Unit 2

Approaches to Micro-finance
Saving led and credit led microfinance
As its name suggests, savings-led microfinance is organized around
savings activities.
It is an approach to financial services for people who are too remote or
too poor to access formal services and marks a sharp departure from
current microfinance (uncovered group/people/Communities), whose
primary and indeed, often exclusive activity is credit or loan-based.
Most savings led approaches to microfinance are community-based,
driven by the innovation and leadership of very poor people who are
underserved by formal financial institutions.
Credit-led microfinance is organized around credit and other micro
lending activities.
Models of Microfinance (Grameen replication)
• Grameen Bank Model- founded in 1976 by the Nobel Laureate, Professor Muhammad Yunus in
Bangladesh
• It is popular worldwide and has been adapted by a large number of organizations.
• The typical loan offers of MFIs under Grameen methodology are;
 General loans
Seasonal loans
Specific loans (sanitation, housing)
loans issued from the group fund
• savings products comprise of the compulsory group fund savings, and any additional personal,
voluntary savings.
• In recent years, several leading Nepalese microfinance providers have started offering diversified
saving schemes such as pension fund savings,education savings, and micro-insurance covering
risks related to health, life and livestockas in Grameen Generalized System (GGS).
• RMDC (Rural Microfinance Development Centre) finances Microfinance Development Banks
(MFDBs) along with commercial banks and finance companies under the Deprived Sector Lending
(DSL) scheme.
• NirdhanUtthan Bank Limited, ChhimekBikas Bank Limited andSwabalambanBikas Bank Ltd. are
some Nepalese MFIs operating under the Grameen Bank Model.
Grameen Bank Model (In Nepal)
 First introduced in Nepal in the early 1990’s, the Grameen Bank model is comparatively more feasible in
Terai, where the economic activities are more flourished with a relatively more developed market and road
infrastructure.
 Under this approach, peer groups, each comprising of five members, are formed.
 Three to ten such peer groups form a center at a particular location – close to a village, where they meet
once every week or fortnight or month as decided by the members.
 A group chairperson and a center chief, elected by each group and each center respectively, oversee the
activities of group members and maintain group discipline, check loan utilization and ensure that loan
installments are timely repaid.
 In the meetings, group members collect savings and make demand for loans and also settle the loans or
interest due and repay loan installments as per schedule.
 Additional loans may be provided to the members using the group fund managed by the group members.
 Loans are made initially to two members, then to two others and finally to the last member, with a four to
eight week interval between each disbursement.
 Such loans do not require collateral security.
 However, group guarantee for repayment is mandatory. Subsequent loans can be accessed only upon the
successful repayment of existing loans by all group members.
 The MFI field staff facilitates the group meetings and also verifies the utilization of disbursed loans.
Grameen Bank Credit Model
Co-operative Model of Microfinance
Co-operative Model of Microfinance
Cooperative models are mostly implemented by the Saving and Credit
Cooperatives (SCCs) under which a wide range of savings and loan products
are provided to the members.
A co-operative is an autonomous association of persons united voluntarily
to meet their common economic, social, and cultural needs and aspirations
through a jointly-owned and democratically-controlled enterprise.
Some cooperatives include member-financing and savings activities in their
mandate.
SCCs are serving almost all the districts in Nepal, they are considered a
more suitable financing model for the hilly and mountain residents as they
provide both savings and financial services to the members in a homely
atmosphere without much bureaucratic hassle. Due to low cost operation,
their interest rates are also lower than that of other financial institutions.
Co-operative Model of Microfinance (Cont.…
Government of Nepal enacted the Co-operative Act 1992 A.D (2048 B.S) and the Co-
operative Regulations 1993 A.D (2049 B.S.)
This Act makes provision for the establishment, registration, operation and management
of cooperative associations or societies in Nepal.
The co-operative concept in the form of Guthi, Parma, Dhikuri, Dharmabhakari etc has
been used from a very beginning in Nepalese societies.
