Reaching the Unreached Microfinance industry is set to reach new heights. With superlative growth numbers in a period of economic downturn, the sector has come to attention of a wider range of investors. Despite the widespread liquidity crunch, the SHG-bank linkage and the group lending microfinance institution (MFI) models recorded impressive increase both in terms of number of households reached and volume of loans. During the year 2008-09 6.9 million new members were added under SHG model taking the total membership tally to 54 million. Meanwhile, in the same period, MFIs added 8.5 million new members, taking the total client base to 22.6 million. The total outstanding microfinance loans including credit to SHGs by banks amounted to Rs.359.39 billion as on March 2009: a growth of 30% over last year. By the end of March 2009, these numbers in combination constituted 1.29% of gross bank credit of scheduled commercial banks1. However the regional bias still exists: the north and eastern India are still largely underserved, and many areas in the north and north-east regions remain entirely untouched. The deeper penetration in new and existing areas has opened many organisations to new and diverse risks. These risks come in the form of multiple lending, large loan size disbursement in poorer markets, migration of borrowers and so on. These risks are further exacerbated by the fact that, with the focus on achieving numbers, poaching of groups and multiple lending has become common within Indian microfinance. Sporadic warning signs have been seen in south where concerted resistance from clients to making repayments in the face of multiple loans is growing. The standardised lending systems, loan amounts, and weekly meetings/repayments ...
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...phisticated deals including a variety of forms of securitisation, non convertible debentures (NCD), commercial paper, purchase of loan books and subordinated debt-based lending have already been completed, and IPOs are anticipated from SKS and at least 3-4 other of the larger NBFCs. Clearly IPOs are the preferred exit route for many of the PE investors – and, if SKS’s model is followed, also for the MFI’s promoters3. Indeed, today an IPO is the inspiration and ambition for a growing number of MFIs and their promoters. Valuations seem to be likely to follow a telco-based model and thus based on the number of clients on an MFI’s books – resulting in huge incentives to rollout and hard-sell standardised products without reference to the needs (or other debts) of the clients. Small wonder there is chorus of concern about the future and direction of microfinance in India.
How has MCI raised external funds in the past? How sensible have these decision been?
Microcredit group lending practices aim to solve both of these problems that prevent poor borrowers from receiving credit through traditional methods. Individuals in the recipient community form groups among themselves and receive a loan as a collective with the knowledge that every member of the group is liable for the debts of the other members. The fact that these groups are voluntary and among people who live in the same community greatly reduces the risk of unreliable individuals receiving loans.
By now, I have fully prosecuted my case against microfinance, and you’re probably wondering, “What did microfinance ever do to this guy?” Well, my answer would be, I have nothing against microfinance, it was an innovative idea that had the best of intentions, however, as I have argued, it just does not work. Personally, I have nothing to gain from writing this editorial against microfinance, but millions of impoverished people around the world do. Millions, who could use our billions in a much more effective way.
MFIs are indeed a source of profit for those who collect the interest rates (IPOs holders and other stakeholders, such as small banks). For that reason, it might look like that the very top of the pyramid is getting even richer on the behalf of the unfortunate bottom of the pyramid. It is also true that the interest rates are locked at their highest pick, which was a result of a global financial crisis in 2008-2009. However, we should look at these facts as the area for improvement, rather than as a reason to stop MFIs once and for
Micro-loaning is designed to break the cycle of poverty by allowing low income residents access to outside funds, which they were previously restricted from. These funds give the opportunity to participate in investments, such as small businesses, and create a steady flow of income. Micro-loaning provides financial services for those who might have low or no income, as well as not having the official documents required when applying for a regular loan. With the goal of low interest and easy application, micro-loaning appears to the most efficient, alternative way of alleviating poverty. To help gain a better understanding of micro-loaning; we will explore the micro-finance history and its organization, poverty and the target subject of this organization, and the benefits and backfires of providing these services.
Microcredit can be defined as small loans, or microloans, for people around the world in extreme poverty to help spur entrepreneurship. The issue of microcredit is extremely important in the world’s economy. Poverty alleviation and economic development are the primary goals of microcredit programs, that is why they began in the developing countries of Asia and Latin America, economist Muhammad Yunus and his Grameen Bank in Bangladesh are credited of pioneering this financial innovation (Smith, Thurman, 2007). After acquiring a loan, impoverished people get involved in self-employment projects that help them to start a business and begin generating income and in many cases leave poverty. Microcredit offers loans to poor people without requesting any financial history from them. These loans help to improve the quality of life of individuals and communities through commitment. In recent years, the idea of giving small loans to poor people became the darling of the development world, giving a way to propel even the poorest people into better lives (Jolis, 2011).
...t of poverty trap. MFIs were faced with many challenges, the fundamental challenge being the adverse selection and moral hazard problems, although these were solved with group lending. The microfinance model was highly flawed as demonstrated with its many critiques ranging from high interest rates to multiple lending by MFIs to the borrowers. However MFIs are under modification, with legalisation and sanctions being drawn up to prevent the exploitation of the poor from occurring in the future. Microfinance is still successful as it is a means of expanding credit access to those who are deemed un-creditworthy by formal institutions and who would otherwise be forced to rely on exploitative informal institutions like moneylenders and pawnbrokers. The establishment of MFIs in developing countries is a step in the movement towards universal financial access for the poor.
As a massive provider of consumer goods in India, Hindustan Lever Limited (HLL), is attempting to penetrate the rural markets where there is a massive opportunity for growth. HLL’s current operating sectors are becoming increasingly competitive and crowded. Their best opportunities now lie in developing new markets and rising to the top of that market. They are attempting to do this with a program for developing entrepreneurs, named Shaktis. Met with initial success the program now needs to grow without increasing costs.
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
Question: “Microfinance appears to offer a ‘win-win’ solution, where both financial institutions and poor clients profit” (Morduch, 1999). Critically assess this statement with reference to the empirical literature.
1.Christen, Robert Peck; Rosenberg, Richard & Jayadeva, Veena “Financial institutions with a double-bottom line: implications for the future of microfinance” (July 2004)
With the dismal picture of state-owned rural finance organizations, micro-finance nongovernmental institutions are growing to meet the credit needs of small producers in many countries. Reports indicate that they now meet the credit demand of 8-10 million people in Africa, Asia, and Latin America.4 Many of these organizations are subsidized not for high loan default costs but for higher transaction costs associated with group-based lending and other social intermediation cost...
...a and Benin have a remarkable loan repayments at level of 97%, almost 20% higher than agricultural credit repayments in some industrialized countries. Microfinance has shown its capabilities as a powerful tool in combating poverty.
Studying Banking and Finance at University of St.Gallen will help me further increase my proficiency in corporate finance and financial markets. The in-depth research of specific topics, as well as a comprehensive curriculum, is a possibility for me to focus on my topic of interest – the mechanisms and institutions involved in providing venture capital and identifying angel investors as means to encourage innovation.... ... middle of paper ... ...
The Grameen Bank has faced criticism for not providing proper tools to educate the borrowers before (Abedin, 1996). It has worked to improve on its microcredit system and continues to alleviate poverty. This bank has helped to impact communities all throughout Bangladesh. Individuals are expanding their choices, growing networks, and utilizing services from the government (Dowla, 2006). It has provided opportunities for the poor in Bangladesh that were unimaginable before. The Grameen Bank still faces challenges with the rapid growth, but it continues to report successful numbers in the repayment of borrowed loans. The next step is to continue to monitor how to properly grow the bank and how to impact more people that are still finding themselves in poor conditions.