UNIT-2

MICRO FINANCE

2.1 Emergence of Micro Finance

Microfinance is the provision of financial services to low-income, poor and very poor self-employed people (Otero,2000). Robinson (2001) as cited in Ogunleye (2009) defined microfinance as small scale financial services that involve mainly savings and credit services to the poor.

In India, Microfinance has been defined by “The National Microfinance Taskforce, 1999” as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and Improve living standards Microfinance is a term used to refer to the activity of provision of financial services to Clients who are excluded from the traditional system on account of their lower economic status. The financial services will most commonly take the form of loan and savings by removing collateral requirement and creating banking system which is based on mutual trust.

From the 1950s onwards, governments and international donors have been assisting subsidized credit for small holder farmers in developing countries with the aim to Increase agricultural productivity development financial institutions such as agricultural development banks were established to deliver subsidized credit to those farmers. Unfortunately the failure of state implemented credit schemes has been more the rule than the exception.In the 1960s and 1970s the supplyled credit approach ended up with failure, despite the middle and upper class farmers benefited in increasing agricultural productivity through intensive use of inputs. Main reason for state failure of credit provision were rapid disbursement of funds with greater political emphasis, failure to collect loans stemming from lack of proper institutional arrangements and clients’ attitude towards loan as grant money demonstrated that ‘microfinance could provide large scale outreach profitably,’ and in the 1990s Microfinance began to develop as an industry. In the 2000s, the microfinance industry’s objective is to satisfy the unmet demand on a much larger scale, and to play in reducing poverty.

Definition Of Micro Finance

According to Kofi Annan (Sec.General of UN) “Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge and while the lack of financial services is not just a sign of poverty. Today it is looked as an untapped opportunity to create markets, bring people in from the margins and give them the tools to help themselves.”

According to Laureate Milton Friedman, "The Poor stay poor, not because they are lazy but because they have no access to capital.”

According to Jeffrey Sachs –American economist and director of the Earth Institute at Columbia University “The key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development . . . the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung.”

According to Bono - Lead singer for the Irish band U2 and humanitarian advocate “Give a man a fish, [and] he’ll eat for a day. Give a woman microcredit, [and] she, her husband, her children and her extended family will eat for a lifetime.”

According to Ha-Joon Chang “Unfortunately, the hype about microfinance is, well, just that hype”.

Meaning

Microfinance is a type of financial services targeting individuals and small businesses who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; micro insurance; and payment systems, among other services. Microfinance services are designed to reach excluded customers, usually poorer population segments, possibly socially marginalized, or geographically more isolated, and to help them become self-sufficient.

Scope

Micro finance includes the following subject areas:

Microloans:

Microfinance loans are significant as these are provided to borrowers with no collateral. The end result of microloans should be to have its recipient outgrow smaller loans and be ready for traditional bank loans.

The importance of Micro loans is that it is provided with no collateral. The borrower is not bound to pledge something as a security for repayment of the loans. It offers a better overall loan repayment rate than traditional banking product.it enhance the possibility of future investments as it is a sustainable process. Most importantly it gives people a soothing and non stressful life.

Microsavings:

Micro savings accounts allow entrepreneurs operate savings account with no minimum balance.These accounts help users inculcate financial discipline and develop an interest in saving for future.

The importance of microsavings are that the poor people and small businessman with low income can operate their account with no minimum balance. These accounts do not bound people to maintain their accounts with certain amount of money in it.

Microinsurance:

Microinsurance is a type of coverage provided to borrowers of microloans. These insurance plans have lower premiums than traditional insurance policies.

The importance of microinsurance is that it is the machinery to protect the poor people from all the mishap that might take place in furture, example : Acidents, chronic disease etc. It addresses to all kind of risks that people of low income group or poor people face globally.

