A Study on Impact of Microfinance on Women Empowerment

8/18/2019 A Study on Impact of Microfinance on Women Empowerment

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A Study on Impact of Micro Finance on Women Empowerment

INTRODUCTION

Microfinance is defined as any activity that includes the provision of financial services

such as credit, savings, and insurance to low income individuals which fall just above the

nationally defined poverty line, and poor individuals which fall below that poverty line, with the

goal of creating social value. The creation of social value includes poverty alleviation and the

broader impact of improving livelihood opportunities through the provision of capital for micro

enterprise, and insurance and savings for risk mitigation and consumption smoothing. A large

variety of sectors provide microfinance in India, using a range of microfinance delivery methods.Since many banks in India, various actors have endeavored to provide access to financial

services to the poor in creative ways. overnments also have piloted national programs, !"s

have undertaken the activity of raising donor funds for on#lending, and some banks have

partnered with public organi$ations or made small inroads themselves in providing such services.

This has resulted in a rather broad definition of microfinance as any activity that targets poor and

low#income individuals for the provision of financial services. The range of activities undertaken

in microfinance include group lending, individual lending, the provision of savings and

insurance, capacity building, and agricultural business development services.

The two main mechanisms for the delivery of financial services to such clients are% &'(

)elationship#based banking for individual entrepreneurs and small businesses and &*( roup#

based models, where several entrepreneurs come together to apply for loans and other services as

a group. Microfinance is a movement whose object is +a world in which as many poor and near

poor households as possible have permanent access to an appropriate range of high uality

financial services, including not just credit but also savings, insurance and fund transfers-. Many

of those who promote microfinance generally believe that such access will help poor people out

of poverty. Microfinance is a way to promote economic development, employment and growth

through the support of micro#entrepreneurs and small business.

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In India, the trickle down effects of macroeconomic policies have failed to resolve the

problem of gender ineuality. omen have been the vulnerable section of society and constitute

a si$eable segment of the poverty#struck population. omen face gender specific barriers to

access education health, employment etc. Micro finance deals with women below the poverty

line. Micro loans are available solely and entirely to this target group of women. There are

several reason for this% Among the poor, the poor women are most disadvantaged# they are

characteri$ed by lack of education and access of resources, both of which is reuired to help

them work their way out of poverty and for upward economic and social mobility. The problem

is more acute for women in countries like India, despite the fact that women/s labor makes a

critical contribution to the economy. This is due to the low social status and lack of access to key

resources. 0vidence shows that groups of women are better customers than men, the better

managers of resources. If loans are routed through women benefits of loans are spread wider

among the household.

1y e2tending small loans to poor individuals, microcredit enables its borrowers to take up

income#earning activities that lead to a series of improvements in their economic situation. In

addition to the improved income#earning ability, microcredit has increasingly promoted for its

positive impact on empowerment, especially for women/s empowerment by enabling poor

women to earn an independent income and contribute financially to their household. This is

supposed to give women greater power within the household. Also, microcredit is seen as a tool

in enabling women to free themselves from household confines and get e2posure to the outside

community. The e2posure to the outside community, together with the formation of networks

with other women, is e2pected to lead to greater self#confidence and courage. 3owever, there is

no real consensus among academics on women/s empowerment. Microcredit has a role in

increasing female borrower/s income#earning ability, leading to stronger decision#making power

and ability to overcome gender#related constraints.

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NEED FOR T#E STUD$

Since independence, various governments in India have e2perimented with a large

number of grant and subsidy based poverty alleviation programmes. These programmes were

based on grant4subsidy and the credit linkage was through commercial banks only. 3ence was

adopted the concept of micro#credit in India. In olden days women were restricted to take part in

any social activities and not given roles in decision making in her family. The situation was even

more worsening in rural and remote areas. !ow the situation has been changed. She is given

freedom to do what she wishes. In today/s scenario are women are engaged in income generating

activities. This is because of !" and other financial institution came forward to provide

microfinance to poor women. They believe that a woman is the small credit risk and often

benefits the whole family. The main aim of microfinance is to empower women and poverty

alleviation.

India has adopted the model of e2tending credit to the poorest sector and took a number

of steps to promote micro#financing in the country. So this study is necessary to know more

about microfinance concept. To know how S1M banks are providing microfinance services to poor people and how it helps to promote poor people to improve their standard of living. To

know how S1M banks are improve and develop the savings habit from poor people through

microfinance concept. If anyone wants to get microfinance facility what are all the procedure is

there.

SCOPE OF T#E STUD$

Microfinance initiatives to finance the projects and bring economic development may get

benefitted by implementing innovative approaches and reinforcing their objectives. Most of the

microfinance critics claim that it is 5over#hyped/. 3owever, several success stories have treated it

as the most effective and successful form of poverty mitigation, when implemented under the

proper conditions. Microfinance industry is at the important stage of evolvement. The industry

has already moved away from the traditional loan system to individual loans. hen an individual

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grows his businesses to certain point, he will be paired it with another person, so that they can

become counter guarantee for each other.

O&'ECTI(ES OF T#E STUD$

'( To analy$e the institutional financial assistance given by the bank for the S3 group

members.*( To know the risk is face by the employees in the bank.6( To know the bank action if any microfinance loan holder fails to repay the loan amount.7( To clarify the limitation of microfinance programmes as the tool for women/s empowerment

and the type of support service necessary to ma2imi$e the contribution of microfinance

service.8( To offer suggestions for the betterment of microfinance service to poor women for their

women empowerment and poverty alleviation.

