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History of microfinance
Over the past centuries, practical visionaries, from the Franciscan monks
who founded the community-oriented pawnshops of the 15th century to
the founders of the European credit union movement in the 19th century
(such as Friedrich Wilhelm Raiffeisen) and the founders of
the microcredit movement in the 1970s (such as Muhammad
Yunus and Al Whittaker), have tested practices and built institutions
designed to bring the kinds of opportunities and risk-management tools
that financial services can provide to the doorsteps of poor people. While
the success of the Grameen Bank (which now serves over 7 million poor
Bangladeshi women) has inspired the world, it has proved difficult to
replicate this success. In nations with lower population densities,
meeting the operating costs of a retail branch by serving nearby
customers has proven considerably more challenging. Hans Dieter
Seibel, board member of the European Microfinance Platform, is in
favour of the group model. This particular model (used by many
Microfinance institutions) makes financial sense, he says, because it
reduces transaction costs. Microfinance programmes also need to be
based on local funds.
The history of microfinancing can be traced back as far as the middle of
the 1800s, when the theorist Lysander Spooner was writing about the
benefits of small credits to entrepreneurs and farmers as a way of
getting the people out of poverty. Independently of Spooner, Friedrich
Wilhelm Raiffeisen founded the first cooperative lending banks to
support farmers in rural Germany.
The modern use of the expression "microfinancing" has roots in the
1970s when organizations, such as Grameen Bank of Bangladesh with
the microfinance pioneer Muhammad Yunus, were starting and shaping
the modern industry of microfinancing. Another pioneer in this sector is
Akhtar Hameed Khan.
ACCION International:
This institution had been established by a law student of Latin
America to help the poor people residing in the rural and urban
areas of the Latin American countries. Today, in 2008, it is one
of the most important microfinance institutions of the world. Its
network of lending partner comprises not only Latin America but
also US and Africa.
SEWA Bank:
In 1973, the Self Employed Women's Association (SEWA) of
Gujarat (in India) formed a bank, named as Mahila SEWA
Cooperative Bank, to access certain financial services easily.
Almost 4thousand women contributed their share capital to
form the bank. Today the number of the SEWA Bank's active
client is more than 30,000.
GRAMEEN Bank:
Credit unions and lending cooperatives have been around
hundreds of years. However, the pioneering of modern
microfinance is often credited to Dr. Mohammad Yunus, who
began experimenting with lending to poor women in the village
of Jobra, Bangladesh during his tenure as professor of
economics at Chittagong University in the 1970s. He would go
on to found Grameen Bank in 1983 and win the Nobel Peace
Price in 2006.Since then, innovation in microfinance has
continued and providers of financial services to the
poor continue to evolve. Today, the World Bank estimates that
about 160 million people in developing countries are served by
microfinance. Grameen Bank (Bangladesh) was formed by the
Nobel Peace Prize (2006) winner Dr Muhammad Younus in
1983. This bank is now serving almost 400, 0000 poor people
of Bangladesh. Not only that, but also the success of Grameen
Bank has stimulated the formation of other several
microfinance institutions like, ASA, BRAC and PROSHIKA .
Background
Microfinance and poverty
People find creative and often collaborative ways to meet these needs,
primarily through creating and exchanging different forms of non-cash
value. Common substitutes for cash vary from country to country but
typically include livestock, grains, jewelry and precious metals. As
Marguerite Robinson describes in The Micro Finance Revolution, the
1980s demonstrated that "micro finance could provide large-scale
outreach profitably," and in the 1990s, "micro finance began to develop
as an industry" (2001, p. 54). In the 2000s, the micro finance industry's
Institutional inefficiencies
Saving up
Rutherford argues that the basic problem that poor people face as
money managers is to gather a 'usefully large' amount of money.
Building a new home may involve saving and protecting diverse building
materials for years until enough are available to proceed with
construction. Childrens schooling may be funded by buying chickens
and raising them for sale as needed for expenses, uniforms, bribes, etc.
Because all the value is accumulated before it is needed, this money
management strategy is referred to as 'saving up'.