Importance of Microfinance

1. The area of microfinance has been highlighted since 1970s with an aim to uplift the poor section of the society and to enhance economic growth. Its importance has been amplified amidst global financial crisis when trust into formal banking system is shaken.
2. Microfinance in India performs  a very important role in the development of its nation. It act as an anti-poverty vaccine for the people living in rural areas. It aims at assisting communities of the economically excluded to achieve greater level of asset creation and income security at the household and community level. The utmost significance of microfinance in India is that it dispenses the access to the capital to small entrepreneurs. As it has been discussed above that microfinance in India is providing loans, insurance, access to savings accounts.
3. The concept of microfinance focuses on women also by granting them loans. It act as a tool for the empowerment of poor women as women are becoming independent, they are able to contribute directly to the well beings of their families and are able to confront all the gender inequalities. The major targets of microfinance are the poor rural and urban households and women too. The Reserve Bank Of India imparts no ceiling with respect to minimum and maximum amounts to be given as loan.
4. Credit is important to the poor people for maintaining the common imbalance in between the income and their expenditure. It is also vital to the poor people for the income generating activities like investing in marginal farms and other small scale self employment ventures. Their access to formal banking channels are low due to the lack of resources an nature of formal credit institutions. Consequently in India, Microfinance institutions and self help groups are leading to other traditional banking channels as they are catering the need of credit to poor people. It has contribute a lot in enhancing the quality of life of the poor people.
5. Therefore microfinance is not a financial system but a tool to allievate poverty from the country and bring social change and especially to uplift the status of women in our country so they can become self reliance. There is a public interest the interest of microfinance and this is what makes it acceptable as valid goal for public policy.

Assumptions

A key assumption of microfinance programmes is that it can help the poor, especially rural men and women, can able to develop new or strengthen existing Income Generation programmes. These programmes seek to enhance livelihoods and household incomes leading to improvements in social and health status.

Models of Microfinance Across the World

Associations Model

This is where the target community forms an 'association' through which various microfinance (and other) activities are initiated. Such activities may include savings. Associations or groups can be composed of youth, women; can form around political/religious/cultural issues; can create support structures for microenterprises and other work-based issues.

In some countries, an 'association' can be a legal body that has certain advantages such as collection of fees, insurance, tax breaks and other protective measures. Distinction is made between associations, community groups, peoples organizations, etc. on one hand (which are mass, community based) and NGOs, etc. which are essentially external organizations.

Bank Guarantees Model

As the name suggests, a bank guarantee is used to obtain a loan from a commercial bank. This guarantee may be arranged externally (through a donor/donation, government agency etc.) or internally (using member savings). Loans obtained may be given directly to an individual, or they may be given to a self-formed group.

Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds may be used for various purposes, including loan recovery and insurance claims. Several international and UN organizations have been creating international guarantee funds that banks and NGOs can subscribe to, to onlend or start microcredit programmes.

Community Banking Model

Community Banking model essentially treats the whole community as one unit, and establishes semi-formal or formal institutions through which microfinance is dispensed. Such institutions are usually formed by extensive help from NGOs and other organizations, who also train the community members in various financial activities of the community bank.

These institutions may have savings components and other income-generating projects included in their structure. In many cases, community banks are also part of larger community development programmes which use finance as an inducement for action.

Cooperatives Model

A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. Some cooperatives include member-financing and savings activities in their mandate.

Credit Unions Model

A credit union is a unique member-driven, self-help financial institution. It is organized by and comprised of members of a particular group or organization, who agree to save their money together and to make loans to each other at reasonable rates of interest.

Grameen Model

The Grameen model emerged from the poor-focussed grassroots institution, Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the following methodology:

A bank unit is set up with a Field Manager and a number of bank workers, covering an area of about 15 to 22 villages. The manager and workers start by visiting villages to familiarize themselves with the local milieu in which they will be operating and identify prospective clientele, as well as explain the purpose, functions, and mode of operation of the bank to the local population.

Group Model

The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at the individual level are overcome by the collective responsibility and security afforded by the formation of a group of such individuals.

The collective coming together of individual members is used for a number of purposes: educating and awareness building, collective bargaining power, peer pressure etc.

The Group model is closely related to, and has inspired, many other lending models. These include Grameen, community banking, village banking, self-help, solidarity, peer pressure etc.

Individual Model

This is a straight forward credit lending model where micro loans are given directly to the borrower. It does not include the formation of groups, or generating peer pressures to ensure repayment.

The individual model is, in many cases, a part of a larger 'credit plus' programme, where other socio-economic services such as skill development, education, and other outreach services are provided.