RESEARC# MET#ODO)O*$

Methodology is a way to systematically solve the problem and it is a game plan for

conducting research. And also it is a framework for the study and is used as a guide in collecting

and analy$ing the data.

This is a Secondary data based study conducted at State 1ank of Mysore, 9andavapura

branch. 9andavapura.

Met+od of Data Co,,ection

3ere only Secondary data/s are used for collect the data.

&i( The information is collected through interviewing the 1ank Manager.&ii( The information is collected through the eb site4 Internet&iii( The information is collected through 1ooks, Maga$ines and :ournals.

Stati-tica, Tec+ni.ue-

9ie charts and 1ar charts are used to analy$e the data and to arrive at conclusions.

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)IMITATIONS OF T#E STUD$

'( The study is confined with the rural area. 3ence the results may not be applicable to

urban area.

*( All the information available was from secondary sources and data was very vast toanaly$e properly and accurately.

6( Study being conducted was very wide and analysis reuires e2pertise knowledge and

skills which was lacking.7( The information is collected from indirect sources so in some information data is not

available.

RE(IEW OF )ITERATURE

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INTRODUCTION

According to International ;abor "rgani$ation &I;"(, +Microfinance is an economic

development approach that involves providing financial services through institutions to low

income clients-.

In India, Microfinance has been defined by +The !ational Microfinance Taskforce, 'ell of the )eserve 1ank "f India , the

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borrowable amounts up to the limit of )s.*8???4# could be considered as micro credit products

and this amount could be gradually increased up to )s.7????4# over a period of time which

roughly euals to @8?? a standard for South Asia as per international perceptions.

The term micro finance sometimes is used interchangeably with the term micro credit.

3owever while micro credit refers to purveyance of loans in small uantities, the term

microfinance has a broader meaning covering in its ambit other financial services like saving,

insurance etc. as well.

The mantra +Microfinance- is banking through groups. The essential features of the

approach are to provide financial services through the groups of individuals, formed either in

joint liability or co#obligation mode. The other dimensions of the microfinance approach are%

'. It is a tool for empowerment of the poorest.*. Belivery is normally through Self 3elp roups &S3s(.6. It is essentially for promoting self#employment, generally used for%

&a( Birect income generation&b( )earrangement of assets and liabilities for the household to participate in future

opportunities and&c( >onsumption smoothing.

7. It is not just a financing system, but a tool for social change, especially for women.8. 1ecause micro credit is aimed at the poorest, micro#finance lending technology needs to

mimic the informal lenders rather than the formal sector lending. It has to%&a( 9rovide for seasonality&b( Allow repayment fle2ibility&c( =i2 a ceiling on loan si$es.

T#E ORI*IN OF MICROFINANCE

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Although neither of the terms microcredit or microfinance were used in the academic

literature nor by development aid practitioners before the '


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Approac+

'.!ationali$ation of private

commercial banks

'.9eer#pressure '.!"#M=Is and S3s

gaining more legitimacy

*.02pansion of rural branch

network

*.0stablishment of M=Is,

typically of non#profit origins

*.M=Is emerging as strategic

partners to diverse entities

interested in the low#income

segments

6.02tension of subsidi$ed

credit

6.>onsumer finance emerged

as high growth area

7.0stablishment of )ural

)egional 1anks7.Increased policy regulation

8.0stablishment of ape2

institutions such as !ational

1ank for Agriculture and

)ural Bevelopment and Small

Industries Bevelopment 1ank

of India

8.Increasing

commerciali$ation

P+a-e !@ In the '


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Microfinance Institutions &M=Is(, largely of non#profit origins, with e2isting development

programs.

P+a-e %@ In *?'*, the third phase in the development of Indian microfinance began, marked by

further changes in policies, operating formats, and stakeholder orientations in the financial

services space. This phase emphasi$es on +inclusive growth- and +financial inclusion.- This

period also saw many !"#M=Is transform into regulated legal formats such as !on#1anking

=inance >ompanies &!1=>s(. >ommercial banks adopted innovative ways of partnering with

!"#M=Is and other rural organi$ations to e2tend their reach into rural markets. M=Is have

emerged as strategic partners to individuals and entities interested in reaching out to IndiaGs low

income client segments.

PO)IC$ ATTENTION TO MICROFINANCE

!redit4)ural >reditG included in the list of permitted non#banking

financial company &!1=>( activities considered for =oreign Birect Investment &=BI(

"==0 ### M=Is acknowledged for the first time in the 1udget Speech by the =inance Minister

+overnment intends to promote M=Is in a big way. The way forward, I believe, is to identify

M=Is, classify and rate such institutions, and empower them to intermediate between the lending

banks and the beneficiaries.-

'anuary "==9 ### Announcement of the business correspondent model

Fe3ruary "==9 ### 1udget Speech by the =inance Minister promises a formal statutory

framework for the promotion, development and regulation of the microfinance sector

Marc+ "==9 ### >omprehensive guidelines by )1I on loan securiti$ation

'u,y "==9 ### )1I master circular allows !"s involved in microfinance to access 02ternal

>ommercial 1orrowings &0>1( up to HSB 8 million &I!) *?.*8 crores( during a year.

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Marc+ "==: ### =inance Minister introduces the +Micro =inance Sector Bevelopment and

)egulation 1ill *??E- in ;okSabha

MICROFINANCE #ISTORICA) &ACB*ROUND

e can trace the origin of the concept of Microfinance in 1angladesh.

;!>Micro8Finance In-titute- of &an,ade-+

1angladesh has been acknowledged as a pioneer in the field of microfinance.

