Unit I

Introduction of Microfinance
Course Outline:
Meaning and Importance of Microfinance
Principles of microfinance;
History of microfinance
 Microfinance models;
Microfinance clients;
Institutional and welfarist approach of microfinance;
Formal, Semi-formal and informal microfinance
providers;
Microfinance and poverty.
Concept of Microfinance
• Microfinance is a financial service provided to low-income individuals or
groups who typically lack access to traditional banking services.
• It involves offering small loans, savings accounts, insurance, and other
financial products tailored to the specific needs of those living in poverty or
with limited resources.
• In the context of Nepal ,Microfinance companies are the "D" class financial
institutions, Licensed by Nepal Rastra Bank in Nepal. NRB regulates MFIs
likes as other BFIs in Nepal.
• Basically there are two types of Microfinance companies:
• Wholesale Microfinance Companies
• Retail Microfinance Companies
As per the present Data of the NRB , 57 MFIs are presently operating in Nepal.
…..concept
• Microfinance can be defined as a set of financial services, including
microcredit (small loans), savings, insurance, and payment facilities, designed
to meet the specific needs of low-income individuals, entrepreneurs, and small
businesses who lack access to traditional banking services.
• The primary goal of microfinance is to promote financial inclusion, poverty
alleviation, and socioeconomic development by providing access to financial
resources, empowering individuals to generate income, build assets, and
improve their economic well-being.
• “Microfinance is the provision of financial services in a sustainable way
to low income people, who do not have access to commercial
financial services”
….. Concept
• Microfinance is a banking service provided to low-income individuals or
groups who otherwise would have no other access to financial services.
• Microfinance allows people to take on reasonable small business loans safely,
in a manner that is consistent with ethical lending practices.
• The majority of microfinancing operations occur in developing nations, such as
Nepal ,Bangladesh, Cambodia, India, Afghanistan, Democratic Republic of
Congo, Indonesia, and Ecuador, among others.
• Like conventional lenders, micro financiers charge interest on loans and
institute specific repayment plans.
Client of MFIs….
• Poor men
• Poor women
• Dalit's / Ethnic Peoples
• Marginalized people
• Small business persons
List of MFIs in Nepal
• Assignment
Importance of Microfinance
• Poverty Alleviation:
• Financial Inclusion:
• Empowering Women:
• Building Financial Resilience:
• Social and Economic Development:
• Job Creation and Economic Growth:
• Education and Health Improvements
• Encourages Savings and Financial Discipline
• Development of Entrepreneurial Skills
Poverty Alleviation:
• Microfinance helps to alleviate poverty by providing financial resources to low-
income individuals and small businesses to start or expand their own businesses.
• This leads to job creation, increased income, and improved standards of living for
the beneficiaries of microfinance.
Financial Inclusion:
• Microfinance institutions provide financial services to people who do not have
access to traditional banking services.
• By offering microloans, savings accounts, and other financial products,
microfinance helps to promote financial inclusion and expand access to financial
services for the unbanked and underbanked population.
Empowering Women:
• Microfinance has been found to be particularly effective in empowering women,
who are often excluded from financial services.
• Microfinance helps women to start and grow their own businesses, become
financially independent, and improve their status within their families and
communities.
Building Financial Resilience:
• Microfinance institutions help their clients to build financial resilience by providing
access to savings accounts, insurance products, and other financial services.
• This helps low-income households and small businesses to manage risks and cope
with unexpected events such as illness, crop failure, or natural disasters.
Social and Economic Development:
• Microfinance helps to promote social and economic development by enabling low-
income individuals and small businesses to participate in the formal economy.
• This leads to the creation of jobs, increased income, and improved access to
essential goods and services.
Job Creation and Economic Growth:
• Microfinance supports micro-enterprises and small businesses, which are
significant sources of employment, especially in developing economies.
• By helping individuals start and grow businesses, microfinance contributes to job
creation and stimulates local economic growth.
Education and Health Improvements
• Access to microloans and savings enables families to invest in education and
healthcare.
• This can lead to better educational outcomes for children, as families are better able
to afford school fees and supplies.
• It can also improve health conditions, as people can pay for medical services or
engage in preventive health measures.
Encourages Savings and Financial Discipline
• Microfinance institutions (MFIs) often promote savings products, encouraging
financial discipline among clients.
• This helps individuals build a safety net for unforeseen expenses and reduces their
dependence on expensive, informal sources of credit.