Intermediaries Model

Intermediary model of credit lending positions a 'go-between' organization between the lenders and borrowers. The intermediary plays a critical role of generating credit awareness and education among the borrowers (including, in some cases, starting savings programmes. These activities are geared towards raising the 'credit worthiness' of the borrowers to a level sufficient enough to make them attractive to the lenders.

The links developed by the intermediaries could cover funding, programme links, training and education, and research. Such activities can take place at various levels from international and national to regional, local and individual levels.

NGO Model

NGOs have emerged as a key player in the field of microcredit. They have played the role of intermediary in various dimensions. NGOs have been active in starting and participating in microcredit programmes. This includes creating awareness of the importance of microcredit within the community, as well as various national and international donor agencies.

They have developed resources and tools for communities and microcredit organizations to monitor progress and identify good practices. They have also created opportunities to learn about the principles and practice of microcredit. This includes publications, workshops and seminars, and training programmes.

Peer Pressure Model

Peer pressure uses moral and other linkages between borrowers and project participants to ensure participation and repayment in microcredit programmes. Peers could be other members in a borrowers group (where, unless the initial borrowers in a group repay, the other members do not receive loans. Hence pressure is put on the initial members to repay); community leaders (usually identified, nurtured and trained by external NGOs); NGOs themselves and their field officers; banks etc.

ROSCA Model

Rotating Savings and Credit Associations or ROSCAs, are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle.

After having received the lump sum amount when it is his turn, he then pays back the amount in regular/further monthly contributions. Deciding who receives the lump sum is done by consensus, by lottery, by bidding or other agreed methods.

Small Business Model

The prevailing vision of the 'informal sector' is one of survival, low productivity and very little value added. But this has been changing, as more and more importance is placed on small and medium enterprises (SMEs) - for generating employment, for increasing income and providing services which are lacking.

Policies have generally focussed on direct interventions in the form of supporting systems such as training, technical advice, management principles etc.; and indirect interventions in the form of an enabling policy and market environment.

A key component that is always incorporated as a sort of common denominator has been finance, specifically microcredit - in different forms and for different uses. Microcredit has been provided to SMEs directly, or as a part of a larger enterprise development programme, along with other inputs.

Village Banking Model

Village banks are community-based credit and savings associations. They typically consist of 25 to 50 low-income individuals who are seeking to improve their lives through self-employment activities.

Initial loan capital for the village bank may come from an external source, but the members themselves run the bank: they choose their members, elect their own officers, establish their own by-laws, distribute loans to individuals, collect payments and savings. Their loans are backed, not by goods or property, but by moral collateral: the promise that the group stands behind each individual loan.

Portfolio Securitization

Securitisation is a process under which a lender bundles loans together and sell them to another financial institution, freeing up capital. The risk of the loan is transferred to the buyer in the process. Financial institutions such as banks buy these portfolios in order to meet their priority sector lending norms.

Loan pools can be securitized two ways—direct assignment or through issuing pass-through certificates (PTC). Direct assignment involves directly transferring a bunch of loans to the buyer. In a PTC, the certificates are issued through a special purpose vehicle (SPV) and could carry an implicit guarantee by the SPV.

“Securitisation volumes have reduced for microfinance segment on account of the impact of demonetisation. We are already seeing a pickup in Direct Assignments. PTC volumes may take some more time to pick up as investors (like mutual funds) wait for collections trends to stabilize," said Krishnan Sitaraman, senior director, financial sector ratings and structured finance ratings, at Crisil Ratings.

Housing and loan against property, commercial finance, small business loans form major part of securitization volume apart from microfinance. Total securitisation portfolio of microfinance industry for the financial year 2016 stood at Rs11,500 crore, according to Crisil estimates.

Demonetisation disrupted the microfinance business in the months of November and December. Local leaders in parts of Maharashtra, Uttar Pradesh, Madhya Pradesh and Kerala were telling people that their loans have been waived, taking benefit of the situation. Repayment rates dropped to 30-40% in many areas in November.

“Since there was no customer acquisition in latter half of the quarter, securitized portfolio was nil. On an average we do securitisation worth Rs.50 crore every quarter. In the coming quarter too, we will not do any securitisation because demand is not there," said Anup Kumar Singh, director of Sonata Finance Pvt. Ltd, an Uttar Pradesh-based microfinance lender.

Portfolio at risk for 30 days has increased considerably from 0.5% in the previous quarters to 7.52% in the quarter three of the current financial year, according to Microfinance Institutions Network (MFIN) report.

