Research Study about the Role of Microfinance Institutions ...

1 International Journal of Trade, Economics and Finance, Vol. 2, No. 4, August 2011. Research Study about the Role of Microfinance Institutions in the Development of Entrepreneurs Sowmyan Jegatheesan, Sakthi Ganesh, and Praveen Kumar S. Africa's saving performance over time displays a Abstract The Case Study is to have its Focus for downturn of saving rates over the past decades. entrepreneurs who want to run a business and yet can't afford a High Interest rates make people harder to get credit. piece of equipment and merchandise. A Research whereby providing equipment or merchandise to enable the project to B. Key Principles endorsed by CGAP and G8 Summit: run a self funding profitable project. In turn, A share in the project plus getting the full costs of the asset equipment or Poor People need a variety of financial services not just merchandise including an interest.

2 So, direct seed finance is not loans. needed to be put in a project. Microfinance is the provision that Microfinance is a powerful tool to fight poverty. provides access to various financial services such as credit, Microfinance means building financial systems that savings, micro insurance, remittances, leasing to low-income serve the poor. clients including consumers and the self employed, who traditionally lack access to banking and related services. Its Microfinance can pay for itself and must do so if it is to main objective is to provide a permanent access to appropriate reach number of people. financial services including insurance, savings, and fund Microfinance is about building permanent local transfer. As Micro finance becomes more widely accepted and financial Institutions moves into main stream, the supply of services to poor may also Interest rate ceilings hurt poor people by making it increase, improving the efficiency and outreach while lowering harder for them to get credit.

3 The costs. The role of government is to enable financial services Index Terms Entrepreneurs, Funding for start-ups Micro- not to provide them directly. finance, Seed funding. Donor funds complete private capital not competes with it. The key bottleneck is the shortage of strong Institutions I. Microfinance IN AFRICA and managers. Microfinance is the provision that provides access to Microfinance works best when it measures -and various financial services such as credit, savings, micro discloses its performance. insurance, remittances, leasing to low-income clients C. Achievements of Microfinance in Africa including consumers and the self employed, who traditionally lack access to banking and related services. Its 164 MFIs are the most important main objective is to provide a permanent access to 500 MFIs belong to AFMIN (The Africa Microfinance appropriate financial services including insurance, savings, Network).

4 And fund transfer. It is rather an important tool for the 700 Institutions With Respect to WAEMU (West eradication of poverty. Poor will be able to deal with African Economy Monetary Union). emergency and also make significant investment 5,328 Service points expenditures. As Microfinance becomes more widely 10 million beneficiaries accepted and moves into main stream, the supply of services to poor may also increase, improving the efficiency and outreach while lowering the costs. Microfinance must II. TYPES OF MFIS. involve the people themselves in examining the problems and A. Banks creating solutions if it is to be sustainable with those upon whom development is targeted. To meet unsatisfied demand Commercial Banks. for financial services, a variety of Microfinance Institutions Agricultural Credit Banks. (MFIs) has emerged over time in Africa.

5 B. Project/State funds A. Need of Microfinance in Africa International aid Programs. Only 6 % of Africans borrow money to start a business Para-public organizations. where as 13 % borrow to buy food. C. Informal Resources 50 % of the population live with less than 1US$ or less per day. Family Traditional Savings Manuscript received July 8, 2011; revised July 31, 2011. Tontines Sowmyan Jegatheesan, Corresponding author. Tel.: +91 9842147452 ; Money Lenders E-mail address: 300. International Journal of Trade, Economics and Finance, Vol. 2, No. 4, August 2011. D. Microfinance A. Community based Approach Credit & Savings Many MFIs rely on local communities to support the Direct Credit development of MFIs, outside the formal banking sector. Non Governmental Organizations(NGOs) Traditional Community based cooperative groups such as Performance of the Micro financial Institutions can be village associations and local groups play a central role in the judged through their institutional financial viability and their savings mobilization effort and expansion of other outreach to the poor people.