Br.Muhammad unus, 9rofessor of 0conomics in >hitgaon Hniversity of 1angladesh, was an

initiator of an action research project +rameen 1ankJ.

The project started in '


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;"> Indian Scenario

India has adopted the 1angladesh/s model in a modified form. To alleviate the poverty

and to empower the women, the micro#finance has emerged as a powerful instrument in the new

economy. ith availability of microfinance, self#help groups &S3/s( and credit management

groups have also started in India. And thus the movement of S3 has spread out in India.

In India, banks are the predominant agency for delivery of micro#credit. In '


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two decades now. They have joined hands proactively with informal delivery channels to give

microfinance sector the necessary momentum. The data for year *?'?#'' have been presented

and reviewed under two models of microfinance%

;!> S#*8&an )inae Mode,

The S3s#1ank ;inkage 9rogramme has received wide acceptance among multiplicity

of Stake holders, civil society organi$ations, bankers and the international communities.

Around '.* million new S3s had credit link with banks and E.7D million S3s maintained

savings account with bank in the financial year *?'?#''.

;">MFI8&an )inae Proramme

The growth is also higher than corresponding growth under the S3s#1ank ;inkage

9rogramme in *?'?#''. This is due to proactive role of the M=Is in microcredit and

professional management of funds from 1anks.

RO)E OF MICROFINANCE@

The micro credit of microfinance progamme was first initiated in the year '


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!7! Strateic Po,icy Initiati5e-

Some of the most recent strategic policy initiatives in the area of Microfinance taken by the

government and regulatory bodies in India are%• orking group on credit to the poor through S3s, !"s, !A1A)B, '


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!1=>s are registered under the >ompanies Act, '


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The '


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9art of a sectoral strategy for change which identifies opportunities, constraints and

bottlenecks within industries which if addressed can raise returns and prospects for large

numbers of women. 9ossible strategies include linking women to e2isting services and

infrastructure, developing new technology such as labour#saving food processing, building

information networks, shifting to new markets, policy level changes to overcome legislative

barriers and unioni$ation.

1ased on participatory principles to build up incremental knowledge of industries and

enable women to develop their strategies for change &>hen, '


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and4or operating in remote areas. Such strategies have recently become a focus of interest from

some donors and also the Microcredit Summit >ampaign.

3ere gender lobbies have argued for targeting women because of higher levels of female

poverty and women/s responsibility for household well#being. 3owever although gender

ineuality is recogni$ed as an issue, the focus is on assistance to households and there is a

tendency to see gender issues as cultural and hence not subject to outside intervention.

Although term GempowermentG is freuently used in general terms, often synonymous

with a multi#dimensional definition of poverty alleviation, the term G womenGs empowerment G is

often considered best avoided as being too controversial and political. The assumption is that

increasing women/s access to micro#finance will enable women to make a greater contribution to

household income and this, together with other interventions to increase household well#being,

will translate into improved well#being for women and enable women to bring about wider

changes in gender ineuality.

FINANCIA) SUSTAINA&I)IT$ PARADI*M

The financial self#sustainability paradigm &also referred to as the financial systems

approach or sustainability approach( underlies the models of microfinance promoted since the

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best practice focus on production of a 5financial sustainability inde2/ which charts progress of

programmes in covering costs from incomes.

ithin this paradigm gender lobbies have been able to argue for targeting women on the

grounds of high female repayment rates and the need to stimulate women/s economic activity as

a hitherto underutili$ed resource for economic growth. They have had some success in ensuring

that considerations of female targeting are integrated into conditions of micro#finance delivery

and programme evaluation.

Alongside this focus on female targeting, the term 5empowermentG is freuently used in

promotional literature. Befinitions of empowerment are in individualist terms with the ultimate

aim being the e2pansion of individual choice or capacity for Self#reliance. It is assumed that

increasing women/s access to micro#finance services will in itself lead to individual economic

empowerment through enabling womenGs decisions about savings and credit use, enabling

women to set up micro#enterprise, increasing incomes under their control. It is then assumed that

this increased economic empowerment will lead to increased well#being of women and also to

social and political empowerment.

These paradigms do not correspond systematically to any one organisational model of

micro#finance. Micro#finance providers with the same organisational form e.g. village bank,

rameen model or cooperative model may have very different gender policies and4or emphases

and strategies for poverty alleviation. The three paradigms represent different 5discourses/ each

with its own relatively consistent internal logic in relating aims to policies, based on different

underlying understandings of development. They are not only different, but often seen as

5incompatible discourses/ in uneasy tension and with continually contested degrees of

dominance. In many programmes and donor agencies there is considerable disagreement, lack of

communication and4or personal animosity and promoted by different stakeholders within

organisations between staff involved in micro#finance &generally firm followers of financial self#sustainability(, staff concerned with human development &generally with more sympathy for the

poverty alleviation paradigm and emphasi$ing participation and integrated development( gender

lobbies &generally incorporating at least some elements of the feminist empowerment paradigm(.

hat is of concern in current debates is the way in which the use of apparently similar

terminology of empowerment, participation and sustainability conceals radical differences in

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policy priorities. Although women/s empowerment may be a stated aim in the rhetoric of official

gender policy and program promotion, in practice it becomes subsumed in and marginali$ed by

concerns of financial sustainability and4or poverty alleviation.