As per the Cooperative Act 1992, a group of 25 persons from a community can form a
cooperative by registering it with the Department of Cooperatives, Ministry of
Agriculture and Cooperatives.
These cooperatives take savings deposits from their members and whoever wants to put
savings in the cooperative is extended membership.
The SCCs generally require mandatory savings from their members.
Members can also choose from a variety of services such as individual or group saving
products, deposits, and festival and educational savings.
Members are also provided with loans covering specific areas, such as agriculture,
housing, micro enterprises, or for some social or emergency purposes. Loans so provided
have a minimum term of three months to three years.
 Self-help Group (SHG) Model
• A SHG (self help group) is a community based group with 10-20
members
• Most self-help groups are located in Nepal, India, though SHGs can
be found in other countries, especially in South Asia and Southeast
Asia.
• They are usually women from similar social and economic
backgrounds, all voluntarily coming together to save small sums of
money, on a regular basis.
• They pool their resources to become financially stable, taking loans
from their collective savings in times of emergency or financial
scarcity, important life events or to purchase assets
Self Help Groups (SHG) Cont.
In Nepal there are several forms of informal self-help groups such as ‘dhukuti’, mothers’ group,
and many other groups with specific objectives.
This type of SHG needs not be pro-poor focused.
Mostly, lower middle or middle class people are involved in this type of SHGs.
Another most popular informal self-help group is Aama Samuha (mothers’ group).
Mothers’ group is mainly formed and activated by the local women with one or more objectives
that could be related to income generation aspect and/or removing social evils and bring about
positive changes in the society.
Women empowerment is the main objective of the most mothers’ groups. These mothers’ groups
organize campaigns against alcoholism, injustice to women, girl trafficking, and other social evils.
They also mobilize their savings and provide credit to the needy members. However, these are
not necessarily targeted at the poor.
They are very common in the hills and mountains. They have been in practice now for more than
3 decades.
They used to be widely practiced in the hills and mountains of Western Development Region.
However, these groups are not recorded anywhere.
Self-help Group (SHG) Model- Cont.….
Goals
• Improving earning level through financial facilities
• Empowering women - health, nutrition, governance and gender
justice
• Developing leadership abilities among poor and the needy people
• Increasing school enrolments
• Focused on civic education and other practical educational trainings
• Improving nutrition
• The use of birth control.
Self Help Groups (SHG)
• Based on the concept of “self-help”, SHG’s are small groups of individuals formed into groups of ten to twenty and operating a
savings-first business model whereby the member’s savings are used to fund loans.
• In a SHG usually women from a similar class and region come together to form a savings and credit organization.
• They pool financial resources to make small interest bearing loans to their members.
• The terms and conditions and accounting of the loan are set by designated members in the group.
• The ‘Dhukuti’ system is one such example of a very old form of self-help group in Nepal which has been in operation for over
four decades.
• Community Organizations (COs)/ SHG’s are formed at the VDC level with the assistance of the Local Development Fund (LDF)
under Participatory District Development Project (PDDP) and Decentralized Local Governance Support Program (DLGSP).
• Local community residents are organized into CO’s, either separately for men or women or together irrespective of the gender.
Similar to other MFI’s, the CO’s too mobilize mandatory and other types of savings.
• Their lending schemes generally offer loans at 10-12% interest per annum to the borrowers.
• Members apply for loans and collect due installments during a CO’s regular meetings. The interest rates and other terms and
conditions of loans are determined by the CO’s if they lend money using their own savings.
• However, if the member seeks a loan amount that is more than what the CO can provide from its savings, the member would
have to fill a separate application form addressed to the Local Development Fund (LDF). The community organization
recommends the loan and forwards it to the LDF for approval. Similarly, Poverty Alleviation Fund (PAF) too organizes the local
groups of the target families called CO’s with the help of local NGOs.
• They are informal groups and not linked up with any financial institutions. These groups are provided with seed fund at
affordable interest rate.