6 These performances could be Microfinance services. Microfinance seems to be rooted in influenced by the technical, political and the social factors to local culture which is more participatory because clients are combine traditional and modern Micro-finance approaches. more ready to identify with and thus involve in making financial decisions and actions that shape their life. The Unique features involved are: III. Microfinance -HOW TO MAKE IT SUCCESS IN AFRICA It is simply and easily adapted to illiterate group Many approaches have been used that ranges from the members. traditional group based systems to specialized lending by Promotes group solidarity, learning and establish a banks and funded by international Non-Governmental vehicle for addressing community development issues. Organizations (NGO) financial intermediaries. Growing Doesn't rely on infusion of outside funds.

7 Linkages between MFIs and the banking system in Africa Doesn't require physical infrastructure appear to be mutually beneficial as MFIs rely on banks for a TABLE 1. AFRICAN COUNTRIES GDP. variety of services, including deposit facilities, liquidity Country % population GDP. management services, and emergency credit lines to cover below poverty Per Capita line (US$). cash shortfalls in some cases. Angola --- 2058. OSCAL (Office of the Special Coordinator for Africa and Benin Botswana 508. Least developed countries) developed four principles Burkina Faso 5,846. Pooling together people's resources Burundi 391. Cameroon 106. Relying and building upon what people know Cape Verde 1,034. Reinforcing Microfinance to empower the African Chad --- 102. private sector 561. Comoros 339. Striving for efficiency, which include maintenance of Congo Congo --- 654.

8 Tools and better working DR --- 1,273. In last twenty years Africa has made significant advances Cote d'Ivoire --- 123. in understanding and providing financial services to better Djibouti 900. Equatorial --- 894. advance development and eradicate poverty. In 2006, Guinea --- 6,416. government of Rwanda ordered to close the country's largest Eritrea MFI's for bankruptcy due to gross mismanagement of funds Ethiopia 220. and poor credit practices. In Benin, there are very small Gabon 157. Gambia --- 5,821. number bank branches (35 nationwide for population of 7. Ghana 304. million) mostly concentrated around the capital city. Against Guinea 485. this backdrop SLCs (Saving and Loan cooperatives) are the Guinea-Bissau 350. only MFIs that collect savings. In Guinea, reach of banking Kenya Lesotho --- 190. Liberia 547. sectors is constrained by the limited number of deposit Madagascar 808.

9 Money banks, and credit is concentrated on largest domestic Malawi --- --- companies. MFIs have started to fill this gap. In Ghana, MFIs Mali Mauritania 271. has a strong savings orientation and a greater role is played Mauritius 161. Mozambique 392. by Non Governmental Organizations (NGOs). Rural and Namibia Niger 605. Community Banks (RCBs), The Savings and Loans Nigeria 5,059. companies (S&Ls) account for most of the Microfinance Rwanda 335. activities. In Tanzania, only six percent of the population has Sao Tome e 3,016. Principe 244. a bank account. The primary sources of Microfinance Senegal 752. services are Savings and Credit Cooperatives (SACCOs), Seychelles 238. The National Microfinance Bank (NMB), Cooperative and Sierra Leone --- 451. Rural Development Bank (CRDB), Akiba Commercial Bank Somalia South Africa 707. (ACB). In addition there are few regional and rural banks Swaziland 8,209.

10 Engaged in deposit-based Microfinance operations which Tanzania Togo 216. lack branch network. Uganda --- --- Zambia 5,109. 2,414. IV. METHODS IN MICRO FINANCE 316. 358. To maintain a sustainable Microfinance Institute various 303. methods can be followed. Some of them are listed below. 623. 301. International Journal of Trade, Economics and Finance, Vol. 2, No. 4, August 2011. B. Informal Methods for Financial Intermediation D. Microfinance Various Informal traditional methodologies used by If Microfinance has a sustainable impact on poverty licensed MFIs have been instrumental in mobilizing savings eradication, then it must level up as into starting a private from poor income households and giving them access to sector of entrepreneurs who function in formal economy. It financial services. can support inventiveness for direct supply and market linkages to small and medium businesses that targets C.