Often, people don't have enough money when they face a need, so they
borrow. A poor family might borrow from relatives to buy land, from a
moneylender to buy rice, or from a microfinance institution to buy a
sewing machine. Since these loans must be repaid by saving after the
cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is
that microcredit is addressing only half the problem, and arguably the
less important half: poor people borrow to help them save and
accumulate assets. Microcredit institutions should fund their loans
through savings accounts that help poor people manage their myriad
risks.
Saving down
Most needs are met through a mix of saving and credit. A benchmark
impact assessment of Grameen Bank and two other large microfinance
institutions in Bangladesh found that for every $1 they were lending to
clients to finance rural non-farm micro-enterprise, about $2.50 came
from other sources, mostly their clients'
savings. This parallels the experience in the West, in which family
businesses are funded mostly from savings, especially during start-up.
Recent studies have also shown that informal methods of saving are
unsafe. For example, a study by Wright and Mutesasira
in Uganda concluded that "those with no option but to save in the
informal sector are almost bound to lose some moneyprobably around
one quarter of what they save there.
The work of Rutherford, Wright and others has caused practitioners to
reconsider a key aspect of the microcredit paradigm: that poor people
get out of poverty by borrowing, building microenterprises and increasing
their income. The new paradigm places more attention on the efforts of
poor people to reduce their many vulnerabilities by keeping more of what
they earn and building up their assets. While they need loans, they may
find it as useful to borrow for consumption as for microenterprise. A safe,
flexible place to save money and withdraw it when needed is also
essential for managing household and family risk.
Examples
The microfinance project of "saving up" is exemplified in the slums of the
south-eastern city of Vijayawada, India. This microfinance project
functions as an unofficial banking system where Jyothi, a "deposit
collector", collects money from slum dwellers, mostly women, in order for
them to accumulate savings. Jyothi does her rounds throughout the city,
collecting Rs5 a day from people in the slums for 220 days, however not
always 220 days in a row since these women do not always have the
funds available to put them into savings. They ultimately end up with
Rs1000 at the end of the process. However, there are some issues with
this microfinance saving program. One of the issues is that while saving,
clients are actually losing part of their savings. Jyothi takes interest from
each clientabout 20 out of every 220 payments, or Rs100 out of 1,100
or 8%. When these slum dwellers find someone they trust, they are
willing to pay up to 30% to someone to safely collect and keep their
savings. There is also the risk of entrusting their savings to unlicensed,
informal, peripatetic collectors. However, the slum dwellers are willing to
accept this risk because they are unable to save at home, and unable to
use the remote and unfriendly banks in their country. This microfinance
project also has many benefits, such as empowering women and giving
parents the ability to save money for their childrens education. This
specific microfinance project is a great example of the benefits and
limitations of the "saving up" project (Rutherford, 2009).
The microfinance project of "saving through" is shown in Nairobi, Kenya
which includes a Rotating Savings and Credit Associations or ROSCAs
initiative. This is a small scale example, however Rutherford (2009)
describes a woman he met in Nairobi and studied her ROSCA. Everyday
15 women would save 100 shillings so there would be a lump sum of
1,500 shillings and every day 1 of the 15 women would receive that lump
sum. This would continue for 15 days and another woman within this
group would receive the lump sum. At the end of the 15 days a new
cycle would start. This ROSCA initiative is different from the "saving up"
example above because there are no interest rates affiliated with the
ROSCA, additionally everyone receives back what they put forth. This
initiative requires trust and social capital networks in order to work, so
often these ROSCAs include people who know each other and have
reciprocity. The ROSCA allows for marginalized groups to receive a lump
sum at one time in order to pay or save for specific needs they have.
HISTORY OF BANK
A bank is a institution, which deals in money. It accepts
deposits from the public and creates credit with a view to lend
or invest.
