Introduction Microfinance - the concept of microfi | Finance

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www.luanar.ac.mwKnowledgeInnovationExcellence

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www.luanar.ac.mwPresentation Outline1. The concept of Microfinance2. Approaches to Microfinance provision3. Principles of Microfinance

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www.luanar.ac.mwDefinition and Description of MicrofinanceA 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 areproduced, 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, draftanimals, machinery and tools; and,(f)to other individuals and groupsat the local level of developing countries both in rural and urban (Robinson,M.,2000)

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www.luanar.ac.mwDefinition and Description of MicrofinanceFor some,Microfinance is understood to entail:(2)“the provision of financial services to micro–entrepreneurs and smallbusinesses which lack access to banking and related services due to thehigh 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 manyways similar the retail banking.”

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www.luanar.ac.mwDefinition 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 havepermanent access to an appropriate range of high quality and affordablefinancial services offered by a rage of retail providers to finance incomeproducing activities, build assets, stabilize consumption, and protect againstrisks. These services include, savings, insurance, credit, payments andremittances (funds transfer).”(Christian, R., Rosenberg, R. andJayadeva, V. 2004)

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www.luanar.ac.mwDefinition and Description of MicrofinanceType of clientsCharacteristics offinancial servicesPurpose for which financialservices are requiredTypes offinancialservicesrequired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 failureetc)SavingsInsuranceCreditPayment andremittances(funds transfer)

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

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www.luanar.ac.mwApproaches/Mechanisms for delivery of Microfinanceservices (Read Ledgerwood 2000, Chapter 3 pp 63-85; Robinson2000 Chapter 1 pp22-29and Chapter 2 pp 46-97)•Two approaches have been used to deliver microfinance services and theseapproaches have been a subject of much debate in the past•The debate centered on what the overall goal of microfinance is; to someextent this also depends on the MFIs objective and the perceived demand forfinancial services.•Two broad views to the delivery of microfinance services(a)The Financial Systems Approach(also referred to as Institutionist view orthe Minimalist Approach)(b)The Poverty Lending Approach(Welfarist View or the IntegratedApproach)

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www.luanar.ac.mwApproaches/Mechanisms for deliveryof Microfinance servicesFinancial Systems ApproachThis view argues that the primary role of Microfinance Institution (MFI) is toprovide financial intermediation.•Financial intermediation –refers to the transfer of capital or liquidity from those who have excessat a particular time to those who are short at the same time (MFIs are needed to coordinatethese needs of the low income people.)•Goal: to provide sustainable financial services to low income and poor peoplebut 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.mwApproaches/Mechanisms for deliveryof Microfinance services•Subsidized credit programme may undermine thedevelopment of a financial system for low incomegroups.•Microfinance should not be integrated with otherdevelopment services because specialization isnecessary to reachfinancial sustainabilityandlarge scale outreach.•The lack of institutional capacity is a bindingconstraint on large scale outreach and that credit isnot an important tool for poverty reduction.

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