: Nicaragua, Morocco, Bosnia and Herzegovina (BiH), and Pakistan. These countries have all experienced a microfinance repayment crisis after a period of high growth and are important microfinance markets in their respective regions. In all four cases, CGAP compiled case studies combining data analysis with wide-ranging interviews with microfinance institution (MFI) managers, investors, and industry analysts. These case studies do not indicate that the global economic recession is a primary cause of the repayment crises, though it was among the various contextual factors affecting borrowers repayment capacity. Instead, the case studies reveal that three vulnerabilities within the microfinance industry lie at the core of the problems: 1. Concentrated market competition and multiple borrowing. 2. Overstretched MFI systems and controls. 3. Erosion of MFI lending discipline. This Focus Note begins by briefly telling the story of recent growth in the four countries leading into the credit delinquency crises. The second section describes the key contextual factors that affected the severity and spread of the crises. The third section breaks down the three internal industry vulnerabilities that lie at the heart of the problems. This is followed by a discussion on how market infrastructure and tools can
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help to mitigate some of the dangers. The note concludes by placing these experiences within the broader context of the global microfinance story and makes recommendations to strengthen the industry.

Case Study
This case study was made possible by support provided in part by the US Agency for International Development (USAID) Agreement No. LAG-A-00-96-90016-00 through Broadening Access and Strengthening Input Market Systems Collaborative Research Support Program (BASIS-CRSP) and the World Council of Credit Unions, Inc. (WOCCU).

1. Introduction
This paragraph uses experiences of what went wrong in two micro finance institutions in South Africa, the practices of one development organization and the current unique Micro Enterprise Alliance HIV/AIDS workplace tool kit, to contribute to the theme of Commercialization: Profitability versus quality. Hence, the write up will show the difficulties of attaining profitability faced by micro finance institutions in South Africa. A suggestion will be made on the importance of addressing the market failures by supporting the end market through the provision of well-directed business support services for their clients. Lastly, MEA as the network organization of enterprise development practioners in South Africa has developed a tool kit aimed at first making the small micro and medium enterprises to internalize the prevention of HIV/AIDS in the workplace and later to externalize the intervention to their client base. It is believed that with the current out reach of MFIs, this will result in a useful intervention which would reduce the impact of HIV/AIDS on poverty alleviation programs, like micro finance and also to suggest ways how micro finance can reduce the HIV/AIDS pandemic.

The South African Rural Micro Finance Context.

The South African economy is still dealing with the blow of the political legacy. This is evident in the existence of a concentration of big businesses. There is a missing critical

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mass of medium and a large number of small, micro, medium (SMMEs) enterprises with low levels of sustainability. South Africa has a population of 42 million people and of these 49% live below the minimum living standard as calculated by the Bureau of Market Research (BMR)1. From 1996 to 2000 the number of poor people is estimated to have increased from 17.1 million to 23.3 million. The worst poverty levels are in the Eastern Cape, Free State and Limpopo, which make 36% of the total population of the country. However, on the supply side, South Africa only has five commercial banks, which control about 80% of the sectors assets. Access to financial services is clearly skewed with most of the population having no access to savings accounts while a small population has access to other formal financial services like credit. This small proportion is the people in urban areas where the providers of different forms of credit operate. This is supported by the Strauss Commission (1996), which concluded that the self-employed and especially those in the rural areas have very limited access to banking services. The lack of interest by the commercial banks to provide other financial services like credit to the poor has been due to the high risk and high transactional costs of servicing small rural accounts. To solve this problem, the Government, created Khula as a wholesaler to provide loan capital and other services to the financial retail institutions. The Land Bank and the Housing Financial Corporation were at the same time created to provide loans for the development of the agriculture sector and the building of houses for the low-income households.