Development of Entrepreneurial Skills
• Many MFIs offer training and support programs along with financial products.
These services help clients develop business skills, improve financial literacy, and
learn effective management techniques.
• This fosters entrepreneurship and promotes sustainable development.
Principles of Microfinance
• Client-Centered Approach:
• Financial Sustainability:
• Social Responsibility:
• Empowerment and Self-Reliance:
• Risk Management:
• Sustainable Impact:
• Innovation and Adaptation:
Client-Centered Approach:
• Microfinance institutions (MFIs) prioritize the needs and preferences of their clients,
designing financial products and services tailored to their specific circumstances, preferences,
and capabilities.
Financial Sustainability:
• MFIs aim to achieve financial sustainability by managing operational costs, generating
sufficient revenues to cover expenses, and minimizing risks while providing affordable and
accessible financial services to their target clientele.
Social Responsibility:
• Microfinance emphasizes social responsibility and aims to have a positive impact on the lives
of the poor and marginalized populations it serves.
• This includes promoting gender equality, empowering women, supporting sustainable
livelihoods, and contributing to community development.
Empowerment and Self-Reliance:
• Microfinance seeks to empower individuals and communities by providing them with
financial resources, knowledge, and skills to manage their finances, make informed decisions,
and pursue economic opportunities.
• The ultimate goal is to foster self-reliance and resilience among clients
Risk Management:
• Microfinance institutions employ various risk management strategies to mitigate
financial, operational, and social risks associated with serving low-income clients.
• This includes assessing the creditworthiness of borrowers, diversifying loan portfolios,
and implementing robust monitoring and evaluation systems.
Sustainable Impact:
• Microfinance aims to achieve sustainable impact by promoting long-term economic
growth, reducing poverty, and improving the overall well-being of clients and their
communities.
• This involves measuring and evaluating the social and economic outcomes of
microfinance interventions and adjusting strategies accordingly.
Innovation and Adaptation:
• Microfinance institutions continuously innovate and adapt their products, services, and
delivery channels to respond to changing market dynamics, technological
advancements, and evolving client needs.
• This includes leveraging digital financial services, fostering partnerships, and
exploring new business models to enhance outreach and effectiveness.
Characteristics of Microfinance
• Free of physical collateral
• Quick services at the door steps
• Small savings and loan size
• Short term loan
• Savings as integral part
• Diversified utilization
• Free choice of activity to clients
• Focus to vulnerable groups
• Preferably women as clients
History of Microfinance
Saving Club in the world
• “Susus" of Ghana, “Chit funds" in India, “Tandas" in Mexico, "arisan" in
Indonesia, "cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in
Bolivia, as well as numerous savings clubs and burial societies found all over the
world.
• Mr. Muhamm Yunus , social entrepreneur ,born in 28 June 1940 , developed the
concept of microfinance companies from Bangladesh and was awarded by Nobel
prize in 2006 AD for the founding the Grameen Bank and pioneer the concept of
micro credit and microfinance.
…… History
• The history of formal microfinance in Nepal began during 1950s when the
Government established 13 credit cooperative societies to provide financial
services to the flood-affected people in Chitwan district.
• Microfinance initiatives in Nepal began in the 1970s, primarily as part of
development projects implemented by international organizations such as the
United Nations and various non-governmental organizations (NGOs).
• These were primarily intended to provide credit to the agricultural sector. A
well-structured and specialized program to cater to the financial needs of the
poor was provided further inputs with the launching of the Small Farmer
Development Program (SFDP) in 1975 within ADB.
• Dr. Harihar Dev Pant (October 8, 1944 – September 7, 2015) was a pioneer and
“Founding Father” of microfinance in Nepal who served as the first Executive
Chairman of Nirdhan Microfinance. He was the founder of Nirdhan and was
the first to introduce the Grameen Bank Financial System in Nepal.
• It was later transformed into a bank as the Nirdhan Utthan Bank Ltd. He was
also the first Chairman of the first two Grameen Bikas Bank: a) Purbanchal and
b)Sudur Paschimanchal.
• In 1981, to strengthen the priority sector program, NRB introduced the
Intensive Banking Program (IBP).
• In Nepal, Center for Microfinance (CMF) was established in July 21, 2000 A.D
with main activities of providing trainings, technical assistance consultancy
services and undertaking studies, research, documentation and publications.