RO)E OF MICROFINANCE IN WOMEN EMPOWERMENT

Microfinance is a powerful tool to assist the stumbling economies to recover and

strengthen, thereby making the lives of millions of poor people more self#respecting and

dignified. Microcredit has made women more productive by providing them opportunity to be

self dependent in terms of their finance, helping them earn, making them aware of their rights

and making them independent which in turn has empowered them. omen are now included

into socio#economic activities of the country, they are contributing to family income and are a part of decision#making process in the family and they are able to e2ercise more control over

their reproductive rights.

Microfinance helps in integrating the financial needs of poor people into a country/s

mainstream financial system. It has been acknowledged that the development of a healthy

national financial system is an important goal and catalyst for the broader goal of national

economic development, which microfinance serves very well. Microfinance helps the poor,

including women in not just obtaining loans but also inculcating in them habits of savings,

investing in insurance policies and money transfer services. It helps them to raise income, be

self#dependent, build up assets and have a better life and better standard of living.

A majority of microfinance programmes target women with a goal to empower them.

Keeping up with the objective of financial viability, an increasing number of micro finance

institutions prefer women members as they believe that they are better and more reliable

borrowers. S+ri Ma+i,a *ri+a Udyo )iat Papad or )iat is an organi$ation that has acted

as a catalyst in empowering poor urban women across India during the last four decades. Starting

as a small group of seven women in '


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)ural India represents a vast opportunity with its largely unmet demand for financial

services. S1M 1ank seeks to tap the significant rural commercial opportunity as well as create a

social impact on the rural poor. The primary function of )MA is to provide financial solutions

to the vast rural hinterland. The group is thus responsible for all of S1M 1ank/s rural, micro#

banking and agri#business initiatives.

Micro &anin@

The 1usiness focuses on establishing a healthy and profitable lending e2change through

relationships with select M=Is &Microfinance institutions(, and invests in building deeper and

concurrent monitoring and control mechanisms to enable healthy growth of the industry. The

roup is responsible for managing >ommercial 1anking opportunities with M=Is. The group

also manages the 1usiness >orrespondent !etwork to enable S1M 1ank/s resolve towards

financial inclusion.

9robably the most potential solution to ending poverty and enabling people to work their way

into a sustainable, improved situation is called microcredit Microfinance. It has proved to be

immensely valuable. It has become clear that poor need access to money to send their children to

school, to buy medicines they need financial services to reduce their vulnerability. As a result,

worldwide, M=Is have started developing and delivering a range of financial products. Thisreflects Millennium Bevelopment oals &MBs( poverty reduction, education, health and

empowerment.

ender ineuality is a major factor affecting progress towards Millennium Bevelopment

oals. In our country also, micro finance can be a tool for making women self#reliant. These

women can provide their children, including girls, with education which in turn can empower

them, thereby setting a new trend of independent women, enjoying their full potential. "ne of the

powerful approaches to woman empowerment is the movement of S3s, which can transform

woman from being alive to live with dignity. The empowerment of women and improvement of

their status and economic role needs to be integrated into economic development programmes, as

the development of any country is inseparably linked with the status and development of women.

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MICRO FINANCE INSTRUMENT FOR WOMENS EMPOWERMENT

Micro =inance is emerging as a powerful instrument for poverty alleviation in the new

economy. In India, micro finance scene is dominated by Self 3elp roups &S3s( 1ank

;inkage 9rogramme, aimed at providing a cost effective mechanism for providing financialservices to the +unreached poor-. 1ased on the philosophy of peer pressure and group savings as

collateral substitute , the S3 programme has been successful in not only in meeting peculiar

needs of the rural poor, but also in strengthening collective self#help capacities of the poor at the

local level, leading to their empowerment.

Micro =inance for the poor and women has received e2tensive recognition as a strategy

for poverty reduction and for economic empowerment. Increasingly in the last five years , there

is uestioning of whether micro credit is most effective approach to economic empowerment of

poorest and, among them, women in particular. Bevelopment practitioners in India and

developing countries often argue that the e2aggerated focus on micro finance as a solution for the

poor has led to neglect by the state and public institutions in addressing employment and

livelihood needs of the poor.

>redit for empowerment is about organi$ing people, particularly around credit and

building capacities to manage money. The focus is on getting the poor to mobili$e their own

funds, building their capacities and empowering them to leverage e2ternal credit. 9erception

women is that learning to manage money and rotate funds builds women/s capacities and

confidence to intervene in local governance beyond the limited goals of ensuring access to credit.

=urther, it combines the goals of financial sustainability with that of creating community owned

institutions.

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therefore are not bankable. !evertheless, the e2periences of several S3s reveal that rural poor

are actually efficient managers of credit and finance. Availability of timely and adeuate credit is

essential for them to undertake any economic activity rather than credit subsidy.

The overnment measures have attempted to help the poor by implementing different

poverty alleviation programmes but with little success. Since most of them are target based

involving lengthy procedures for loan disbursement, high transaction costs, and lack of

supervision and monitoring. Since the credit reuirements of the rural poor cannot be adopted on

project lending app roach as it is in the case of organi$ed sector, there emerged the need for an

informal credit supply through S3s. The rural poor with the assistance from !"s have

demonstrated their potential for self help to secure economic and financial strength. Larious case

studies show that there is a positive correlation between credit availability and women/s

empowerment.

PRO&)EM AND C#A))EN*ES

Surveys have shown that many elements contribute to make it more Bifficult for women

empowerment through micro businesses. These elements are%

• ;ack of knowledge of the market and potential profitability, thus Making the choice of

business difficult.

• Inadeuate book#keeping.

• 0mployment of too many relatives which increases social pressure to share benefits.

• Setting prices arbitrarily.

• ;ack of capital.

• 3igh interest rates.