The minimum living level for a family of five is R1,585 per month.
Sine the creation of Khula as a wholesaler intermediary, 60 retail finance institutions were created but to date only a paltry fourteen MFI and 15 micro credit organizations exist in operation and most of them hardly aimed at reaching the poor as their operations are confined to the urban small enterprises. One reason given for the lack of growth within the micro finance institutions is that the markets in which they operate in are unsustainable. This suggests that there is currently a market failure both on the demand and supply side. Currently, there are visible programmes from the Bank Sector Educational Training Authority and the new apex fund to address this market disequilibrium by providing capacity building to MFIs and
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SMMEs. Only when this takes place will the small enterprise seen to be growing thereby being health customers of the micro finance institutions.

Provident South Africa.

Provident Financial is a financial services U.K based company, which has offered financial services for the last 120 years. It is a public company, listed on the London stock exchange and based in London, U.K. The main product lines are home credit and motor insurance. Provident South Africa operated as a subsidiary of International Home Credit. The original case study was drafted by the former CEO of PSA. Figures were with hold for confidentiality. Provident South Africa (PSA), was one of the leading providers of finance between 1998 and 2001. Operating in the Northern province in South Africa, it covered 60% of the province within three years. After the initial trial period, it was allowed to operate as a profit center by the mother company. By the end of December 2001, PSA had served over 100,000 clients in four branches. Had some 150 employees and 600 self employed agents mainly women who they used for loan collections. Amid competition from the other institutions like TISHA, Small Enterprise Foundation and Aghishana, PSA prided itself of having the capability of growing its loan book weekly compared to the others. Indeed, most of these organizations found it very difficult to function in the Northern province due to the operations of PSA. However, by the end of 2001 signs were setting in showing a decline in growth. This was due to financial resource constraints, internal weaknesses and threats from the macro environment.

Case Study Assessing Micro-Finance Services in Agricultural Sector Development: A Case Study of Semi-Formal Financial Institutions in Tanzania Background
In Tanzania, as in other parts of Africa, lack of credit severely constrains sustainable agricultural development. Deficient or inappropriate collateral, credit rationing, lender preferences for high-income customers borrowing large amounts, and bureaucratic procedures in the formal financial sector are often identified as key factors contributing
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to low access to credit among most rural dwellers. Without credit, the millions of cashstarved smallholders who dominate the rural landscape are unable to adopt most productivity-enhancing technologies. Low-return, diversified, subsistence-oriented production practices therefore continue to underpin most rural livelihood strategies. With liberalization of the financial sector in the 1990s, credit facilities for input supply and marketing collapsed as interest rates rose and shut out the subsidized sources of credit on which such schemes depended. Most co-operative unionswhich were already struggling financiallycould no longer access loans and were, in turn, unable to service small and medium-scale farmers. Private banks sprung up, but under the more competitive liberalized financial system, they could not profitably fill the gaps left by co-operatives. The sharper focus on profitability and actual financial risks therefore worked against traditional lending to the rural sector, and to agriculture in particular. These barriers to rural lending in the formal and informal financial sectors have become a major concern for policy makers in Tanzania. One outcome of that concern is increased interest in semi-formal micro-finance institutions, which are responsible for increasingly large shares of credit in both urban and rural areas. Most of these microfinance institutions are not profit-seeking banks but rather are run as not-for-profit nongovernmental organizations. These features of micro-finance organizations raise a number of issues regarding their viability, and, more importantly, about their ability to meet the borrowing needs of rural dwellers, including farmers.

Objectives
The objective of this study was therefore to evaluate the performance of, and constraints facing, semi-formal micro-finance institutions currently providing credit in two rural regions of Tanzaniai.e., the Agricultural Development Programme in Mbozi, Mbeya and the Mwanza Women Development Association in Ukerewe, Mwanza. Specifically, the study investigated the lending mechanisms of these institutions, examined the socio-economic characteristics that influence loan demand To achieve these objectives, data were collected through a formal survey of 222 farmers participating in the two lending programs. These primary data were supplemented by secondary data from the lending institutions, the Ministry of Agriculture and other regional and district authorities. Descriptive analysis of the data provided summary statistics that were complemented by regression analysis on credit demand and repayment. Demand for credit was hypothesized as being determined by household size, years of schooling of household head, household income, input expenditure, farmer's experience in farming, disbursement lag and borrowing transaction costs.

