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Definition
Microfinance is defined as any activity that includes the provision of financial services such as credit, savings, and insurance to low income individuals which fall just above the nationally defined poverty line, and poor individuals which fall below that poverty line, with the goal of creating social value.
The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations.
In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long history from the beginning of the 20th century we will concentrate mainly on the period after 1960. ACCION International, Sewa Bank, Grameen bank these financial institutions has been pioneering the microfinance program after 1970. Some of the microfinance institutions are: Bandhan, Microcredit Foundation of India and Saadhana Microfinance Society, Grameen Koota (1, Sharada's Women's Association for Weaker Section , SKS Microfinance Private Ltd ( and Asmitha Microfin Ltd ).
Model 1: Associations
An association is formed by the poor in the target community to offer microfinance services(micro savings, microcredit, micro-insurance, etc.) to themselves. The association, which can form on the basis of gender, religion, or political and cultural orientation of its members, then gathers capital and intermediates between banks, MFIs and its members. E.g.: Self Help Groups, SHGs (India)
Model 4: Cooperatives
Cooperatives are very much like associations and Community Banks except that their ownership structure does not include the poor. A group of middle or upper class individuals may form a co-op to offer microfinance services to the poor. E.g.: Co-operative Bank (England), Cooperative Rural Bank of Bulacan
(Philippines)
Model 8: Rotating Savings and Credit Associations (ROSCAs) E.g.: A group of 10 women come together in January and pitch in $7 each, making a total of $70, and this sum is given to Member A for the month. In February, another $70 is gathered and given to Member B, and the cycle continues for 10 months (10 members). No interest is charged, and social collateral ensure the money is returned.
The process through which an issuer creates a financial assets and then marketing different tiers of the repackaged instruments to the investors. The process can encompass any type of financial assets and promotes liquidity in the market place.
Securitization helps the MFIS to: To have an access to the capital markets. Improve liquidity. Lend more money Ability to raise finance at low cost. Foreign exchange. To receive instant cash.
Collaterals: Assets pledged by a borrower to secure loan or other credit and subject to seizure in the event of default, also called security. MFIs take little or no collateral security for the credit extended. But now there are indications that majority of microfinance banks are now accepting collaterals because they feel that introduction of soft collateral as security on loans will forbid defaults.
The Malegam committee of RBI had recommended an average margin cap 'of 10% on MFIs having a loan portfolio of Rs. 100 crore 12% for smaller MFIs and a cap of 24% for interest on individuals loans. Currently most MFIs are charging an interest rate over 24%.
Provide access to funding. Encourage self-sufficiency and entrepreneurship. Manage risk. Empower Women.
Improper regulation. Increasing competition. Perceive high risk of micro entrepreneurship and small business. High cost involved in a small transactions. Lack of debt and equity funds for MFIs to pass on to the poor. Difficulty in measuring the social performance of MFIs.