The word bank is derived from the words bancus
or banquet that is a bench. The early bankers, the Jews in Italy
transacted their business on benches in the market places,
when a banker failed, his bench was broken into pieces by the
people which indicated the bankruptcy of the individual banker.
but this explanation was turned out on the ground that the
Italian money changes as such were never called bankers in the
middle ages. some others say that the word banks originally
derived from the German WORD PACK meaning a joint stock
fund, which was Italianised into Banco when the Germans
were masters of a great part of Italy . According to professor
Rama Chandra Rao, whatever be the origin of the word bank,
it would trace the history of banking in Europe from the middle
ages.
A bank is a financial institution and a financial intermediatary
that accepts deposits and channels those deposits into lending
activities, either directly by loaning or indirectly through capital
markets. A bank is a connection between customers that have
capital deficits and customers with capital surpluses.
Due to their influence within a financial system and an
economy, banks are generally highly regulated in most
countries. Most banks operate under a system known as
fractional reserve banking where they hold only a small reserve
of the funds deposited and lend out the rest for profit. They are
generally subject to minimum capital requirements which are
employees had not treated them better than their king, the city
merchants decided to keep their cash with the goldsmiths.
which 21 are nationalized banks and six are SBI and its
associate banks.
NATURE OF BANKING
BUSINESS
The nature of banking business can be understood from the
following:
1. Intermediaries or middlemen: banks act as middlemen
between those members of public who have sufficient
funds to be deposited in commercial banks for earning
interests and those who need funds, and so, are willing to
borrow funds from banks on interest for investment in
their business activities.
2. Dealers in debt or financial obligations: the varies types of
deposits accepted by commercial banks from varies
depositors are the debts or financial obligations incurred
by the banks, and are their financial obligations or
liabilities to the depositors, and the advances granted by
them to borrowers are the debts incurred by the borrowers
in favor of banks.
3. Creator of money: Banks are not only dealers in money but
also creators of money.
4. Service industry: All the services provided by banks fall
under service sector industry, they render a variety of
services to the depositors as well as the general public
5. Network of branches: banks are one of the orders form of
financial institution and they have wide network of
branches through which they provide their services across
the world.
CLASSIFICATION OF BANKS
The Banking System in India is categorized into scheduled and nonscheduled banks. They are further divided into cooperative and
commercial banks. The Reserve Bank of India (RBI) controls all these
banks. RBI is considered as the Central Bank of our country. It also
acts as the bankers bank.
nk,
List of private sector banks: (1) Axis Bank (2) Bank of Punjab (3) Centurion Bank Ltd. (4)
Development Credit Bank (6) ICICI Bank (7) IndusInd Bank (8) Kotak
Mahindra Bank (9) Yes Bank (10) Times Bank (11) Global Trust Bank
(12) Balaji Corporation Bank Limited (13) HDFC bank (14) Bandhan
bank (15) IDFC Bank
Foreign Banks These banks are based in foreign country but have
numerous branches in India. Example HSBC, Standard Chartered
Bank. There are 44 foreign banks in India.