2.2 SHG-2

Characteristic features of Self-Help Groups (SHGs) and the norms for their linkage with banks were first enumerated in the guidelines of NABARD circular dated 26 February 1992.

Two decades hence the SHG-Bank Linkage Programme (SHG-BLP) continues to be the mainstay of the Indian microFinance scene with 74 lakh SHGs covering over 10 crore households saving with the formal banking system with savings balance of over Rs. 7, 000 crore as on 31 March 2011. About 49 lakh of these SHGs have also accessed bank credit and have over Rs 31,000 crore as outstanding credit from the banking system. In other words, the SHG-BLP has so far been the most preferred and viable model for financial inclusion of the hitherto unreached poor.

However, despite the unique characteristics of SHGs and noteworthy accomplishments, the following issues continue to affect the programme in many areas;

• inadequate outreach in many regions,

• delays in opening of SHG accounts and disbursement of loans,

• impounding of savings by banks as collateral,

• non-approval of repeat loans even when the first loans were repaid promptly,

• multiple membership and borrowings by SHG members within and outside SHGs and

• limited banker interface and monitoring

Product level changes: SHG2

While the basic tenets of the SHGs being savings led credit product remain true even today (Annexure 1), many recent developments require crucial changes in the approach and design of SHG-BLP to make it more flexible and client friendly. The following guidelines of SHG2 are suggested to enable financing banks to respond to the changing requirements of members of

SHGs:

Allowing voluntary savings:

a) Presently, SHGs save fixed amounts as compulsory savings in weekly/ fortnightly / monthly meetings.

b) Growth in rural economy and opportunities like MNREGS and other schemes has positively influenced the SHGs and their member’s capacities to save.

c) While many SHGs and their members have enhanced the amount of compulsory savings over the years1 ; the compulsory savings in the SHGs are often restricted to the lowest savings potential of a member of SHG.

d) It has been observed that the savings capacity and potential varies across members. Therefore, the concept of voluntary savings by members over and above the compulsory savings provides an opportunity for banks.

e) It is desirable that such SHG members are encouraged to open individual bank accounts revive their existing “no frill accounts” by depositing the surplus so as to facilitate them to steadily graduate from community banking to individual banking.

f) However, until the members of SHGs graduate to the level of opening and maintaining individual bank accounts, there is a need to create a suitable alternate framework within the group. SHG members with greater savings potential may be allowed to park their surplus fund within the group in the form of voluntary savings over and above the compulsory savings mandated in the group and a suitable accounting system may be started in the SHG for this purpose.

g) Voluntary savings can be reckoned in two ways; (1)not forming a part of the group corpus (2) as a part of group corpus and utilized for intra group lending. In case of (2), it will also be reckoned for assessing the quantum of loan to the group from bank. However, it is desirable that the additional savings by group members does not entitle the concerned members to seek proportionately higher dosage of credit for themselves. The SHGs should have freedom to decide as to whether the voluntary savings by members of the group are eligible for

proportionate share in the interest income or dividend from the group.

h) The suggested approaches of capturing voluntary savings of the members of SHGs need to

be introduced with commensurate financial education of SHGs.

Modifications in credit product

Purpose of bank loan

Loan granted by the bank to the SHG is purpose neutral as the group decides the purpose for which loan can be given to its members. As indicated by RBI in its circular the banks are expected to meet the entire credit requirements of SHG members for (a) income generation activities, (b) social needs like housing, education, marriage, etc., and (c) debt swapping, etc.

Cash Credit / overdraft for SHGs

a) There are instances of non-sanction of repeat loans to SHGs, as also cases of limiting need based credit. Sanction of a cash credit / overdraft system of lending for SHGs for a longer operational tenure may therefore be adopted to overcome these issues and to permit SHGs to have larger loans in tune with increasing pooled savings.

b) This approach will provide considerable flexibility to SHGs in meeting their frequent needs as well as help them in reducing their cost of borrowings.

