Microfinance: The Basics

Muhammad Yunus, founder of Grameen BankImage via WikipediaThe basic premise behind microfinance is simple: access to credit is basic, it is a human right. You give people three tools - education, health, credit - and they fly. Traditional credit has depended on your ability to put down some collateral. And that has cut off a large swath of humanity. There are over a billion people who live on less than a dollar a day. There are over two billion people who live on less than two dollars a day.

Yunus in Bangladesh has proven the default rate among these small borrowers tends to be really, really low. 98% of those who borrow pay back. That is a much better rate than rich people and corporations in New York City. Their default rate is higher.

So what gives? Why were mad men bankers pouring trillions into real estate and shady finance tools a few years back instead of pumping that money into microfinance? Stupidity. Racism.

You can't build enough schools and colleges and print enough textbooks on time. But you can hope to take everyone online. Similarly microfinance has to be taken to all those people. Microfinance is the ultimate fishing net.

Microfinance - Wikipedia, the free encyclopedia not just credit but also savings, insurance, and fund transfers ..... Microfinance is a broad category of services, which include microcredit. ..... Due to the broad range of microfinance services, it is difficult to assess impact, and no studies to date have done so. ...... it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one ..... most poor people have few assets that can be secured by a bank as collateral...... 76% of moneylender rates exceed 10% per month, including 22% that exceeded 100% per month. ..... their services are convenient and fast, and they can be very flexible when borrowers run into problems ..... the Grameen Bank (which now serves over 7 million poor Bangladeshi women) ..... the overwhelming majority of people who earn less than $1 a day, especially in the rural areas, continue to have no practical access to formal sector finance. ...... $25 billion currently at work in microfinance loans ..... estimated that the industry needs $250 billion to get capital to all the poor people who need it ...... Poor people need not just loans but also savings, insurance and money transfer services. ... microfinance must pay for itself. ..... Microfinance means building permanent local institutions. .... integrating the financial needs of poor people into a country's mainstream financial system. ..... the shortage of strong institutions and managers ..... Microfinance institutions should measure and disclose their performance – both financially and socially. ..... Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. ..... Borrowers were prepared to pay very high interest rates for services like quick loan disbursement, confidentiality and flexible repayment schedules. They did not always see lower interest rates as adequate compensation for the costs of attending meetings, attending training courses to qualify for disbursements or making monthly collateral contributions. They also found it distasteful to be forced to pretend they were borrowing to start a business, when they were often borrowing for other reasons ..... moneylenders more legitimacy, arguing in favour of regulation and efforts to increase competition between them to expand the options available to poor people. ...... experts generally agree that women should be the primary focus of service delivery. Evidence shows that they are less likely to default on their loans than men. ..... The delinquency rate for solidarity lending was 0.9% after 30 days (individual lending—3.1%), while 0.3% of loans were written off (individual lending—0.9%) ....... many MFIs consider the risk of lending to men to be too high. .... the 1980s 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 a role in reducing poverty ...... massive worldwide demand. ..... Few MFIs that meet the needs for savings, remittances or insurance ..... Need for more dissemination and adoption of rural, agricultural microfinance methodologies ..... 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. ..... 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 ...... parallels the experience in the West, in which family businesses are funded mostly from savings, especially during start-up ....... poor people get out of poverty by borrowing, building microenterprises and increasing their income. ..... While they need loans, they may find it as useful to borrow for consumption as for microenterprise. ...... 2004 .. approximately 665 million client accounts at over 3,000 institutions ...... postal savings banks (318 million accounts), state agricultural and development banks (172 million accounts), financial cooperatives and credit unions (35 million accounts) and specialized rural banks (19 million accounts). ...... the highest concentration of these accounts was in India (188 million accounts representing 18% of the total national population). The lowest concentrations were in Latin American and the Caribbean (14 million accounts representing 3% of the total population) and Africa (27 million accounts representing 4% of the total population, with the highest rate of penetration in West Africa, and the highest growth rate in Eastern and Southern Africa ...... "savings accounts in alternative finance institutions outnumber loans by about four to one. This is a worldwide pattern that does not vary much by region." ...... the MicroBanking Bulletin, which is published by Microfinance Information Exchange. At the end of 2009 it was tracking 1,084 MFIs that were serving 74 million borrowers ($38 billion in outstanding loans) and 67 million savers ($23 billion in deposits) ....... help people manage costs like weddings, funerals and sickness .... The microcredit era that began in the 1970s has lost its momentum, to be replaced by a 'financial systems' approach. ..... progress in delivering financial services in less densely populated rural areas has been slow. ...... The new financial systems approach pragmatically acknowledges the richness of centuries of microfinance history and the immense diversity of institutions serving poor people in developing world today. ........ an increasing awareness of diversity of the financial service needs of the world’s poorest people, and the diverse settings in which they live and work. ...... Informal financial service providers ..... Member-owned organizations ..... NGOs ..... 3,316 of these MFIs and NGOs lending to about 133 million clients by the end of 2006 ...... pioneering banking techniques like solidarity lending, village banking and mobile banking that have overcome barriers to serving poor populations ..... Formal financial institutions ...... efforts are being made to link self-help groups to commercial banks, to network member-owned organizations together to achieve economies of scale and scope, and to support efforts by commercial banks to 'down-scale' by integrating mobile banking and e-payment technologies into their extensive branch networks. ...... he unbalanced emphasis on credit at the expense of microsavings .... The volume channeled through Kiva's peer-to-peer platform is about $100 million as of November 2009 ...... there are only one or two methodologically sound studies of microfinance's impact ..... rather than focusing strictly on microcredit, also giving citizens in poor countries access to rudimentary and cheap savings accounts ...... strengthen the communication skills and leadership of women ..... those borrowers randomly selected to receive financial training as part of their borrowing group meetings had higher profits ..... Most criticisms of microfinance have actually been criticisms of microcredit, delivered in the absence of other microfinance services such as savings, remittances, payments and insurance. ....... hundreds of thousands of borrowers effectively work as wage labourers for the marketing subsidiaries of Grameen Bank or BRAC. ...... In July 2010 India's biggest MFI, SKS Microfinance also went public. ...... In 1997 the Norwegian authorities discovered that 608 million kroner (US$ 100 Million approximately) aid from Norway and other countries contributed to the Grameen Bank was being diverted by Mohammed Yunus and his closest associates to a company that was engaged in an entirely different sector. ...... the For-Profit company Grameen Phone ..... the high interests and mafia like ways of trying to get those interest money from the poor ...... people receiving microloan often end in a spiral of debt because the interest rate often is 100% a year
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