List of foreign banks: -
List of RRBs: (1) Allahabad UP Gramin Bank (2) Andhra Pradesh GrameenaVikas
Bank (3) Andhra Pragathi Grameena Bank (4) Arunachal Pradesh
Rural Bank (5) Assam Gramin Vikash Bank (6)
Bangiya
Gramin Vikash Bank (7) Baroda
Gujarat Gramin Bank (8) Baroda Rajasthan Kshetriya Gramin Bank (9)
Baroda UP Gramin Bank (10) Bihar Gramin Bank (11) Central Madhya
Pradesh Gramin Bank (12) Chaitanya Godavari Grameena Bank (13)
Chhattisgarh Rajya Gramin Bank (14) Dena Gujarat Gramin Bank (15)
Ellaquai Dehati Bank (16) Gramin Bank of Aryavarti (17) Himachal
Pradesh Gramin Bank (18) J&K Grameen Bank (19) Jharkhand Gramin
Bank (20) Karnataka Vikas Grameen Bank (21) Kashi Gomti Samyut
Gramin Bank (22) Kaveri Grameena Bank (23) Kerala Gramin Bank
(24) Langpi Dehangi Rural Bank (25) Madhyanchal Gramin Bank (26)
Madhya Bihar Gramin Bank (27) Maharashtra Gramin Bank (28)
Malwa Gramin Bank State (29) Manipur Rural Bank (30) Meghalaya
Rural Bank (31) Mizoram Rural Bank (32) Nagaland Rural Bank (33)
Narmada Jhabua Gramin Bank (34) Odisha Gramya Bank (35)
Pallavan Grama Bank (36) Pandyan Grama Bank (37) Paschim Banga
Gramin Bank (38) Pragathi Krishna Gramin Bank (39) Prathama Bank
(40) Puduvai Bharthiar Grama Bank (41) Punjab Gramin Bank (42)
Purvanchal Bank (43) Rajasthan Marudhara Gramin Bank (44)
Saptagiri Grameena Bank (45) Sarva Haryana Gramin Bank (46) Sarva
UP Gramin Bank (47)Saurashtra Gramin Bank (48) Sutlej Gramin
Bank (49) Telangana Grameena Bank (50) Tripura Gramin Bank (51)
Utkal Grameen Bank (52) Uttar Banga Kshetriya Gramin Bank (53)
Interest rates
This shop in South Sudan was opened using money borrowed from the Finance Sudan Limited (FSL)
Program. This program was established in 2006 as one of the only microfinance lenders in the country.
Role of Microfinance:
The micro credit of microfinance prename was first initiated in
the year 1976 in Bangladesh with promise of providing credit to
the poor without collateral, alleviating poverty and unleashing
human creativity andendeavor of the poor people. Microfinance
impact studies have demonstrated that1. Microfinance helps
poor households meet basic needs and protects them against
risks.2. The use of financial services by low-income households
leads to improvements in household economic welfare and
enterprise stability and growth.3. By supporting womens
economic participation, microfinance empowers women,
thereby promoting gender-equity and improving household well
being.4. The level of impact relates to the length of time clients
have had access to financial services.
Difference between micro credit and microfinance:
Micro credit refers to very small loans for unsalaried borrowers
with little or no collateral, provided by legally registered
institutions. Currently, consumer credit provided to
salaried workers based on automated credit scoring is usually
not included in the definition of micro credit, although this may
change. Microfinance typically refers to micro credit, savings,
insurance, money transfers, and other financial products
targeted at poor and low-income people.
Borrowers:
FINANCIAL INSTRUMENTS
borrowers and the terms of the loans for which the borrowers are
applying.
Community Investing
Investments made directly into low-income or disadvantaged communities
through channels such as community development banks, credit unions, loan
fund and microfinance institutions. Community investing is closely tied to
socially responsible investing and focuses on economically improving rundown communities by offering banking services and small loans to fund
businesses, non-profit groups and affordable housing initiatives.
Microsavings
A branch of microfinance, consisting of a small deposit account offered to
lower income families or individuals as an incentive to store funds for future
use. Microsavings accounts work similar to a normal savings account,
however, are designed around smaller amounts of money. The minimum
balance requirements are often waived, or very low, allowing users to save
small amounts of money and not be charged for the service.
Granting Of Loans
The primary role of micro-finance banks is to provide micro loans to
individuals or groups in need of it. People seeking to acquire a loan from
a micro-finance bank must have met all of the requirements for acquiring
such loan.
Acquiring loans from commercial banks could be very cumbersome
compared to micro-finance banks. Also, the chances of average people
and small scale business to get loans from commercial banks are very
slim, unlike micro-finance banks whose primary objective is to grant
loans to small scale businesses and individuals, irrespective of their
financial status, especially poor and low income earners.
Poverty Alleviation
Microfinance Banks play an important role in the poverty alleviation of a
particular country. This is because, the primary objective of a
government seeking to alleviate poverty is to provide as many job
opportunities as possible, as well as creating a means of generating
income for businesses. Micro-finance banks are key players in this
aspect because they specialize in the provision of credit facilities to
individuals as
well as businesses.
