- Term Papers and Free Essays

What Are Micro Finance Institutes And What Are Their Benefits?

Essay by   •  November 12, 2010  •  2,788 Words (12 Pages)  •  1,476 Views

Essay Preview: What Are Micro Finance Institutes And What Are Their Benefits?

Report this essay
Page 1 of 12

What are Micro Finance Institutes and what are their benefits?

On 18 November 2004 the United Nations launched the International Year of Microcredit, as part of an effort to build support for making financial services more accessible to poor and low-income people. The aim of this essay is to outline what a Micro Finance Institute is and who its customers are. It will then go on to explore how they serve the customer and how the Micro Finance Institute benefits its customers. Theses are benefits such as aiding the movement of many out of poverty and empowering women.

Micro Finance Institutes (MFIs) are organizations that offer financial services to the poor and financially vulnerable that come from lesser-developed economies. The term micro finance institution has come to refer to a wide range of organizations dedicated to providing these services. These are institutions or organisations such as NGOs, credit unions, cooperatives, private commercial banks and non-bank financial institutions (some that have transformed from NGOs into regulated institutions) and parts of state-owned banks, for example.

The most common image of an MFI is that of a 'Financial Non Governmental Organisation (NGO)'. That is an NGO fully and virtually exclusively dedicated to offering financial services. As in most cases micro credit NGOs are unable to capture savings deposits from the general public this has led to a group of a few hundred NGOs that offer micro credit and therefore this has subsequently become micro finance. Many of these NGOs make up a group that is commonly referred to as \"best practice\" organizations. These are organisations, which employ the newest lending techniques so to generate efficient outreach that allows them to on a sustainable basis reach, and aide the development of the poorest sectors of the economy. Examples of this can be seen all over Bangladesh. Micro finance programs are essentially run by NGOs, most of which are community-based organizations evolved primarily with some social development missions.

There are a great many NGOs who offer micro credit and other financial services and products. However they do not see themselves as financial institutions. Nevertheless, from an industry perspective, as they engaged in the supplying financial services to the poor, they are called MFIs. The same distinction can be applied to a small number of commercial banks that offer micro finance services. For our purpose of this essay they will be collectively label under the umbrella MFIs, even though the commercial banks involved may only have a small portion of their assets may actually be tied up in financial services for the poor. When referring to MFIs in both cases the part of the institution, which offers micro finance, is the only sector being referred to. Other institutions do play a part in the sector of Micro finance and play a part in the reshaped and deepened financial sector. These are namely community-based financial intermediaries; they range from membership based such as credit unions and cooperative housing societies to those owned and managed by local entrepreneurs or municipalities. On the other hand these institutions tend to have a broader client base than the financial NGOs and already consider themselves to be part of the formal financial sector. Although it is dependent on the country some poor people do have some access to these types of institutions, however they tend not to reach as far down market as the financial NGOs.

The original and arguably the most famous of the Micro finance Institutes is the Grameen bank founded 1976 by a Doctor of Economics Muhammad Yunus from the University of Chittagong who believed that making loans available to a wide population (many of which were poor) could ameliorate the rampant poverty present in Bangladesh. The bank began as a research project by Yunus and the Rural Economics Project at the University of Chittagong, Bangladesh to test his method for providing credit and banking services to the rural poor. Bank was immensely successful and the project, with government support, was introduced in 1979 to the Tangail District, the success then soon spread to other districts of Bangladesh. In 1983 the bank underwent a transformation to an independent bank courtesy of the legislature of Bangladesh. The was known for its excellent repayment rate but a religious boycott in 1995 against the banks policy of improving the status of women and again in 1998 the banks repayment record was hit by the flooding in Bangladesh. However in recent years the rate of repayment has been seen to be recovering. The Bank today continues to expand across the nation and still provides small loans to the rural poor. As of mid-2005, Grameen Bank branches number over 1,500. Its success has inspired similar projects around the world. One unusual feature of the Grameen Bank is that it is owned by the poor borrowers of the bank, most of whom are women. Of the total equity of the bank, the borrowers own 94%, and the remaining 6% is owned by the Government of Bangladesh.

Micro-finance Institutes operate by offering credit and small loans and savings facilities to those who are excluded from commercial financial services. They also offer other financial products such as insurance. This has been promoted as a key strategy for reducing poverty as well as stimulating sustainable economic growth through self-employment and small enterprise development. The access to these facilities provided by MFIs also allow for those in poverty to (a) cushion themselves against economic shocks, such as the flotation in oil prices. (b) To develop their skills and through entrepreneurship achieve self reliance. (c) Also to accomplish social empowerment, this is especially important in the case of women who in regions of poverty are seen as second class citizens

The typical micro finance client is from a low income situation and often female. The typical employment of a Micro finance client is household based entrepreneurship, thus meaning they are self employed and lack the benefits of an employed worker. The area in which a Micro finance client lives greatly impacts on the form of work they carry out, in rural areas it is usually farming and small income-generating activities such as food processing and petty trade. Where as in urban areas the options of self employment are more diverse and can range from shopkeepers and service providers to artisans and street vendors. However it is not only the poor who benefit from MFIs those who are vulnerable non poor can also apply for Micro credit and other such similar financial aid.

Those who come from this sector of society are often denied access to the more known and more conventional formal financial



Download as:   txt (17.8 Kb)   pdf (187.9 Kb)   docx (15.8 Kb)  
Continue for 11 more pages »
Only available on