• Refer Hand Out Note for more details
Microfinance Model:
Grameen Model:
• Origin: Developed by Dr. Muhammad Yunus and implemented by the Grameen
Bank in Bangladesh
• Key Features:
 Group Lending: Borrowers form small groups, typically five members, who
collectively guarantee the repayment of each member’s loans. The group
mechanism leverages peer pressure and mutual accountability to ensure timely
repayment.
 Collateral-Free Loans: Loans are provided without the need for collateral,
making financial access possible for those who lack assets.
 Progressive Lending: Borrowers start with small loans, and as they prove their
creditworthiness through repayments, they can access larger loans over time.
• Impact: This model empowers communities, especially women, and fosters
entrepreneurship while minimizing default rates through group accountability.
Cooperative Model
• Key Features:
• Member-Owned: In this model, financial services are provided by
cooperatives that are owned and controlled by their members.
• Savings and Credit: Members pool their savings, which are then used to
provide loans to the cooperative’s members at reasonable interest rates.
• Democratic Control: Decisions are made democratically by the members,
promoting collective responsibility and shared benefits.
• Example: Village Savings and Loan Associations (VSLAs) are community-
based cooperatives that operate in many developing regions.
• Impact: This model fosters local ownership and financial literacy,
strengthening community bonds and promoting savings habits.
Credit Union Model

• Key Features:
• Member-Owned Financial Institutions: Like cooperatives, credit unions
are member-owned and operated for the benefit of their members.
• Savings and Loans: Members save money in the credit union and have the
opportunity to take out loans, often at lower interest rates compared to
commercial banks.
• Regulated by Law: Credit unions are typically subject to regulatory
oversight, which ensures financial stability and protects members' funds.
• Impact: Credit unions are effective at pooling local resources and reinvesting
them into the community, promoting financial stability and social trust.
Self-Help Group (SHG) Model
• Key Features:
• Community-Based: SHGs are informal groups of people (typically 10–20) who
save regularly and pool their money to create a fund from which members can
borrow.
• Empowerment Focus: SHGs often prioritize women’s empowerment, providing a
platform for mutual support, capacity building, and collective decision-making.
• Linkages with Banks: SHGs may form partnerships with formal financial
institutions, accessing larger amounts of credit while leveraging their pooled
savings as collateral.
• Example: The Self-Employed Women’s Association (SEWA) in India has
effectively used the SHG model to support women entrepreneurs.
• Impact: The SHG model is powerful for community development and financial
literacy, helping members gain economic independence.
Village Banking Model
• Key Features:
• Community-Managed: Village banks are community-based groups that
provide both financial services and social support. Members contribute
savings and manage loans collectively.
• External Funding: While members provide savings, village banks often
receive external funding or support from NGOs to boost their lending
capacity.
• Training and Capacity Building: Members receive training in financial
management and business skills to enhance their ability to use loans
effectively.
• Impact: Village banking helps build local capacity, strengthens community ties,
and encourages entrepreneurship.
Individual Lending Model
• Key Features:
• Direct Loans: Unlike group-based models, this model provides loans directly to
individual borrowers.
• Collateral Requirements: Often used for borrowers who may have some form of
collateral or credit history.
• Personalized Approach: Loan amounts, terms, and repayment schedules can be
customized to fit the needs and capacities of individual clients.
• Impact: The individual lending model is suitable for entrepreneurs who need more
significant loan amounts and have demonstrated their creditworthiness.
Digital Microfinance Model
• Key Features:
• Technology-Driven: This modern model leverages digital platforms such as mobile
banking and fintech apps to deliver microloans, savings, and other financial services.
• Remote Access: Clients can access services without visiting a physical branch, making it
easier to reach remote and underserved areas.
• Low Operational Costs: Digital models often have lower overhead costs, enabling MFIs
to offer services at lower rates.
Institutional Approach of Microfinance
• The institutional approach focuses on creating financially sustainable microfinance institutions
that can operate independently without relying heavily on donations or subsidies. This
approach prioritizes the long-term sustainability and scalability of MFIs to ensure they can
continue to serve clients and expand their reach.
Key Characteristics:
• Profitability and Financial Self-Sufficiency: The primary goal is for MFIs to generate
sufficient income to cover their operating costs and potentially make a profit. This ensures that
they can operate sustainably and expand their services.
• Commercialization: MFIs under the institutional approach often operate similarly to
commercial banks, sometimes attracting private investments to scale their operations.
• Focus on Outreach: While serving low-income clients remains a goal, the emphasis is often
on achieving a broad outreach to as many clients as possible. MFIs may offer larger loans to
individuals who are seen as creditworthy to boost profitability.