Enabling Joint Liability Groups (JLGs) within SHGs

a) A few members of an SHG may graduate faster to start or expand economic activities requiring much higher levels of loans than required by other SHG members. In such cases, the other members may not like to stand mutual guarantee for a few large sized loans.

b) In such cases, a smaller “Joint Liability Group (JLG)” from members of an SHG may be created. The members of JLG will continue to remain members of the SHGs and continue to participate in the activities of SHGs are earlier.

c) Banks may encourage creation of such enterprise / livelihood based JLGs as a separate entity. Banks may use financial and other support extended by NABARD for this purpose.

Improving Risk Mitigation Systems

In order to further strengthen the banker’s comfort and confidence in financing of SHGs, a few risk mitigation mechanisms, viz; self-rating tools by SHGs, conduct of audits at SHG level, etc are recommended.

a) The self-rating mechanism by SHGs is intended to educate SHG members of their strengths and weakness in an SHG’s functioning for initiating corrective action.

b) Audit in SHGs is a third party assessment of SHGs’ operations while keeping SHGs’ own functioning free and flexible. Audit, inter alia, should cover aspects like regularity in meetings, savings, internal lending process, correctness of interest application, accounting for all receipts and payments, drawing out final accounts of SHGs, etc. The audit may be informal in nature, but be made compulsory for credit expansion beyond the normal limit of four times of the savings of SHGs

Building second tier institutions

a) Experience gathered over the years in promotion and nurturing of SHGs suggests the need for a much longer and sustained hand holding by SHG Promoting Institutions (SHPIs) to ensure SHG’s sustainability.

b) Members of well functioning or active members of SHGs and NGOs or other entities engaged

in promotion of SHGs best provide these support services to SHGs. Such entities may beengaged by banks to serve as Business Facilitators for helping the bank monitor the functioning of SHGs and take corrective action.

National Rural Livelihood Mission

National Rural Livelihoods Mission (NRLM) was launched by the Ministry of Rural Development (MoRD), Government of India in June 2011.

Aided in part through investment support by the World Bank, the Mission aims at creating efficient and effective institutional platforms of the rural poor, enabling them to increase household income through sustainable livelihood enhancements and improved access to financial services.

National Rural Livelihood Mission (NRLM) is a poverty alleviation project implemented by Ministry of Rural Development, Government of India. This scheme is focused on promoting self-employment and organization of rural poor. The basic idea behind this programme is to organize the poor into SHG (Self Help Groups) groups and make them capable for self-employment. In 1999 after restructuring Integrated Rural Development Programme(IRDP), Ministry of Rural Development (MoRD) launched Swarnajayanti Grameen Swarojgar Yojana (SGSY) to focus on promoting self-employment among rural poor. SGSY is now remodeled to form NRLM thereby plugging the shortfalls of SGSY programme.This scheme was launched in 2011 with a budget of $5.1 billion and is one of the flagship programmes of Ministry of Rural Development. This is one of the world's largest initiatives to improve the livelihood of poor. This programme is supported by the World Bank with a credit of $1 Billion. The scheme was succeeded by Deen Dayal Antyodaya Yojana on 25 September 2015.

Mission

"To reduce poverty by enabling the poor households to access gainful self- employment and skilled wage employment opportunities resulting in appreciable improvement in their livelihoods on a sustainable basis, through building strong and sustainable grassroots institutions of the poor."

Guiding Principles

Poor have a strong desire to come out of poverty, and they have innate capabilities .

An external dedicated and sensitive support structure is required to induce the social mobilization, institution building and empowerment process.

Facilitating knowledge dissemination, skill building, access to credit, access to marketing, and access to other livelihoods services enables them to enjoy a portfolio of sustainable livelihoods.

Values

The core values which guide all the activities under NRLM are as follows:

• Inclusion of the poorest, and meaningful role to the poorest in all the processes
• Transparency and accountability of all processes and institutions.
• Ownership and key role of the poor and their institutions in all stages – planning, implementation, and, monitoring.

NRLM will be implemented in a mission mode. This enables:

(a) shift from the present allocation based strategy to a demand driven strategy, enabling the states to formulate their own livelihoods-based poverty reduction action plans.

(b) focus on targets, outcomes and time bound delivery.

(c) continuous capacity building, imparting requisite skills and creating linkages with livelihoods opportunities for the poor, including those emerging in the organized sector.

(d) monitoring against targets of poverty outcomes.

