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Introduction Microfinance - the concept of microfi

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    www.luanar.ac.mw Knowledge Innovation Excellence

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    www.luanar.ac.mw Presentation Outline 1. The concept of Microfinance 2. Approaches to Microfinance provision 3. Principles of Microfinance

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    www.luanar.ac.mw Definition and Description of Microfinance A variety of definitions exists:  Microfinance has been defined to refer to: (1) small–scale financial services, primarily credit and savings provided to people: (a) who farm or fish or herd; (b) who operate small enterprises or micro enterprises where goods are produced, recycled, repaired or sold; (c) who provided services; (d) who work for wages or commissions (e) who gain income from renting out small amounts of land, vehicles, draft animals, machinery and tools; and, (f) to other individuals and groups at the local level of developing countries both in rural and urban (Robinson,M., 2000)

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    www.luanar.ac.mw Definition and Description of Microfinance  For some, Microfinance is understood to entail: (2) “ the provision of financial services to micro–entrepreneurs and small businesses which lack access to banking and related services due to the high transactions costs associated with serving these clients categories.”  In South Africa – Microfinance is used to describe: (3) “the supply of financial services to low income employees, which in many ways similar the retail banking.”

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    www.luanar.ac.mw Definition and Description of Microfinance  For others Microfinance is viewed as a movement which: (4) “envisions a world in which as many poor and near poor households have permanent access to an appropriate range of high quality and affordable financial services offered by a rage of retail providers to finance income producing activities, build assets, stabilize consumption, and protect against risks. These services include, savings, insurance, credit, payments and remittances (funds transfer).” (Christian, R., Rosenberg, R. and Jayadeva, V. 2004)

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    www.luanar.ac.mw Definition and Description of Microfinance Type of clients Characteristics of financial services Purpose for which financial services are required Types of financial services required  Poor households  Near poor households  Accessible  Affordable  Appropriate  Available  Income generating activities (micro/small businesses, farming)  Building assets (housing, agricultural implements, household assets)  Consumption smoothing (food, etc)  Risk management (emergency, illnesses and old age, crop failure etc)  Savings  Insurance  Credit  Payment and remittances (funds transfer)

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    www.luanar.ac.mw Key features that describe/characterize Microfinance • Those that lack access to banking services – implies that others are excluded from the formal financial system • See FINSCOPE Consumer Survey Summary for Malawi by Fin Mark Trust 2014  Microfinance is therefore a collective term used for financial intermediation services to low income groups and poor customers.  the term that has come to refer generally to both informal and formal arrangements offering small scale financial services to the poor.  Modern “Microfinance” began as a grass-roots “movement” motivated largely by a development paradigm and has over the years evolved into a global industry informed increasingly by a commercial/finance paradigm.

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    www.luanar.ac.mw Approaches/Mechanisms for delivery of Microfinance services ( Read Ledgerwood 2000, Chapter 3 pp 63-85; Robinson 2000 Chapter 1 pp22-29 and Chapter 2 pp 46-97 ) • Two approaches have been used to deliver microfinance services and these approaches have been a subject of much debate in the past • The debate centered on what the overall goal of microfinance is; to some extent this also depends on the MFIs objective and the perceived demand for financial services. • Two broad views to the delivery of microfinance services (a) The Financial Systems Approach ( also referred to as Institutionist view or the Minimalist Approach ) (b) The Poverty Lending Approach ( Welfarist View or the Integrated Approach )

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    www.luanar.ac.mw Approaches/Mechanisms for delivery of Microfinance services Financial Systems Approach This view argues that the primary role of Microfinance Institution (MFI) is to provide financial intermediation. • Financial intermediation –refers to the transfer of capital or liquidity from those who have excess at a particular time to those who are short at the same time (MFIs are needed to coordinate these needs of the low income people.) • Goal: to provide sustainable financial services to low income and poor people but not necessary to the poorest among them. • Proponents of this view argue that: • Competition amongst MFIs will ensure high quality and low-cost services. • Evaluation of MFIs should focus on financial indicators and efficiency.

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    www.luanar.ac.mw Approaches/Mechanisms for delivery of Microfinance services • Subsidized credit programme may undermine the development of a financial system for low income groups. • Microfinance should not be integrated with other development services because specialization is necessary to reach financial sustainability and large scale outreach . • The lack of institutional capacity is a binding constraint on large scale outreach and that credit is not an important tool for poverty reduction.

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