For example, the Lift Above Poverty Level (LAPO) is an NGO that runs a
micro-finance bank in Nigeria. LAPO is a pro-poor financial institution
committed to the empowerment of low income earners and petty traders.
It was established in 1987 and has been committed to improving the
quality of life of poor people by giving them access to credit facilities
without collateral. They grant loans on the basis of small installment
payments, making repayment of the loans less stressful. LAPO has
helped a lot of small scale business people in financing their businesses.
Types of MFI
Legal Acts under which Registered
1.
Not for Profit MFIs
a.) NGO - MFIs4 0 0 t o 5 0 0 S o c i e t i e s R e g i s t r a t i o n A c t , 1 86 0 o r
s i m i l a r Provincial Acts Indian Trust Act, 1882b . )
N o n -
Th e r e wi l l b e n o ce i l i n g i n r es p e c t o f l oa n a m o u n t
extended by Section 25 companies to SHGs; h o w e v e r
SHGs, to provide credit not exceeding Rs. 50000/p e r m e m b e r o f t h e S H G . R B I m a y c o n s i d er i s s u i n g
r e v i s e d i n s t r u c t io n s . As r e g ar d s c a p i t a l , t o e n c ou r a g e
m o r e f l o w o f d o n a t i o n s / c o n t r i bu t i o n s , d on o r s t o b e
e x e m p t e d f r o m i n c o m e t a x un d e r S e c t i o n 11C of t h e I T
A c t . As r e g a r d s c a p i t a l a de q u a c y, s i n c e t he r e i s no
m a n d a t o r y ca p i t a l r e q u i r e m e n t , m i n i m u m s t an d a r d s n e e d
n o t b e c o n s i d e r e d . S a v i n g s o f S H G s pr o m o t e d b y S e c t i o n
2 5 c o m p a n i e s b e m a i n t a i ne d wi t h p er m i t t e d o r ga n i z a t i o n s .
C o m p l e t e i n c o m e t a x e x e m p t i o n f or S e c t i o n 2 5 co m p a n i e s
p u r v e yi n g m i c r o c r e d i t ( t o t h e d o no r a nd t o t h e
r e c e i v e r ) . G o v e r n m e n t t o c on s i d e r co m p l e t e ex e m p t i o n
f r o m I T f o r i n c o m e e a r n ed , a s t h e m a i n p ur p o s e of t h e
organization is to empo wer the poor.
Indian microfinance is poised for continued growth and high valuation
but faces pressing challenges and opportunities thatleft unaddressed
could negatively impact the long-term future of the industry. The
industry needs to move past a single-minded focus on scale, expand the
depth and breadth of products and services offered, and focus on the
double bottom line and over indebtedness to effectively address the risks
facing the industry.
STRENGTHS OF Microfinance
1 . E x p e r i e n c e d s e n i or m a n a g e m en t Tea m .
2.Robust IT system.
3 . C l e a r a n d we l l d e f i ne d H R p o l i c y.
4.Infusion of own equity - commitment from
promoters.
5.Process innovation.
6.Clarity and good understanding of vision.
7 . Tra n sp a r e n c y a t a l l l ev e l s .
8.Plans for value added and livelihood support
services (LDS).
9.Shared ownership.
WEAKNESSES
1.Limited resources.
2.Micro managing.
Impact
For more details on this topic, see Impact of microcredit.
achieved much less than what its proponents said it would achieve,
but its negative impacts have not been as drastic as some critics have
argued. Microcredit is just one factor influencing the success of small
businesses, whose success is influenced to a much larger extent by
how much an economy or a particular market grows. For example,
local competition in the area of lack of a domestic markets for certain
goods can influence how successful small businesses who receive
microcredit are.
Abuse
In Nigeria cases of fraud have been reported. Dubious banks
promised their clients outrageous interest rates. These banks were
closed shortly after clients had deposited money and their deposits
were lost. The officials of Nigeria Deposit Insurance Corporation
(NDIC) have warned customers about so-called "wonder banks".
[61]
One initiative to prevent people from depositing money to wonder
banks is the mini-series "e go better" that warns about the practices of
these wonder banks.