As NRLM follows a demand driven strategy, the States have the flexibility to develop their own livelihoods-based perspective plans and annual action plans for poverty reduction. The overall plans would be within the allocation for the state based on inter-se poverty ratios.

The second dimension of demand driven strategy implies that the ultimate objective is that the poor will drive the agenda, through participatory planning at grassroots level, implementation of their own plans, reviewing and generating further plans based on their experiences. The plans will not only be demand driven, they will also be dynamic.

2.3 Impact Of Microfinance

Impact is about understanding how financial services affect the lives of poor people. To date, most impact assessments have focused on microcredit programs rather than looking at a range of financial services.

• Impact considers income growth, asset building, and reduction of vulnerability.
• Impact indicators extend beyond enterprise measures (assets, employment, revenues) to include multiple dimensions of poverty, including overall household income, social improvements in health and education, and empowerment (in terms of increased self-esteem and control of household resources among women

The impact of microfinance is important because of the following reasons

• Outreach is important.-Financial institutions must reach poor clients to have an impact. As we know most microfinance clients today fall in a band around the poverty line. The extreme poor are rarely reached by microfinance. (Social safety net programs are often more appropriate for the destitute and extreme poor.)
• Product characteristics count- Specific characteristics of financial products, such as loan terms and transaction size, affect impact. Shortterm working-capital loans may work well for traders wanting to purchase inventory. For producers who need to make one-time investments in equipment purchases, however, they work less well. These clients may require other services like term savings or longer-term loans.
• The asset base of clients is relevant- The initial resource base of a client affects impact. The impact of financial services on clients who begin with more resources (financial, physical, or social) tends to be greater than on clients who start from a very low resource base.
• Sustainability matters- The length of time that an individual has been a client of an institution has a positive correlation with impact. Sustainable institutions ensure ongoing impact by providing permanent access to services.
• Country context is a factor- The macroeconomic, legal, and policy environments seriously affect impact. Poor economic conditions, weak social and physical infrastructure (education, health, roads), corruption, and lack of security adversely influence the ability of clients to benefit from financial services.

Impact of MicroFinance in following areas

Household level

• Microcredit leads to an increase in household income. The use of loans and deposit services can result in a diversification of income sources (e.g., Uganda) or enterprise growth (e.g., Eastern Europe).
• Access to financial services enables clients to build and change their mix of assets. Microcredit can be used for land acquisition, housing construction or improvements, or the purchase of animals and consumer durables. Clients can also use loans to make important investments in human assets, such as health and education.
• Poor people are very vulnerable and move from one crisis to another. Access to microfinance enables them to manage risk better and take advantage of opportunities. In Bolivia, many Pro Mujer clients use loans to protect their level of consumption when crises occur, avoiding large dips in material wellbeing.

Individual level

• For women, money management, greater control over resources, and access to knowledge leads to greater choices and a voice in family and community matters. Economic empowerment is accompanied by growth in self-esteem, self-confidence, and new opportunities. In 2002, 103 women clients from Activists for Social Alternatives (ASA) were elected to local councils in India.
• Microfinance clients tend to have higher levels of savings than nonclients, which is very important for building assets. In Zimbabwe, microfinance clients opened accounts in banks or post offices; in Peru, mistrust of formal institutions translated into savings in construction materials and inventory.

Enterprise level

• Enterprise revenues rise as a result of microfinance services, but not always where expected. Loans are fungible and are used where the perceived need or return is highest. Between 1997 and 1999, an overall increase in revenues was observed among all enterprises managed by households in India and Peru. But the same studies showed no impact on the specific enterprises for which loans were presumably taken.
• Job creation in single -person enterprises appears negligible. However, when the total number of enterprises is combined, client households often create work for others. For example, in Peru, each microfinance client created three additional working days per month for non-household workers.