• Inventory and inflation accounting is never undertaken.

• >redit policies that can gradually ruin their business &many customers cannot pay cash

on the other hand, suppliers are very harsh towards women(.

"ther shortcomings includes,

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'. 1urden of meeting% Time consuming meetings, in particular in programmes based on

group lending, and time consuming income generating activities without reduction of

traditional responsibilities increase women/s work and time burden.

*. !ew 9ressures% 1y using social capital, in#group lending4group collateral programmes,

additional stresses and pressures are introduced, which might increase vulnerability and

reflect disempowerment.

6. )einforcement of traditional gender roles % lack of economic empowerment% Micro

finance assists women to perform traditional roles better and women thus remain trapped in

low productivity sectors, not moving from the group of survival enterprises to micro#

enterprises. There are evidence of men withdrawing their contributions to certain types of

household e2penditures.

C#A))EN*IN* ECONOMIC EMPOWERMENT

3owever impact on incomes is widely variable. Studies which consider income levels

find that for the majority of borrowers income increases are small, and in some cases negative.

All the evidence suggests that most women invest in e2isting activities which are low profit and

insecure and4or in their husband/s activities. In many programmes and conte2ts it is only in a

minority of cases that women can develop lucrative activities of their own through credit and

savings alone.

It is clear that women/s choices about activity and their ability to increase incomes are

seriously constrained by gender ineualities in access to other resources for investment,

responsibility for household subsistence e2penditure, lack of time because of unpaid domestic

work and low levels of mobility, constraints on se2uality and se2ual violence which limit access

to markets in many cultures.

These gender constraints are in addition to market constraints on e2pansion of theinformal sector and resource and skill constraints on the ability of poor men as well as women to

move up from survival activities to e2panding businesses. There are signs, particularly in some

urban markets like 3arare and ;usaka that the rapid e2pansion of micro#finance programmes

may be contributing to market saturation in 5female/ activities and hence declining profits.

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C#A))EN*IN* WE)) &EIN* AND INTRA #OUSE#O)D RE)ATION

There have undoubtedly been women whose status in the household has improved,

particularly where they have become successful entrepreneurs. 0ven where income impacts have

been small, or men have used the loan, the fact that micro#finance programmes have thought

women worth targeting and women bring an asset into the household may give some women

more negotiating power.

Savings provide women with a means of building up an asset base. omen themselves

also often value the opportunity to be seen to be making a greater contribution to household well#

being giving them greater confidence and sense of self#worth.

3owever women/s contribution to increased income going into households does not

ensure that women necessarily benefit or that there is any challenge to gender ineualities within

the household. omen/s e2penditure patterns may replicate rather than counter gender

ineualities and continue to disadvantage girls. ithout substitute care for small children, the

elderly and disabled, and provision of services to reduce domestic work many programmes

reported adverse effects of women/s outside work on children and the elderly. Baughters in

particular may be withdrawn from school to assist their mothers.

Although in some conte2ts women may be seeking to increase their influence within joint

decision#making processes rather than independent control over income &Kabeer '


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C#A))EN*IN* SOCIA) AND PO)ITICA) EMPOWERMENT

There have been positive changes in household and community perceptions of women/s

productive role, as well as changes at the individual level. In societies like Sudan and

1angladesh where women/s role has been very circumscribed and women previously had little

opportunity to meet women outside their immediate family there have sometimes been

significant changes. It is likely that changes at the individual, household and community levels

are interlinked and that individual women who gain respect in their households then act as role

models for others leading to a wider process of change in community perceptions and male

willingness to accept change &;akshman, ' in 1angladesh and >I9>)0 in >ameroon, indicate the potential of micro#finance to

form a basis for organi$ation against other issues like domestic violence, male alcohol abuse and

dowry.

3owever there is no necessary link between women/s individual economic empowerment

and4or participation in micro#finance groups and social and political empowerment. These

changes are not an automatic conseuence of microfinance per se. As noted above, women/s

increased productive role has also often had it costs.

There is no necessary link between women/s individual economic empowerment and4or

participation in micro#finance groups and social and political empowerment. These changes are

not an automatic conseuence of microfinance per se. As noted above, women/s increased

productive role has also often had it costs*'.

In most programmes there is little attempt to link micro#finance with wider social and

political activity. In the absence of specific measures to encourage this there is little evidence of

any significant contribution of micro#finance. Micro#finance groups may put severe strains on

womenGs e2isting networks if repayment becomes a problem &!oponen '


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development services. hen compared to the wider S3 bank linkage movement in India,

private M=Is have had limited outreach. 3owever, we have seen a recent trend of larger

microfinance institutions transforming into !on#1ank =inancial Institutions &!1=>s(. This

changing face of microfinance in India appears to be positive in terms of the ability of

microfinance to attract more funds and therefore increase outreach.

In terms of demand for micro#credit or micro#finance, there are three segments, which

demand funds. They are%

• At the very bottom in terms of income and assets, are those who are landless and engaged

in agricultural work on a seasonal basis, and manual laborers in forestry, mining,

household industries, construction and transport. This segment reuires, first and

foremost, consumption credit during those months when they do not get labor work, andfor contingencies such as illness. They also need credit for acuiring small productive

assets, such as livestock, using which they can generate additional income.

• The ne2t market segment is small and marginal farmers and rural artisans, weavers and

those self#employed in the urban informal sector as hawkers, vendors, and workers in

household micro#enterprises. This segment mainly needs credit for working capital, a

small part of which also serves consumption needs. This segment also needs term credit

for acuiring additional productive assets, such as irrigation pump sets, bore wells and

livestock in case of farmers, and euipment &looms, machinery( and work sheds in case

of non#farm workers.

