Microfinancing And Grameen Bank

April 19, 2010

What do you think

Microfinancing is ?
Microfinance is the supply of loans, savings,
and other basic financial services to the poor
Moreover

Microfinance is the provision of financial services

to low-income clients, including consumers and the self-
employed, who traditionally lack access to banking and
related services
 What is the difference between
microfinance and microcredit ?
Microcredit 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 microcredit,
although this may change.

Microfinance typically refers to microcredit, savings, insurance,

money transfers, and other financial products targeted at poor and
low-income people
Why are they small ?
 What is an MFI ?
A microfinance institution (MFI) is an organization that
provides microfinance services, ranging from small non-
profit organizations to large commercial banks
Why don't the poor just go to a
bank?
For a moment pretend that you are a poor goat
herder walking into a bank:

– You don't have any money to open a savings account

with
– You don't have any collateral to secure a loan with
– You don't have a credit record as you have never been
formally employed and you've never taken out a loan
before
– You might even be unable to complete the necessary
paperwork as you are illiterate
 So what do poor people do?
Credit is available from informal commercial and non-
commercial money-lenders but usually at a very high cost to
borrowers. Savings services are available through a variety
of informal relationships like savings clubs, rotating savings
and credit associations, and mutual insurance societies that
have a tendency to be erratic and insecure
Why don't banks accommodate poor
people?

Grameen Bank in Bangladesh was formed out of a project

providing small loans to women in the village of Jobra.
Bancosol, a commercial bank in Bolivia, is also a bank which
provides microfinance services for the poor of Bolivia.
Why are microcredit interest rates so
high?

The nature of microcredit – small loans – is such that

interest rates need to be high to return the cost of the loan.
Three kinds of costs the MFI has to cover

The first two, the cost of the money that it lends and the
cost of loan defaults, are proportional to the amount lent
The third type of cost, transaction costs, is not
proportional to the amount lent.
 What are the effects of microfinance?

Microfinance helps very poor households meet basic needs

and protect against risks;
The use of financial services by low-income households is
associated with improvements in household economic
welfare and enterprise stability or growth;
By supporting women's economic participation,
microfinance helps to empower women, thus promoting
gender-equity and improving household well-being

For almost all significant impacts, the magnitude of impact is positively

related to the length of time that clients have been in the programme
 Can microfinance be profitable?
It is true that programs serving very poor clients are somewhat less
profitable than those reaching better-off clients, but this may say
more about managers' objectives than an inherent conflict between
serving the very poor and profitability. MFIs serving the very poor
are showing rapid financial improvement.
Is microfinance the solution to poverty?

No. Microfinance is but one strategy

battling an immense problem.
Microfinancing in [Pakistan]
 In recent years, Pakistan’s relatively young and underdeveloped
microfinance sector has benefited from new initiatives launched by
the Pakistan government, notably, the creation of a microfinance
retail bank, the Khushhali Bank and an apex organisation, the
Pakistan Poverty Alleviation Fund (PPAF) set up to serve retail
microfinance organisations.

There are currently three primary methodologies followed

in Pakistan; first the community-based methodology (used
by Rural Support Programs), the Grameen/solidarity group
model and a hybrid mixing individual lending and
community-based methodology
 The Microfinance Connect has been designed by the Pakistan
Microfinance Network to serve as a resource center for the local
microfinance industry. It provides online access to news, events,
research studies, publications, anecdotes, contacts and other items
of relevance for the microfinance stakeholder community
Commercial Banks in Microfinance

Despite half of commercial bank (CB) branches being

located in rural areas, commercial banking involvement in
the Pakistani Microfinance sector remains underdeveloped

However, two commercial banks have significant

involvement in the microfinance industry, the Bank of
Khyber and the First Women Bank Ltd.
 Grameen Bank
- Banker to the Poor

Grameen's experience demonstrates that, given the support of

financial capital, however small, the poor are fully capable of
improving their lives.

- Muhammad Yunus,
Grameen Bank, Founder
Grameen Bank's positive impact on its poor and formerly poor borrowers
has been documented in many independent studies carried out by
external agencies including the World Bank, the International Food
Research Policy Institute (IFPRI) and the Bangladesh Institute of
Development Studies (BIDS).
The Grameen Bank Project (Grameen means "rural" or "village" in
Bangla language) came into operation with the following
objectives:
 extend banking facilities to poor men and women
 eliminate the exploitation of the poor by money lenders
 create opportunities for self-employment for the vast multitude of
unemployed people in rural Bangladesh
 bring the disadvantaged, mostly the women from the poorest
households, within the fold of an organizational format which they
can understand and manage by themselves and
 reverse the age-old vicious circle of "low income, low saving & low
investment", into virtuous circle of "low income, injection of credit,
investment, more income, more savings, more investment, more
income.
 Is Grameen Bank Different From
Conventional Banks ?

Grameen Bank methodology is almost the reverse of the conventional

banking methodology. Conventional banking is based on the principle
that the more you have, the more you can get

Grameen Bank starts with the belief that credit should be accepted as a
human right, and builds a system where one who does not possess
anything gets the highest priority in getting a loan
 Grameen credit
General features of Grameen credit are :
 It promotes credit as a human right.
 Its mission is to help the poor families
 it is not based on any collateral,
 It is offered for creating self-employment for income-
generating activities and housing for the poor
 It was initiated as a challenge to the conventional
banking It provides service at the door-step of the
poor
 The challenge-Grameen Bank
The industry has been growing rapidly and there have been
concerns that the rate of capital flowing into microfinance is
a potential risk unless managed well.
Thank You!