Impact Assessment and Monitoring

There are some guidelines for Impact assessment and monitoring of Microfinance

These guidelines have been formulated to:

• Offer relevant information that will help users make informed and effective decisions in order to design IM and IA suited to prevailing contextual factors and objectives;
• Build on and improve existing M&E procedures, and help users understand and appraise the impact of projects on human well-being (current M&E mainly focuses on performance indicators such as financial and institutional sustainability criteria);
• Measure the effectiveness of microfinance programmes according to key concepts in poverty reduction: strengthening physical, human and social capital; increasing the standard of living; improving access to and control over productive resources; and enhancing knowledge about and participation in individual rights and power;
• Help to design a less-costly, application-orientated M&E process that is con-text specific and with which it is possible to reach a high level of data reliability;
• Provide information for decision making, project design and mid-term corrections by proving impact (accountability) and improving intervention (project management);
• Help users avoid undesirable or negative programme impact;
• Identify various MFI stakeholders and make them more aware of their ownership;
• Help to indicate necessary changes in microfinance policies to ensure that effi-cient dissemination and transparency exist between the project, the MFI and the donor;
• Show donors the effectiveness of their input in response to their goal to alleviate poverty.

Microfinance Impact Assessment Designes

Monitoring

Impact assessment experts in the field of international development, including in microfinance, place emphasis first on monitoring. Monitoring is critical to development programs and institutions because it provides information in a timely manner that can be used to correct or improve implementation. Monitoring requires having indicators and targets. Indicators can be financial, social, and/or environmental. They can be at different levels: individual, household, business, and/or village/community.

Monitoring can take place at different stages, such as entry into the program, during the program, exiting the program, and post-exit. It can take place at periodic times: monthly, annually, etc. Monitoring can be done thematically, for example, to know client satisfaction, changes in clients’ lives, etc. A good monitoring system has a variety of these elements, and most importantly, a good monitoring system is designed to supply the information that the institution needs.

Monitoring is used for decision-making. Therefore, information that is captured by monitoring tools should

be analyzed and presented to the appropriate decision-making body (ies) in the institution or program.

Information is costly to collect for the MFI and is an imposition on clients. If information is not being used, then there is no point in collecting it.

Microfinance Poverty Alleviation Measures

The microfinance industry promotes the dual objectives of sustainability of services and outreach to the very poor. When deciding to fund specific microfinance institutions (MFIs), donors and other social investors in the sector consider both objectives, but their relative importance varies among funders. Furthermore, many practitioners, donors, and experts perceive a trade-off between financial sustainability and depth of outreach, although the exact nature of this trade-off is not well understood.

In recent years, several tools have emerged to assist donors in their assessment of the institutional performance of MFIs. One example is the CGAP Format for Appraisal of Microfinance Institutions (hereafter, CGAP Appraisal Format), which contains practical guidelines and indicators for measuring MFI performance on a range of issues, including governance, management and leadership, mission and plans, systems, operations, human resource management, products, portfolio quality, and financial analysis. Analysis of these institutional features allows an appraisal to consider an institution’s potential for viability and/or sustainability. At the same time, the proliferation of tools such as the CGAP Appraisal Format has encouraged transparency and the development of standards for financial sustainability in microfinance.

Currently, no rigorous tool exists to measure the poverty level of MFI clients. In order to gain more transparency on the depth of poverty outreach, CGAP collaborated with the International Food Policy Research Institute (IFPRI) to design and test a simple, low-cost operational tool to measure the poverty level of MFI clients relative to non clients. This toolis a companion piece to the CGAP Appraisal Format; donors should not use the poverty assessment tool without also conducting a larger institutional appraisal.

The concept of poverty is complex and strongly influenced by local cultural and socioeconomic conditions. The poverty assessment approach presented in this manual supports a flexible definition of poverty that can be adapted to fit local perceptions and conditions of poverty. The tool is intended neither as a means to target new clients nor to assess the impact of microfinance services on the lives of existing clients. It may provide a useful means to verify—both for the donor and the MFI—the extent to which an existing strategy results in poor clients joining the MFI. The tool assesses the poverty levels of MFI clients compared to non clients within the operational area of an MFI. Using available data or expert opinion, the tool also relates local poverty levels to poverty measured at larger regional and national levels.

IFPRI developed a survey-based method of assessment and tested it with case studies using random samples of client and non client households from the operational areas of four MFI partners of CGAP. Not only did these institutions operate in significantly different geographic

and socio economic settings, they also had different objectives and institutional designs. A sample of 500 households—200 client households and 300 non client households—was drawn in each of the case studies.

Results from these case studies helped refine the final product, a practical operational manual. This manual explains in detail the process for conducting a comparative poverty assessment between MFI clients and non clients.