Financial Intermediary Non-Governmental Organizations
(FINGO)
This is one of the latest forms of micro finance development in terms of
financial intermediary process. The records show that there are numbers of
unregistered NGO than registered one. In this model, NGO disburse loans
for microfinance on a group basis.
Microfinance service providing organizations mainly target excluded (dalit,
janajati) and low income level people especially women living with hard
economic conditions.
These institutions have been playing significant roles to reduce social and
economic poverty in rural and urban areas.
Microfinance sector in Nepal is seen as a joint effort of Government and
private sectors implementing various financial programmes including
Grammen replications, savings and credit cooperative activities, number of
informal credit groups promoted through different donor supported
programmes, such as Poverty Alleviation Programmes and the other
activities supported by different donors and INGOs.
Financial Intermediary Non-Governmental
Organizations (FINGO)
This is the latest form of development in micro-finance in terms of
financial intermediary process. It is believed that more than 10,000
unregistered NGOs are operating in the country either in the field of
micro-finance or in social and community based development
activities.
FINGOs are established for mobilizing savings and promoting credit
activities within the group.
In this model, the NGOs disburse loans for micro-finance on a group
basis.
The interest rate is affordable and the repayment system of NGOs in
MF is on a very short term periodic basis i.e. weekly, fortnightly and
monthly.
Financial Intermediary Non-Governmental Organizations (FINGO)
MFIs in Nepal work as Non Government Financial Intermediary Organizations (FINGOs).
They are active in around 38 districts with coverage of 63% hill districts and 36 percent
Tarai districts. FINGOs target excluded and low-income people, especially women living in
difficult economic conditions.
FINGOs have been playing an important role in reducing social and economic poverty in
rural and urban areas. The microfinance sector in Nepal is a joint effort of the government
and the private sector.
FINGOs in Nepal face challenges of:
• Serving rural and remote households living in hilly districts;
• Restrictive regulations for MFI that are in contrast to the liberal environment provided to
commercial banks;
• Unhealthy competition;
• Resource constraints, such as shortage of credit funds;
• Development needs and lack of attention from the government and Nepal Rastra Bank;
• Lack of efficient and trained staff, security risks in the management of local branches and
lack of supervising and monitoring institutions.
Strengths and weaknesses of the various
approaches (Models)
Strengths;
 Providing saving and credit facilities to poor and unreached people
 Reduced dependence of poor people on informal money-lenders and non-institutional sources
 Employment and income generation through micro enterprises
 Diversification of non-farm activities – agro-farming , livestock farming, cottage industries, Handloom
industries
 Enhancing rural economic productivity through easy finances
 Providing wide range of services like saving, credit, insurance, training, social services counselling etc.
 Building up support system through non-financial assistance like technical support, skill development,
training, marketing assistance etc.
 Increase in the standard of living of people
 Women empowerment through saving mobilization and capacity building
 Strengthening SHGs or community groups to address their problems and promoting leadership qualities
among the members
 Establishing the linkages between banks and marginalized citizens especially women
Strengths and weaknesses of the various
approaches (Models) Contd.
Weaknesses;
 Regional disparity (imbalance) in disbursement of credit across the country
 High administrative cost
 High repayment structure/high rate of interest (due to the lack of proper supervision and monitoring from
the regulatory bodies)
 Multiple lending and over indebtedness
 Financial illiteracy of the people
 Indiscipline among the borrowers for eg. Dropout and migration of group members and individual clients
 No proper regulatory body or legal structure to check working of MFIs ( cooperatives and FINGOs)
 No field supervision to check operational feasibility of lending
 Inability of microfinance institutions to generate sufficient funds
 Non transparent pricing
 Fight (competition) among MFIs to grab established markets
 Inhuman behavior of recovery of loans sometimes led to tensions even suicide
 Discontinuing of micro financial programs and models by donors, government agencies and MFIs
Opportunities and Threats of microfinance in Nepal
Threats Opportunities
 Increasing the degree of competitions among MFIs  Still large number of people and areas in Nepal
 MFIs vested interests like to grab the market lead are still uncovered
to non-required lending even  Various regions, districts, village, societies,
 Loans being provided for unproductive or communities still untapped
unfeasible projects  Government and Banks support to the programs
 Multiple loans to the same borrower lead to un- Range of services can be increased from financial
recovery (default) of loans to non-financial and others
 No use of SHGs peer pressure group for  Members can be helped to invest in asset
repayment creation, diversify their occupation and improve
their risk bearing capacities
Social Banking VS Commercial Banking
Social banking is the combination of social trends, such as green practices,
social entrepreneurship, and peer-to-peer (P2P) lending and financial
planning via social networks, with banking products and services.
