Evolution of microfinance and poverty reduction

The disadvantage is that loan officers must travel to and attend all group meetings, and that time must be spent organizing and training new groups.

How microfinance help in alleviating poverty

Groups can be used in two ways: simply as delivery mechanisms, receiving the loan payments from the microfinance institution and collecting savings and repayments on behalf of the members, while maintaining individual responsibility; or as solidarity groups, where the group as a whole is responsible for the individual members' subloans and if one member fails to repay, the repayment will be covered by the others. Infrastructural capacity in the sub-sector is yet to be developed around an integrated and holistic logistical support and internal operating systems. Venture capital means the use of equity finance for capitalizing extremely risky investments such as start-ups, which might not be able to attract traditional microfinance and may not provide sufficient collateral. Building a new home may involve saving and protecting diverse building materials for years until enough are available to proceed with construction. If provided at a reasonable cost, micro-insurance can be a powerful poverty reduction mechanism with great expansion potential, and at the same time, can significantly contribute to microfinance institution profitability. Since the s, development theorists have considered non-governmental microfinance institutions MFIs as the leading practitioners of sustainable development through financing micro-entrepreneurial activities. Microfinance analyst David Roodman contends that, in mature markets, the average interest and fee rates charged by microfinance institutions tend to fall over time. This particular model used by many Microfinance institutions makes financial sense, he says, because it reduces transaction costs. Among the constraints are inappropriate institutional arrangements, poor regulatory environment, inadequate capacities, lack of coordination and collaboration, poor institutional linkages, no specific set of criteria developed to categorize beneficiaries, channeling of funds by MDAs, lack of linkages between formal and informal financial institutions, inadequate skills and professionalism, and inadequate capital. The overlap is also due partly to the fact that organizational and institutional hierarchy and reporting relationships among all the stakeholders are not clearly defined. If provided at a reasonable cost, micro-insurance can be a powerful poverty reduction mechanism with great expansion potential, and at the same time, can significantly contribute to microfinance institution profitability. Because all the value is accumulated before it is needed, this money management strategy is referred to as 'saving up'. The equity investor buys shares on behalf of a target group and then gradually divests by selling the shares to this group. Since it is costly to create new distribution channels, micro-insurance has greater chances of reaching these enterprises viably when it is integrated into existing microfinance institutions, using the existing delivery mechanisms and clientele.

It is the mobilization of voluntary savings, ensuring safety, flexibility and accessibility, which can have the strongest impact on poor people's lives. Micro-insurance traditionally started as loan insurance, but is now expanding to address the needs of the low-income market and to cover a variety of insurance products such as: health insurance covering medical costs for illnesses and injuries; annuities, endowment and life insurance providing savings accumulations for retirement and in case of death; crop insurance against poor yields due to specific causes such as natural disasters; property insurance against damage, destruction and theft of assets; a death insurance fund providing benefits for the members and their legal dependents and loan redemption for member-borrowers.

This target group in particular could benefit from complementary skills training programmes.

Impact of microfinance on poverty reduction in india

Also, conventional investors have realized that microfinance may be an investment opportunity that creates attractive financial returns. Financing micro-entrepreneurs for job creation and income generating activities shows some success in many developing countries. The money can be used in emergencies to cover the loan instalments of group members who experience temporary difficulties in making timely loan payments. The possibility of becoming owner of an asset also provides a strong incentive for the lessee to make timely payments. The obstacles or challenges in building a sound commercial micro finance industry include: Poor regulation and supervision of deposit-taking micro finance institutions MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural micro finance methodologies Members lack of collateral to secure a loan Microfinance is the proper tool to reduce income inequality, allowing citizens from lower socio-economical classes to participate in the economy. Jyothi does her rounds throughout the city, collecting Rs5 a day from people in the slums for days, however not always days in a row since these women do not always have the funds available to put them into savings. Conclusion In all, the potential economic benefits of sustainable microfinance in Ghana are compelling, and its potential effects on the development process cannot be understated. In-country transfers of funds are also important, especially for rural families living in poorer regions, often supported by a member working in the city. This specific microfinance project is an example of the benefits and limitations of the "saving up" project Rutherford, Microfinance standards and principles[ edit ] A group of Indian women have assembled to make bamboo products that they intend to resell.

Equipment loans or leases with maturities of two or more years are other examples of new loan products that have emerged from the increasingly competitive microfinance sector and that would allow small forest-based enterprises to overcome the constraint of short-term working capital loans.

Groups can be used in two ways: simply as delivery mechanisms, receiving the loan payments from the microfinance institution and collecting savings and repayments on behalf of the members, while maintaining individual responsibility; or as solidarity groups, where the group as a whole is responsible for the individual members' subloans and if one member fails to repay, the repayment will be covered by the others.

Evolution of microfinance and poverty reduction

Microcredit is the provision of cash and in kind loans in smaller amounts to micro, small entrepreneurs meant to improve their business operations. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death.

Insurance protects people and businesses against financial loss by spreading the risks among large numbers.

microfinance contribution to poverty reduction

Thirdly, it deals with the connection between economic, environmental, and social effects of microfinance. Business development services should grow with the development of small-scale enterprises and cater to their evolving needs.

Microfinance contribution to poverty reduction

According to traditional commercial banking principles, the credit methodology requires documentary evidence, long-standing bank-customer relationship and collateral, which most micro and small businesses do not possess. The contract indicates the amount of a specific potential loss covered by the insurer and the insured person or enterprise pays a premium that is directly related to the likelihood and the cost of the particular risk. The main types of leasing are: Financial or full payment lease. Rural households and their enterprises are likely to have difficult access to microfinance institutions, which tend to avoid areas of sparse population and remote access due to the higher costs involved. Firstly, it is connected with the financial sustainability of the microfinance institution. They are a suitable mechanism, acting as an alternative to matching grants, and are more appropriate than subsidized interest rates for governments or NGOs that are willing to support particular environmental practices while developing small forest-based enterprises. Often a percentage of the loan amount is required as mandatory savings and is meant to guarantee group loan repayment. Remittances can also play an important role in building financial assets and facilitating kick-starting of small livelihood activities such as forest-based enterprises. Savings As worldwide microfinance experience has shown, access to safe and flexible savings services can play a critical role in poor people's strategies for minimizing risks, mitigating income fluctuations, facing unexpected expenditures and emergencies, and building a small asset base over time. Group incentives and dynamics to avoid moral hazard are reinforced through regular group meetings, often required under the terms of the group loan. Even the simple expansion of microfinance institution outreach, where possible, may not be sufficient to ensure that rural and especially poorer households can take advantage of the available microfinance services and in particular access microcredit. As a complement to the co-liability for the existing loans of fellow group members, a group guarantee fund is often established. The main advantage with leasing compared to traditional loans is the elimination or reduction of collateral requirements, because the leased item itself stands as security.

The selection of the asset is crucial for success because it constitutes the main source of payment and the security of the transaction. Close collaboration with equipment suppliers facilitates technical training and after-sales service.

The promotion of practices such as intercropping, staggered planting of tree crops and planting of species with different gestation periods can ease cash flow constraints and make it possible to use other income sources for loan repayment.

impact of microfinance on poverty reduction pdf

Numerous studies have shown that country-specific and cultural factors are determinants in how microfinance will interact with povertyand there are occasionally devastating tales of failure in which the inability to repay a very small loan has plunged households further into desperate penury.

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Microfinance in Ghana: an overview