Financial Products And Services Objectives

Role of Microfinance- Minimalist vs Integrated approach

The minimalist approach considers the access by low-income individuals to credit as the only piece missing for income generation and, therefore, sees the providing of microcredit loans as a development strategy per se.

On the other hand, the integrated approach emphasizes the importance of                            providing not only credit but a range of development-oriented services to the poor in order to attack the structural causes of poverty.

Minimalist Approach

• Typically, these non-financial services should include educational programs, community-based development programs, business and capabilityenhancing training, and so on.

In terms of economic sustainability, operating costs incurred in the minimalist approach are obviously much lower than those of integrated microcredit programs.

• Minimalist programs often adopt specific risk-managing and credit analysis methods that demand some degree of social intermediation through the use of loan officers, but avoid the costs of additional development-oriented services or policies.
• This approach is based on the premise that there is a single “missing piece” for economic growth among the poor, i.e. affordable, accessible short-term credit (Ledgerwood 1999).
•  Minimalist programmes are implemented by microfinance institutions such as agriculture/farming banks or credit unions.

• Minimalist approaches normally offer only financial intermediation, i.e. savings, credit, insurance, credit cards, and payment systems.
• Minimalist programmes will acknowledge that the poor may need other development and social services, but they have to assume that other agencies will provide these, because provision of such services is not their corporate business.
• This approach offers the great advantage of having a single focus, which becomes more cost effective with time, so that subsidies that might have been necessary to establish the programme, can gradually be eliminated (Ledgerwood 1999).

Integrated Approach

This strategy, which lies somewhere near the centre of the microfinance spectrum, takes a rather more wholistic view of the poor in its design of poverty reduction

programmes (Ledgerwood 1999).

It offers not only a range of financial and social intermediations, but adds to these enterprise development services, such as marketing, marketing analysis, business and production training, and social services, like health and nutrition, education, adult literacy training awareness raising on civil and human rights matters, and so forth.

World Vision explains how this model fits into its wholistic, integrated development programmes, in which the poor are engaged in activities addressing multiple inter-related needs, such as potable water supply, health care, basic education, food security and economic growth.

The programme offers community banking as the solution for the poorest, using a group-based, joint liability model that includes compulsory savings, member training in loan management and business

training skills.

Financial Services

Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises.

The financial sector is traditionally among those to receive government support in times of widespread economic crisis. Such bailouts, however, enjoy less public support than those for other industries.

Banking Services

A commercial bank is what is commonly referred to as simply a bank. The term "commercial" is used to distinguish it from an investment bank, a type of financial services entity which instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds (debt) or stock (equity).

The primary operations of commercial banks include:

• Keeping money safe while also allowing withdrawals when needed
• Issuance of cheque books so that bills can be paid and other kinds of payments can be delivered by the post
• Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business) etc

Investment banking services

Underwriting debt and equity for the private and public sector in order for such entities to raise capital.

1. Mergers and acquisitions - Work to underwrite and advise companies on mergers or takeovers.
2. Structured finance - Develop intricate (typically derivative) products for high net worth individuals and institutions with more intricate financial needs.
3. Restructuring - Assist in financially reorganizing companies
4. Market maker - Provide liquidity to the markets by both buying and selling financial instruments with their own account in hopes of profiting off the Bid–ask spread.

Foreign exchange services

Foreign Exchange machine

Foreign exchange services are provided by many banks and specialist foreign exchange brokers around the world. Foreign exchange services include:

Currency exchange - where clients can purchase and sell foreign currency banknotes.

Wire transfer - where clients can send funds to international banks abroad.

Non- Financial Services

The non-financial Non- financial services include information, education, networking/access to markets and recognition. They should complement the financial offerings of a bank. They are not a marketing effort, not part of CSR and not one-size-fits-all; they require a business strategy in order to ensure sustainability; services sector includes economic activities, such as computer services, real estate, research and development, legal services and accounting.

Designing Micro Finance Models

Revenue Models

Revenue models can be based on a combination of joining fees, commission fees for both borrowers and lenders for every loan, or commission on monthly repayments. Additional revenues can come from donations, sponsoring partners and advertisers. Many microcredit models use a system of peer support and pressure where borrowers are responsible for each other's success to ensure that every member of their group is able to pay back the loans.

References

1. https://www.researchgate.net/
2. https://www.economicsdiscussion.net/