• The third market segment is of small and medium farmers who have gone in for

commercial crops such as surplus paddy and wheat, cotton, groundnut, and others

engaged in dairying, poultry, fishery, etc. Among non#farm activities, this segment

includes those in villages and slums, engaged in processing or manufacturing activity,

running provision stores, repair workshops, tea shops, and various service enterprises.

These persons are not always poor, though they live barely above the poverty line and

also suffer from inadeuate access to formal credit.

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ell these are the people who reuire money and with Microfinance it is possible. )ight now

the problem is that, it is S3sG which are doing this and efforts should be made so that the big

financial institutions also turn up and start supplying funds to these people. This will lead to a

better India and will definitely fulfill the dream of our late 9rime Minister, Mrs. Indira andhi,

i.e. 9overty.

"ne of the statements is really appropriate here, which is as%

+Money2 -ay- t+e pro5er3 mae- money7 W+en you +a5e ot a ,itt,e2 it i- often ea-y to et

more7 T+e reat difficu,ty i- to et t+at ,itt,e76 Adams Smith.

Today India is facing major problem in reducing poverty. About *8 million people in

India are under below poverty line. ith low per capita income, heavy population pressure,

prevalence of massive unemployment and underemployment, low rate of capital formation,

misdistribution of wealth and assets, prevalence of low technology and poor economics

organi$ation and instability of output of agriculture production and related sectors have made

India one of the poor countries of the world.

W#O ARE T#E C)IENTS OF MICRO FINANCE

The typical micro finance clients are low#income persons that do not have access to

formal financial institutions. Micro finance clients are typically self#employed, often household#

based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in

small income#generating activities such as food processing and petty trade. In urban areas, micro

finance activities are more diverse and include shopkeepers, service providers, artisans, street

vendors, etc. Micro finance clients are poor and vulnerable non#poor who have a relatively

unstable source of income.

Access to conventional formal financial institutions, for many reasons, is inversely

related to income% the poorer you are the less likely that you have access. "n the other hand, the

chances are that, the poorer you are, the more e2pensive or onerous informal financial

arrangements. Moreover, informal arrangements may not suitably meet certain financial service

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needs or may e2clude you anyway. Individuals in this e2cluded and under#served market

segment are the clients of micro finance.

As we broaden the notion of the types of services micro finance encompasses, the

potential market of micro finance clients also e2pands. It depends on local conditions and

political climate, activeness of cooperatives, S3 N !"s and support mechanism. =or

instance, micro credit might have a far more limited market scope than say a more diversified

range of financial services, which includes various types of savings products, payment and

remittance services, and various insurance products. =or e2ample, many very poor farmers may

not really wish to borrow, but rather, would like a safer place to save the proceeds from their

harvest as these are consumed over several months by the reuirements of daily living. >entral

government in India has established a strong N e2tensive link between !A1A)B &!ational

1ank for Agriculture N )ural Bevelopment(, State >ooperative 1ank, Bistrict >ooperative

1anks, 9rimary Agriculture N Marketing Societies at national, state, district and village level.

SE)F #E)P *ROUPS ;S#*S>

Self#help groups &S3s( play today a major role in poverty alleviation in rural India. A

growing number of poor people &mostly women( in various parts of India are members of S3s

and actively engage in savings and credit &S4>(, as well as in other activities &income generation,

natural resources management, literacy, child care and nutrition, etc.(. The S4> focus in S3 is

the most prominent element and offers a chance to create some control over capital, albeit in very

small amounts. The S3 system has proven to be very relevant and effective in offering women

the possibility to break gradually away from e2ploitation and isolation.

1asically groups can be of two types%

Se,f #e,p *roup- ;S#*->@ The group in this case does financial intermediation on

behalf of the formal institution. This is the predominant model followed in India.

*rameen *roup-@ In this model, financial assistance is provided to the individual in a

group by the formal institution on the strength of group/s assurance. In other words, individual

loans are provided on the strength of joint liability4co obligation. This microfinance model was

initiated by 1angladesh rameen 1ank and is being used by some of the Micro =inance

Institutions &M=Is( in our country.

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Microfinance approach is based on certain proven truths which are not always recogni$ed.

These are%

'. That the poor are bankable successful initiatives in micro finance demonstrate that there

need not be a tradeoff between reaching the poor and profitability # micro finance

constitutes a statement that the borrowers are not 5weaker sections/ in need of charity, but

can be treated as responsible people on business terms for mutual profit .*. That almost all poor households need to save, have the inherent capacity to save small

amounts regularly and are willing to save provided they are motivated and facilitated to

do so.6. That easy access to credit is more important than cheap subsidi$ed credit which involves

lengthy bureaucratic procedures # &some institutions in India are already lending to

groups or S3s at higher rates # this may prevent the groups from enjoying a sufficient

margin and rapidly accumulating their own funds, but members continue to borrow at

these high rates, even those who can borrow individually from banks(.7. G9eer pressureG in groups helps in improving recoveries.

#OW SE)F8#E)P *ROUPS WORB

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!A1A)B &'


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interest of '*#'6.8F but if we include the transaction costs &number of visits to banks,

compulsory savings and costs incurred for payments to animators4staff4local leaders etc.(

they come out to be as high as *'#*7F.