• Interest Rates: To maintain financial sustainability, MFIs in this approach may charge higher
interest rates compared to those in the welfarist approach. The rationale is that sustainable
practices enable the continued provision of services.
• Impact Measurement: Success is measured by financial indicators such as repayment rates,
profitability, and portfolio growth.
Advantages:
• Ensures the long-term viability of microfinance services.
• Attracts investment, enabling rapid scaling and greater outreach.
• Supports a more professionalized and robust microfinance industry.
Criticisms:
• Higher interest rates may lead to concerns about the affordability for the
poorest clients.
• May prioritize profitability over the depth of social impact, potentially
excluding the most vulnerable populations.
Welfarist Approach of Microfinance
• The welfarist approach prioritizes the social mission of microfinance: poverty
alleviation and the empowerment of marginalized communities. This model
places a greater emphasis on reaching the poorest segments of society, often
sacrificing financial returns to achieve social impact.
• The welfarist approach to microfinance focuses on the social and economic
welfare of the poorest segments of the population.
• Unlike the institutional approach, which emphasizes financial sustainability
and scale, the welfarist approach prioritizes the social impact of financial
services
Key Objectives:
• Prioritizes social impact over financial returns
• Views microfinance as a poverty reduction tool
• Focuses on empowering marginalized populations
Theoretical Foundation:
• Conceptualizes microfinance as a transformative social intervention
• Challenges traditional financial service delivery models
• Emphasizes human development over financial metrics
• Sees poverty as a multidimensional challenge requiring holistic solutions
• Prioritizes social impact measurement
• Accepts lower financial returns
• Provides flexible, compassionate financial services
• Integrates financial assistance with social support mechanisms
Comprehensive Welfare Dimensions:
Economic Welfare
• Income generation support
• Livelihood enhancement strategies
• Economic opportunity creation
• Breaking intergenerational poverty cycles
Social Welfare
• Empowerment of marginalized communities
• Gender equality promotion
• Social capital development
• Community resilience building
Human Capital Development
• Skills training programs
• Financial literacy education
• Entrepreneurship cultivation
• Personal capability enhancement
Key Characteristics:
• Poverty Alleviation Focus: The primary goal is to improve the socio-economic
conditions of the clients, focusing on the poorest and most disadvantaged groups,
often women and rural communities.
• Social Objectives: MFIs adopting the welfarist approach aim to provide not just
credit, but a range of services including financial literacy training, health education,
and community development.
• Subsidized Operations: These MFIs may rely on donor funding, grants, or
subsidies to offer lower interest rates and affordable services. This is intended to
make financial services accessible to those who may not qualify under more
commercially driven models.
• Lower Interest Rates: To remain affordable for the poorest clients, MFIs may
charge lower or subsidized interest rates, even if it affects financial self-sufficiency.
• Depth of Outreach: Success is often measured by the level of poverty of the clients
served and the overall impact on their quality of life rather than the number of
clients reached.
Advantages:
• Directly targets poverty reduction and supports community development.
• Tailored services can address specific needs beyond finance, such as
training and capacity building.
• Ensures that financial services reach the most vulnerable and marginalized
groups.
Criticisms:
• Dependency on donor funding and subsidies may limit the long-term
sustainability of operations.
• The focus on serving the poorest can make financial sustainability
challenging, potentially limiting growth.
• May lack efficiency compared to more commercially focused models.
Formal, semi-formal and informal
microfinance providers
Formal Microfinance Providers
These institutions are fully regulated and licensed by government authorities and
operate within a formal financial framework. Examples include:
• Microfinance Banks (MFBs): Specialized banks that provide small loans,
savings accounts, and insurance services. They often comply with central
banking regulations.
• Cooperative Banks and Credit Unions: Member-owned institutions that offer
savings and loans to their members. They are often regulated by specific
national or local laws.
• Commercial Banks with Microfinance Services: Large banks that have
microfinance programs as part of their broader financial services.
• Non-Governmental Organizations (NGOs) with microfinance licenses:
NGOs that have obtained formal registration and authorization to offer
financial services beyond charitable work.
Semi-Formal Microfinance Providers
These providers are typically registered entities but not licensed as banks,
meaning they are not fully regulated under banking laws but still adhere to some
financial or cooperative laws. Examples include:
• Non-Governmental Organizations (NGOs): They operate microfinance
programs but are not regulated as financial institutions. They often receive
grants or donations to fund their activities.