Implications
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Despite the fact that rural micro-finance institutions in Tanzania are rather new and operate in a difficult environment, they are playing a very important role in the agriculture sector development. It is evident that designing, experimenting with, and building micro-finance institutions, for smallholders, requires new thinking and access to new resources. Public policy will need to support and evaluate this experimentation process and nurture those designs or institutions that hold promise for future success. The government, donors, practitioners and research institutions must work together closely to identify costs, benefits and future potential of emerging micro-finance institutions in rural areas. Analysis shows that micro-finance services are inadequate and do not solve all the agricultural sector problems. It is certainly an illusion to think that micro-finance alone will lead to the sectors development. Agricultural sector development requires complementary services (e.g. infrastructure, marketing services, extension). If a clear orientation is taken towards agricultural development, the public sector must invest in these operations, since even sustainable micro-finance institutions will not be able to fulfil their role in the absence of essential complementary services.

Findings
Descriptive analysis revealed that more than 80 percent of borrowers were aged between 18 and 45 years, with a bias toward older farmers. The average farming experience was 13 years in Mbozi and 21 years in Ukerewe. About half of the borrowers in Mbozi and three-quarters of those in Ukerewe had attained primary education, indicating a level of literacy enabling understanding of rules and procedures for acquiring and using credit. But still only about 15 percent of borrowers in both regions were able to explain procedures for credit procurement and repayment. The average household family size was about 7 people in Mbozi and 9 people in Ukerewe, and area cultivated averaged 0.9 hectares (ha) in the former and 1.6 ha in the latter. About 90 percent of farmers in both regions cultivated less than 1.6 ha, indicating the predominance of smallholder agriculture. One-third of the borrowers were males in Mbozi; all the respondents in Ukerewe were female because the lending program there targeted women. Major constraints to agricultural production were identified as lack of credit, lack of markets and shortage of farm inputs. Other key constraints included low producer prices, high input costs, shortage of extension services, damage caused by crop pests and high transportation costs. High interest rates were significant barriers to borrowing decisions. Borrowers also cited problems with lengthy credit procurement procedures and the amount disbursed being inadequate. Both credit programs experienced poor repayment rates, especially in the early years of operation, with farmers citing poor yields, low producer prices and untimely acquisition of loans as reasons for non-payment. High and increasing
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transaction costs in credit procurement and disbursement hindered effectiveness of the credit programs. Since most borrowers lived in rural areas and far from credit offices, high transportation costs further constrained credit access. In addition, a savings-first arrangement before potential borrowers could gain access to credit, and linking the credit amount to the savings combined to shut out most poor, smallholder farmers, who need credit the most. Regression analysis of the Mbozi credit system indicated that credit demand is negatively affected by transaction costs and disbursement lag period but positively influenced by input expenditure, average household income and the borrowers farming experience. Similarly, in Ukerewe, the regressions identify a negative relationship between credit demand and both transaction costs and disbursement lag, but a positive relationship with average household income and borrowers farming experience. Unlike in Mbozi, input expenditure in Ukerewe is not a significant factor in credit demand. The results show that transaction costs are significant determinants of the demand for credit and cause farmers to borrow less. Long disbursement lag periods are also a disincentive to borrowing. Farmers with high input expenditures tend to borrow more. The same applies to farmers with greater farming experience and those with high incomes. Experienced farmers tend to be well-established, well-known to lenders, and thus more favored in the credit schemes. High household income signals high ability to repay loans. Education and household size have positive but insignificant effects on the demand for credit. Regression on repayment performance indicates that slow credit disbursement and high transaction costs significantly deter repayment. In addition, in Mbozi, the education level of the borrowers is positively linked to better repayment rates, but those with access to other sources of funding have poor repayment rates. In Ukerewe, farmers with large cultivated areas achieve better repayment rates.

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Bibliography 1. 2. 3. 4. 5. Wikipedia www.ask.com www.cagp.com www.socialedge.org Microfinancehub.com

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