Semi 8 forma, Sector

The majority of institutional microfinance providers in India are semi#formal

organi$ations broadly referred to as M=Is. )egistered under a variety of legal acts, these

organi$ations greatly differ in philosophy, si$e, and capacity. There are over 8?? non#

government organi$ations &!"s( registered as societies, public trusts, or non#profit

companies. "rgani$ations implementing micro#finance activities can be categori$ed into

three basic groups.

I. "rgani$ations which directly lend to specific target groups and are carrying out all

related activities like recovery, monitoring, follow#up etc.

II. "rgani$ations that only promote and provide linkages to S3s and are not

directly involved in micro lending operations.III. "rgani$ations which are dealing with S3s and plan to start micro#finance

related activities.

Informa, Sector

In addition to friends and family, moneylenders, landlords, and traders constitute the

informal sector. hile estimates of their importance vary significantly, it is undeniable

that they continue to play a significant role in the financial lives of the poor. These are the

organi$ations that provide support to implementing organi$ations. The support may be in

terms of resources or training for capacity building, counseling, networking, etc. They

operate at state4regional or national level. They may or may not be directly involved in

micro#finance activities adopted by the associations4collectives to support implementing

"rgani$ations.

DE(E)OPMENT PROCESS T#ROU*# MICRO FINANCE

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Production Needs

Donors and Banks Micro-Finance Government and Banks

Implementing Organizations

AwarenessPromotional !orkIndividualIndividual

Promotion and Formation o" #$Gs

%onsolidation o" #$GsMicro &nterpriseMicro &nterprise

#avings

%onsumption Needs %redit Deliver'

(ecover'

Follow-up Monitoring

Farm (elatedIncome Generation )#ustaina*le + Growt, OrientedNon-Farm (elated

#el"-#ustaina*ilit' o" #$Gs

&conomic &mpowerment t,roug, use o" Micro-%redit as an entr' point "or overall &mpowermen


Fiure No7 !

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National Financial Institutions Banks Government Funded ProgrammesDonorsBilateral Pro.ects

Implementing Organizations

(esource#upport Organizations

Directl' engaged in Micro-Finance

Indirectl' engaged in Micro-Fin

Individuals

#$Gs

Mem*ers


MICRO8FINANCE INTER(ENTIONS T#ROU*# DIFFERENT

OR*ANISATIONS

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T#E NEED IN INDIA%

• India is said to be the home of one third of the world/s poor official estimates range from

*D to 8? percent of the more than one billion population.

• About CE percent of the poorest households do not have access to credit.• The demand for microcredit has been estimated at up to @6? billion the supply is less

than @*.* billion combined by all involved in the sector.

Bue to the sheer si$e of the population living in poverty, India is strategically significant in

the global efforts to alleviate poverty and to achieve the Millennium Bevelopment oal of

halving the world/s poverty by *?'8. Microfinance has been present in India in one form or

another since the '


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• Microfinance institutions should measure and disclose their performance both

financially and socially.

Microfinance can also be distinguished from charity. It is better to provide grants to families

who are destitute, or so poor they are unlikely to be able to generate the cash flow reuired to

repay a loan. This situation can occur for e2ample, in a war $one or after a natural disaster.

MICRO FINANCE MODE)S

!7 Micro Finance In-titution- ;MFI->@

M=Is are an e2tremely heterogeneous group comprising !1=>s, societies, trusts and

cooperatives. They are provided financial support from e2ternal donors and ape2 institutions

including the )ashtriyaMahilaKosh &)MK(, SIB1I =oundation for micro#credit and !A1A)B

and employ a variety of ways for credit delivery.

Since *???, commercial banks including )egional )ural 1anks have been providing funds to

M=Is for on lending to poor clients. Though initially, only a handful of !"s were +into-

financial intermediation using a variety of delivery methods, their numbers have increased

considerably today. hile there is no published data on private M=Is operating in the country,

the number of M=Is is estimated to be around C??.

)ea, Form- of MFI- in India

Type- of MFI- E-timate

d

Num3erG

)ea, Act- under w+ic+ Rei-tered

'. Not for Profit MFI-

a.( !" # M=Is

7?? to 8?? Societies )egistration Act, 'CD? or

similar 9rovincial ActsIndian Trust Act, 'CC*

b.( !on#profit >ompanies '? Section *8 of the >ompanies Act,

'ooperative Societies

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a.( Mutually Aided

>ooperative Societies &MA>S(

and similarly set up institutions

Act enacted by State overnment

6. For Profit MFI-

a.( !on#1anking =inancial

>ompanies &!1=>s(

D Indian >ompanies Act, '


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/7 Ser5ice Company Mode,

Hnder this model, the bank forms its own M=I, perhaps as an !1=>, and then works hand

in hand with that M=I to e2tend loans and other services. "n paper, the model is similar to the

partnership model% the M=I originates the loans and the bank books them. 1ut in fact, this model

has two very different and interesting operational features%

• The M=I uses the branch network of the bank as its outlets to reach clients. This allows

the client to be reached at lower cost than in the case of a standalone M=I. In case of

banks which have large branch networks, it also allows rapid scale up. In the

partnership model, M=Is may contract with many banks in an arm/s length relationship.

In the service company model, the M=I works specifically for the bank and develops an

intensive operational cooperation between them to their mutual advantage.• The 9artnership model uses both the financial and infrastructure strength of the bank to

create lower cost and faster growth. The Service >ompany Model has the potential to

take the burden of overseeing microfinance operations off the management of the bank

and put it in the hands of M=I managers who are focused on microfinance to introduce

additional products, such as individual loans for S3 graduates, remittances and so on

without disrupting bank operations and provide a more advantageous cost structure for

microfinance.

