Lesson 1: Introduction to Microfinance (ENTREP-ELEC)
- 2. DefinitionofMicrofinance DefinitionofMicrofinance Microfinance, also known as microcredit, refers to a banking service tailored for individuals or communities with low income, offering financial access that would otherwise be unavailable to them (Kagan, 2024). Note: It enables individuals to access small business loans responsibly and safely, aligning with ethical lending principles.
- 3. 18th Century: Microfinance traces its origins back to initiatives like the Irish Loan Fund system, which aimed to assist impoverished individuals in Ireland. 1970s: Modern microfinance emerged as a means of providing financial services to low- income individuals and communities, gaining traction worldwide. 1983: Muhammad Yunus established Grameen Bank in Bangladesh, pioneering microcredit by providing small loans to entrepreneurs, particularly targeting impoverished individuals. "16 Decisions": Grameen Bank introduced a set of guidelines known as the "16 Decisions," offering clients guidance on improving their lives through various social and health measures. 2006: Muhammad Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize for their significant contributions to developing the microfinance system. Global Expansion: Microfinance expanded beyond Grameen Bank, with numerous organizations collaborating with institutions such as the World Bank or operating independently to provide financial services to underserved communities worldwide. Customized Lending: Some microfinance institutions offer lenders the option to choose specific borrowers based on criteria like poverty level, geographic location, or the type of small business they are involved in, allowing for targeted support Brief History of Microfinance Brief History of Microfinance Muhammad Yunus
- 4. Purpose, Role, and Principle of Microfinance Purpose, Role, and Principle of Microfinance Microfinance aims to empower impoverished individuals by providing them with the opportunity to achieve self-sufficiency in the long term. The roles of microfinance institutions include providing small loans to low-income earners, creating employment opportunities, and offering capacity-building initiatives to borrowers. These capacity-building efforts encompass imparting skills such as financial management, entrepreneurship, and managerial skills to empower borrowers for long- term success. Key actions that governments can take to support microfinance include maintaining macroeconomic stability, avoiding the imposition of interest-rate caps, and refraining from distorting the market with unsustainable subsidized or high- delinquency loan programs.
- 5. Loan Terms in Microfinance Loan Terms in Microfinance It involves interest charges and structured repayment plans, with some lenders requiring borrowers to save a portion of their income as insurance against default. Often utilizing a group lending model, microfinance fosters peer pressure and mutual support among borrowers, while also providing access to assistance from peers or loan officers. Successful repayment builds a positive credit history, improving future loan accessibility, with a particular focus on empowering women for broader family stability and prosperity. Despite serving low-income individuals, microfinance boasts high repayment rates, highlighting its effectiveness in fostering financial inclusion and self- sufficiency.
- 6. Advantages of Microfinance Advantages of Microfinance Institutions (MFIs) Institutions (MFIs) Collateral-free Loans: Microfinance provides access to loans without requiring traditional collateral, enabling individuals without assets to access financial resources. 1. Quick Disbursement: Microfinance institutions can disburse loans quickly, making them suitable for addressing urgent financial needs and emergencies. 2. Meeting Financial Needs: Microfinance assists individuals in meeting various financial needs, including starting or expanding businesses, covering educational expenses, or addressing healthcare costs. 3. Diverse Loan Portfolio: Microfinance institutions offer an extensive range of loan products tailored to different purposes, allowing borrowers to choose options that best suit their requirements. 4. Promotion of Self-sufficiency and Entrepreneurship: By providing access to capital and resources, microfinance promotes self-sufficiency and entrepreneurship among borrowers, empowering them to generate income and improve their livelihoods. 5. Small Loan Amounts: Microfinance typically offers small loan amounts, making them accessible to individuals who may not qualify for larger loans from traditional financial institutions. 6.
- 7. Challenges of Microfinance Challenges of Microfinance Institutions (MFIs) Institutions (MFIs) Over-Indebtedness: Borrowers accumulating excessive debt beyond their repayment capacity, leading to financial strain and default. 1. Inadequate Investment Validation: Borrowers may lack proper assessment of investment opportunities, resulting in inefficient use of loan funds and failure to generate sufficient income for repayment. 2. Lack of Awareness: Some borrowers may have limited understanding of financial services, leading to poor financial management and increased risk of over-indebtedness. 3. Regulatory Issues: Weak regulatory frameworks or ineffective enforcement can enable predatory lending practices and inadequate borrower protection, exacerbating over-indebtedness. 4. Choice of Appropriate Model: The selection of microfinance models, such as group lending, may inadvertently contribute to over-borrowing and over-indebtedness if not tailored to the specific needs and capacities of borrowers. 5.
- 8. References References Kagan, J. (2024, February 25). Microfinance Definition: Benefits, History, and How It Works. Investopedia. Retrieved from https://www.investopedia.com/terms/m/microfinance.asp CFI Team. (n.d.). Microfinance. Corporate Finance Institute. Retrieved from https://corporatefinanceinstitute.com/resources/commercial- lending/microfinance/