Social Banking describes a way of value-driven banking that has a positive
social and ecological impact at its heart, as well as its own economic
sustainability.
The Bank focuses on cultural, social and ecological projects which try to
tackle challenges in our society by developing creative solutions.
Social banks provide financial services to individuals and organizations that
create social environmental and sustainability benefits.
According to the Global Alliance for Banking on Values “social banking
follows a triple bottom line approach at the core business model and
communities, serving the real economy and enabling new business model”.
social banking provides long term relationships with clients and a direct
understanding of their economic activities and the risk involved.
Social Banking VS Commercial Banking
• Commercial banking, also known as business banking or institutional banking.
• Commercial banking refers to banking products and services designed for
corporations, institutions, and sometimes governments, as opposed to banking
products offered to individual consumers.
• Many of the products offered by commercial banks are similar to those offered to
individuals by retail banks, such as checking and savings accounts. However, many
of the products and services offered by commercial banks are specifically
designed to meet the financial needs of corporations and institutions.
• For example, when a retail business works with a bank to assist with payment
processing services, that's an example of a commercial banking service.
• Commercial banks focus on products and services that are specifically designed
for businesses, such as deposit accounts, lines of credit, merchant services,
payment processing, commercial loans, global trade services, treasury services,
and other business-oriented products.
Commercial Banking
commercial banks may offer the products and services:
Merchant services, such as credit card processing, mobile payment solutions, online
payments, and electronic check services
Global trade services, such as foreign exchange, financing, letters of credit, and global
payments, remittance services
Treasury management services, such as fund collecting and disbursement, and fraud
prevention
Lending services, such as working capital for businesses, commercial real estate lending,
equipment financing, and other types
Retirement products and services for businesses and their employees
Employee stock ownership plans (kind of employee benefit plan, similar in some ways to
a profit-sharing plan)
Insurance products designed for corporations and institutions
Advisory services
Specialized services for certain types of businesses, such as auto dealer services, aircraft
lending, investment real estate lending, and others
Commercial Banking
Other types of banking
In addition to commercial banking, there are several other varieties of banking
products and services:
Investment banking: Investment banks provide services to corporations,
governments, and individuals. These services include raising financial capital by
underwriting debt or equity issuances, and assisting in mergers and acquisitions.
Retail banking: This is what most people think of when they hear the word
"bank." Retail banking refers to any banking services that are intended for
everyday consumers. This includes checking and savings accounts, credit cards,
mortgages, auto loans, CDs, and more.
Private banking: Similar to retail banking, private banking refers to banking and
financial services provided to high-net-worth individuals. Private bankers provide
financial and wealth management services on a much more personal level than
traditional retail banks, which is why it can be considered a separate type of
banking.
Financial access Vs Financial inclusion
The topic of access to finance and financial inclusion has been of
growing interest throughout the world, particularly in emerging and
developing economies.
Policymakers are increasingly concerned that the benefits produced by
financial intermediation and markets are not being spread widely
enough throughout the population and across economic sectors, with
potential negative impacts on growth, income distribution and poverty
levels, among others.
Financial access
• It is important to distinguish between the use of and access to financial services.
• Some individuals and firms may have access to but choose not to use some financial
products.