• Microfinance Institutions (MFIs): Organizations that provide small loans and
financial services but do not take deposits. They may be regulated under laws
related to credit services but not under the full banking regulations.
• Cooperatives and Self-Help Groups (SHGs): These are community-based
organizations where members pool their savings to make small loans to each
other. They are often registered under cooperative acts but are less strictly
regulated than formal banks.
Informal Microfinance Providers
These providers operate outside the scope of regulatory oversight, typically within
local communities. They are based on trust and social connections rather than legal
agreements. Examples include:
• Moneylenders: Individuals who offer loans at high-interest rates without formal
contracts.
• Rotating Savings and Credit Associations (ROSCAs): Groups of people who
contribute to a common fund regularly, with members taking turns to receive the
total amount.
• Accumulative Savings and Credit Associations (ASCAs): Similar to ROSCAs but
with more flexible and longer-term savings and loan structures.
• Friends and Family Lending: Small, informal loans within social circles, often
with no interest or minimal terms.
• Village Savings and Loan Associations (VSLAs): Informal community groups that
pool savings to lend among members with basic record-keeping but no external
regulation.
Role of Microfinance for the poverty elevation
Microfinance plays a crucial role in poverty alleviation by addressing the financial needs of
low-income individuals and communities in several ways:.
Access to Credit: Microfinance provides access to credit for people who lack collateral or
credit history to obtain loans from traditional banks. By offering small loans, microfinance
enables individuals to invest in income-generating activities, such as small businesses,
farming, or handicrafts, which can help increase their income and lift them out of poverty.
Microfinance institutions provide small loans that can be used to start or expand small
businesses, which can create income-generating opportunities and help people to move out of
poverty.
Empowerment of Women: Microfinance has a profound impact on women's empowerment,
as it often targets women who are disproportionately affected by poverty. By providing
women with access to financial services, including credit, savings, and insurance,
microfinance enables them to start or expand businesses, invest in education and healthcare
for their families, and gain greater control over their finances and decision-making.
Microfinance can be particularly empowering for women, who often have limited access to
financial resources and are more likely to live in poverty. By providing financial services to
women, microfinance can help to promote gender equality and reduce poverty.
…. Contd
Asset Building:
• Microfinance helps individuals and families build assets over time. By
accessing loans to purchase productive assets, such as livestock, agricultural
equipment, or tools for small businesses, people can increase their wealth and
create a foundation for long-term economic stability.
Promotion of Financial Inclusion:
• Microfinance helps to promote financial inclusion by providing financial
services to people who may not have access to traditional banking services.
This can help to reduce poverty by giving people the tools they need to manage
their finances and plan.
Contd…..
Community Development: Microfinance contributes to community
development by developing entrepreneurship, job creation, and local economic
growth. By supporting small businesses and livelihood activities, microfinance
stimulates economic activity at the grassroots level, which can have positive
ripple effects on the broader community, including increased employment
opportunities and improved infrastructure.
Poverty Reduction Strategies: Microfinance is often integrated into broader
poverty reduction strategies implemented by governments and development
agencies. By complementing other interventions, such as education, healthcare,
and social welfare programs, microfinance contributes to comprehensive
approaches to poverty alleviation that address the multidimensional nature of
poverty.
…. Contd
Encourages savings
Microfinance institutions often encourage their clients to save money, which can
help people to build assets and create a safety net for emergencies.
Increases resilience
By providing access to credit and financial services, microfinance can help
people to cope with financial shocks and crises, such as illness or crop failure.
This can help to reduce the impact of these events on people's lives and
livelihoods.
……….. Poverty elevation
• Microfinance institutions provide small loans that can be used to start or expand small
businesses, which can create income-generating opportunities and help people to reduce
the poverty.
• Microfinance helps to promote financial inclusion by providing financial services to
people who may not have access to traditional banking services. This can help to reduce
poverty by giving people the tools they need to manage their finances and plan.
• Microfinance institutions often encourage their clients to save money, which can help
people to build assets and create a safety net for emergencies.
• Microfinance can be particularly empowering for women, who often have limited access
to financial resources and are more likely to live in poverty. By providing financial
services to women, microfinance can help to promote gender equality and reduce
poverty.
• By providing access to credit and financial services, microfinance can help people to
cope with financial shocks and crises, such as illness or crop failure. This can help to
reduce the impact of these events on people's lives and livelihoods.
The End