Microfinance and Its Delivery Models
4.1 Introduction
The most important finding in the last two decades in the world of finance did not come from the world of the rich or the relatively well off. More important than the hedge fund or the liquid yield option note was the finding that the poor can save, can borrow, and will certainly repay loans. This is the world of microfinance.
Definition
Microfinance may be defined as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards"
For several decades, many economies including the Indian, experimented with subsidized credit for the poor. But the only tangible outcome perhaps was the increase in Non-Performing Assets (NPA). Then came the realization that the core issue for the poor was access to credit rather than the cost of credit. In fact one of the contributions of the microfinance can possibly be the end of interest rate debate'.
Microfinance has proved time and again that it is access and not interest rates that are a constraint for the poor. Another discovery followed, that the poor can and will save, and can indeed use a wide range of financial services such as remittances facilities and insurance products. The most well-known and cited international example of a micro credit institution is the Grameen Bank in Bangladesh. But there are numerous others. Even during the Asian financial crisis, Bank Rayat Indonesia not only survived but also thrived; as did BancoSol in Bolivia.
Delivery Models of Microfinance
Individual Banking Based Model
This is a formal banking model where individual clients are provided financial services. The group formation costs are not incurred. Group peer pressure is absent and therefore programmes management and client appraisal poses specific challenges. While the individual banking model is suited for lending to enterprises the group approach is best suited
The most important finding in the last two decades in the world of finance did not come from the world of the rich or the relatively well off. More important than the hedge fund or the liquid yield option note was the finding that the poor can save, can borrow, and will certainly repay loans. This is the world of microfinance.
Definition
Microfinance may be defined as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards"
For several decades, many economies including the Indian, experimented with subsidized credit for the poor. But the only tangible outcome perhaps was the increase in Non-Performing Assets (NPA). Then came the realization that the core issue for the poor was access to credit rather than the cost of credit. In fact one of the contributions of the microfinance can possibly be the end of interest rate debate'.
Microfinance has proved time and again that it is access and not interest rates that are a constraint for the poor. Another discovery followed, that the poor can and will save, and can indeed use a wide range of financial services such as remittances facilities and insurance products. The most well-known and cited international example of a micro credit institution is the Grameen Bank in Bangladesh. But there are numerous others. Even during the Asian financial crisis, Bank Rayat Indonesia not only survived but also thrived; as did BancoSol in Bolivia.
Delivery Models of Microfinance
Individual Banking Based Model
This is a formal banking model where individual clients are provided financial services. The group formation costs are not incurred. Group peer pressure is absent and therefore programmes management and client appraisal poses specific challenges. While the individual banking model is suited for lending to enterprises the group approach is best suited