• Some may have indirect access, such as using somebody else’s bank account, or are
already using a close substitute. Others may not use financial services because they do
not need them or because of cultural or religious reasons.
• The nonusers include individuals who prefer to deal in cash and firms without promising
investment projects.
• The lack of financial access limits the range of services and credits
for household and enterprises.
• Poor individuals and small enterprises need to rely on their personal wealth or internal
resources to invest in their education and businesses, which limits their full potential and
leading to the cycle of persistent inequality and diminished growth
• Access to finance is the ability of individuals or enterprises to obtain financial services,
including credit, deposit, payment, insurance, and other risk
management services. Those who involuntarily have no or only limited access to financial
services are referred to as the unbanked or under-banked, respectively.
Financial access
Tier/class Definition Institutions Principal clients
Commercial banks, Individuals
development banks, Small-medium-Large
Formal banks
finance companies, businesses
microfinance Government
Licensed by central bank
Rural banks Large rural enterprises
Specialized non-bank
Savings & loan companies Salaried workers
financial institutions
Deposit-taking Small & medium
(NBFIs)
microfinance banks enterprises

Legally registered, but not

Credit unions Microenterprises
Semi-formal licensed as financial
Microfinance NGOs Entrepreneurial poor
institution by central bank

Not legally registered at Savings collectors

national level (though Savings & credit Self-employed
Informal
may belong to a associations, groups Poor
registered association) Moneylenders
Financial inclusion
• Financial Inclusion is described as the method of offering banking and financial solutions
and services to every individual in the society without any form of discrimination.
• It primarily aims to include everybody in the society by giving them basic financial
services without looking at a person’s income or savings.
• Financial inclusion chiefly focuses on providing reliable financial solutions to the
economically underprivileged or uncovered sections of the society without having any
unfair treatment.
• Its objective is to provide financial solutions without any signs of inequality.
• It is also committed to being transparent while offering financial assistance without any
hidden transactions or other financial costs.
• Financial inclusion means that individuals and businesses have access to useful and
affordable financial products and services that meet their needs – transactions,
payments, savings, credit and insurance – delivered in a responsible and sustainable way.
• Financial inclusion is the use of financial services by individuals and firms.
• Financial inclusion allows individuals and firms to take advantage of business
opportunities, invest in education, save for retirement, and insure against risks
Objectives of Financial Inclusion
Financial inclusion intends to help people secure financial services and products
at economical prices such as deposits, fund transfer services, loans, insurance,
payment services, etc.
It aims to establish proper financial institutions to cater to the needs of the poor
people. These institutions should have clear-cut regulations and should maintain
high standards that are existent in the financial industry.
Financial inclusion aims to build and maintain financial sustainability so that the
less fortunate people have a certainty of funds which they struggle to have.
Financial inclusion also intends to have numerous institutions that offer
affordable financial assistance so that there is sufficient competition so that
clients have a lot of options to choose from. There are traditional banking options
in the market. However, the number of institutions that offer inexpensive
financial products and services is very minimal.
Objectives of Financial Inclusion (Cont.
Financial inclusion intends to increase awareness about the benefits of
financial services among the economically underprivileged sections of the
society.
The process of financial inclusion works towards creating financial products
that are suitable for the less fortunate people of the society.
Financial inclusion intends to improve financial literacy and financial
awareness in the nation.
Financial inclusion aims to bring in digital financial solutions for the
economically underprivileged people of the nation.
It also intends to bring in mobile banking or financial services in order to
reach the poorest people living in extremely remote areas of the country.
It aims to provide tailor-made and custom-made financial solutions to poor
people as per their individual financial conditions, household needs,
preferences, and income levels.
Unit 2: Approaches to Micro-finance LH 6
Saving led and credit led, Practices and different models (Special
reference to Nepal) Grameen replication, Co-operative, FINGO and Self
Help Groups (SHG), Strengths and weaknesses of the various
approaches, Social Banking VS Commercial Banking, Financial access Vs
Financial inclusion