Looking at microfinance and its future
Microfinance refers to the provision of financial services to poor or low-income clients, including consumers and the self-employed. In broader terms, it refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.
India has seen an impressive growth in Microfinance Industry in the recent past. Microfinance is one of the few market-based, scalable anti-poverty solutions that are in place in India today, and the argument to scale it up to meet the overwhelming need is compelling. A recent study done by Celent, a company that publishes reports identifying trends and best practices in financial services technology, shows a staggering growth in MFI’s in India over the last 5 years, with less than 50 million US $ assets in 2003, to over 800 million US $ assets in 2007. You can find the entire report here.
UNCDF, in 2005 published ‘Microfinance and the Millenium Development Goals’, whilst observing the ‘International Year of Microcredit’. It was a complete compendium containing various strategies, barriers and recent developments.
Strategies recommended
1. Engage the Informal Economy
Up to 80% of people in developing countries derive their incomes from the informal sector, without security of tenure and without formal employment, thus the need for good financial mechanisms to support wealth creation and financial services in this sector.
2. Grow Domestic Deposits: Mobilize Micro-saving
Cost effective, secure and accessible microsavings services feed impoverished, cash-strapped economies, and improve the lives of those living in poverty.
Contrary to some beliefs, low-income people save their money. In fact, their savings represent a higher portion of their net assets than those of their counterparts in society’s upper income segments. Even
in the poorest countries, such as Bangladesh, research indicates that poor households save an average of more than $800USD per year. With access to well-designed savings products, low-income people
can accumulate wealth. When aggregated and invested properly, these small, sometimes seemingly insignificant amounts can add fuel to country economic growth.
3. Invest in Women
Because of the interconnection of financial power, poverty and women, microfinance has an active role in improving economic equality. Increased economic power enables women to improve other areas of their – and their children’s – lives.
4. Facilitate National and International Remittance Flows
National and international remittances and payment systems as important financial tools for those living in poverty are highlighted as key drivers to achieve the Millennium Development Goals.
5. Develop Local Private Sectors and Invest in Innovation
Microfinance is the progenitor of local private sector development. Microfinance feeds small and medium enterprise development, both propelling the growth of micro enterprises but also fueling the expansion of suppliers and vertical infrastructure needed by larger businesses. Because microfinance creates increased wealth for low-income individuals, it also creates new consumers and markets for businesses of all sizes.
6. Improve Slum Conditions
Microfinance increasingly supports purchasing living space, home improvement and home building in slums through special savings and loan products. It generates wealth for slum dwellers, enabling them to obtain improved housing.
8. Improve Health Services
Microfinance can contribute to financing health initiatives and create wealth for low-income people so that they can afford health services. Healthy clients also reduce credit risk.
Barriers Identified
1. Lack of Relevant Data
In microfinance, the availability of hard financial sector data to answer the simple question of “who has access to what, and what is the quality of that access?” is nearly impossible to come by.
2. Financial Sector Infrastructure Support
Access to microfinance is stifled by a lack of fiscal, regulatory and supervisory policies to promote rather than stunt deep, broad and inclusive financial sectors.
The Grameen Bank, one among the most famous microfinance organizations, originated in Bangladesh and was awarded the Nobel Peace Prize in 2006. It started off by disbursing small loans to the impoverished without requiring collateral. Other leading microfinance institutions in India include, SKS Microfinance, SHARE Microfin Ltd. (SML), and Spandana.
