Microfinance is not new ...

Understanding the viability of microfinance requires a comprehensive analysis from the right perspective - one that emphasizes its precedence in the numerous traditional and informal systems of credit that were already in existence before microfinance came into the vogue. The links on the left refers to resources and documents on the Virtual Library on Microcredit ...

So what is "microcredit"?


The concept of microfinance can be best described by the title of F.A.J. Bouman's 1990 book, "Small, Short and Unsecured" - microfinance is the provision of very small loans that are repaid within short periods of time , and is essentially used by low income individuals and households who have few assets that can be used as collateral.

Environmental Colours of Microfinance

    .     The aspect of microfinance that has contributed to its success is its 'credit-plus' approach - where the focus has not only been on providing adequate and timely credit to low income groups, but to integrate it with other developmental activities such as community organizing and development, leadership training, skills and enterpreneurship management, financial management etc. The success and sustainability of microfinance programmes has depended upon, and has fostered, these aspects.

14 Reasons why the informal credit markets are used by the poor

    .     In the absence of commercial bank loans, access to microfinance affords low income groups to receive loans for their economic activity. Programmes and organizations that provide credit to low-income groups make a clear match between the quality and quantity of credit, and the capacity of the poor to utilize that credit - at the same time being organizationally sustainable. Unlike government credit programmes and formal bank credit that emphasize large loans for long repayment periods at very low interest rates, microfinance loans are for short periods that are repaid quickly, and made available at interest rates that keep the programme sustainable and viable.

A Continuum of Informality of Credit

A Typology of Informal Credit Suppliers

    .     It is important to understand that the concept of microfinance is not new. The precedence for microfinance lies in the numerous traditional and informal systems of credit that have existed in developing economies for centuries, long before modern, western-based commercial banking came into the picture. Many of the current microfinance practices, in fact, derive from community-based mutual credit transactions that were based on trust, peer-based non-collateral borrowing and repayment. Transactional (eg. money lenders), mutual (eg. ROSCAs) or personal (eg. friends and neighbours) credit suppliers have always lent to the poor, providing the right quality and quantity of credit, at the right time and place, to low-income households.


    .     The 'adoption' of traditional financial systems and its intergration into modern banking and financial systems is not reltively new (poineered by Grameen Bank, and other microfinance institutions such as SEWA (India), BRAC (Bangladesh) Bancosol (Bolivia) etc.). As far back as 1720, an Irish pastor and writer, Jonathan Swift, started the first Irish Loan Fund, providing loans without collateral to the poor of Dublin. The first formal Asian micro bank was the Priyayi Bank of Purwokerto in Java, Indonesia that was set up in 1895, and which is the predecessor of the current BRI.

Networks and Networking in Microfinance

    .     The integration of microfinance systems into the larger macro systems in developing countries has not been smooth and many barriers have existed. This is where second-tier institutions (multilateral institutions, donor agencies, universities and research institutions, international NGOs etc) have played a critical role in mainstreaming microfinance programmes and institutions. They have played both financial and non-financial roles - in terms of supporting microfinance initiatives financially, and in instituting capacity building and good governance practices in microfinance programmes.

There is a clear need, first of all, in establishing the viability and importance of microfinance as a poverty alleviation approach for low-income groups. It also helps in mainstreaming the concept of microfinance within the larger development economics thought. This is important to create a level playing field for microfinance, and its acceptance by macro players such as bankers and other financial institutions. Emphasis also needs to be placed on second tier organizations in order to support and promote microfinance initiatives.

Thus microfinance institutions and the governmental and non-governmental entities that support it have to face two key challenges if microfinance is to become a viable tool for poverty alleviation and development.

Capacity Building for Microfinance

    .     Firstly, there is a need for repackaging microfinance, focusing on capacity building of MFIs. Microfinance needs to 'graduate' from its dependence on grants and its charity orientation, to one of self-sufficiency and financial sustainability. Technical advisory, management tools, appropriate and timely information are some important inputs.

Governance of Microfinance Institutions

    .     Secondly, there is a need for mainstreaming microfinance, focusing on governance of MFIs. This calls for a facilitative and supportive legislative environment to be put in place by national and local government agencies and financial institutions - essentially as a complement to the growing trend of self governance by MFIs.

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Hari Srinivas - hsrinivas@gdrc.org
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