&an )ed Mode,

The bank led model was derived from the S3#1ank linkage program of !A1A)B.

Through this program, banks financed Self 3elp roups &S3s( which had been promoted by

!"s and government agencies.

Partner-+ip Mode,-

A model of microfinance has emerged in recent years in which a microfinance institution

&M=I( borrows from banks and on#lends to clients few M=Is have been able to grow beyond a

certain point. Hnder this model, M=Is are unable to provide risk capital in large uantities, which

limits the advances from banks. In addition, the risk is being entirely borne by the M=I, which

limits its risk#taking.

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MA'OR RISBS TO MICROFINANCE INSTITUTIONS

)isk is an integral part of financial services. hen financial institutions issue loans, there

is a risk of borrower default. hen banks collect deposits and on#lend them to other clients &i.e.

conduct financial intermediation(, they put clients/ savings at risk. Any institution that conducts

cash transactions or makes investments risks the loss of those funds. Bevelopment finance

institutions should neither avoid risk &thus limiting their scope and impact( nor ignore risk &at

their folly(. ;ike all financial institutions, microfinance institutions &M=Is( face risks that they

must manage efficiently and effectively to be successful. If the M=I does not manage its risks

well, it will likely fail to meet its social and financial objectives.

Many risks are common to all financial institutions. =rom banks to unregulated M=Is,

these include credit risk, liuidity risk, market or pricing risk, operational risk, compliance and

legal risk, and strategic risk. Most risks can be grouped into three general categories% financial

risks, operational risks and strategic risks,

Maor Ri- Cateorie-

Financia, Ri-- Operationa, Ri-- Strateic Ri--

Credit Ri-

Transaction risk

9ortfolio risk

)i.uidity Ri-

Maret Ri-

Interest rate risk

=oreign e2change Ri-

Investment portfolio

risk

Tran-action Ri-

3uman resources Ri-

Information N technology

risk

Fraud ;Interity> Ri-

)ea, H Comp,iance

Ri-

*o5ernance Ri-

Ineffective oversight

9oor governance structure

Reputation Ri-

Eterna, &u-ine--

Ri--

0vent risk

Financia, Ri--

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The business of a financial institution is to manage financial risks, which include credit

risks, liuidity risks, interest rate risks, foreign e2change risks and investment portfolio risks.

Most microfinance institutions have put most of their resources into developing a methodology

that reduces individual credit risks and maintaining uality portfolios. Microfinance institutions

that use savings deposits as a source of loan funds must have sufficient cash to fund loans and

withdrawals from savings.

Those M=Is that rely on depositors and other borrowed sources of funds are also

vulnerable to changes in interest rates. =inancial risk management reuires a sophisticated

treasury function, usually centrali$ed at the head office, which manages liuidity risk, interest

rate risk, and investment portfolio risk. As M=Is face more choices in funding sources and more

product differentiation among loan assets, it becomes increasingly important to manage these

risks well.

Credit ri-

>redit risk, the most freuently addressed risk for M=Is, is the risk to earnings or capital

due to borrowers/ late and non#payment of loan obligations. >redit risk encompasses both the

loss of income resulting from the M=I/s inability to collect anticipated interest earnings as well

as the loss of principle resulting from loan defaults. >redit risk includes both transaction risk and

portfolio risk.Transaction risk

Transaction risk refers to the risk within individual loans. M=Is mitigate transaction risk

through borrower screening techniues, underwriting criteria, and uality procedures for loan

disbursement, monitoring, and collection.

Portfolio risk

9ortfolio risk refers to the risk inherent in the composition of the overall loan portfolio.

9olicies on diversification &avoiding concentration in a particular sector or area(, ma2imum loan

si$e, types of loans, and loan structures lessen portfolio risk.

)i.uidity ri-

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;iuidity risk is the possibility of negative effects on the interests of owners, customers

and other stakeholders of the financial institution resulting from the inability to meet current cash

obligations in a timely and cost#efficient manner.

;iuidity risk usually arises from management/s inability to adeuately anticipate and

plan for changes in funding sources and cash needs. 0fficient liuidity management reuires

maintaining sufficient cash reserves on hand &to meet client withdrawals, disburse loans and fund

une2pected cash shortages( while also investing as many funds as possible to ma2imi$e earnings

&putting cash to work in loans or market investments(.

A lender must be able to honor all cash payment commitments as they fall due and meet

customer reuests for new loans and savings withdrawals. These commitments can be met by

drawing on cash holdings, by using current cash flows, by borrowing cash, or by converting

liuid assets into cash.

Some principles of liuidity management that M=Is use include%

• Maintaining detailed estimates of projected cash inflows and outflows for the ne2t few

weeks or months so that net cash reuirements can be identified.

• Hsing branch procedures to limit une2pected increases in cash needs. =or e2ample, some

M=Is, such as ASA, have put limits on the amount of withdrawals that customers can

make from savings in an effort to increase the M=I/s ability to better manage its liuidity.

• Maintaining investment accounts that can be easily liuidated into cash, or lines of credit

with local banks to meet une2pected needs.

• Anticipating the potential cash reuirements of new product introductions or seasonal

variations in deposits or withdrawals.

;iuidity management has a short#term focus &the section on investment portfolio risk below

discusses longer#term cash management issues(. "ften, liuidity projections are e2tended up to a

year with diminishing detail on the far end of the timeline.

Operationa, Ri--"perational risk arises from human or computer error within daily product delivery and

services. It transcends all divisions and products of a financial institution. This risk includes the

potential that inadeuate technology and information systems, operational problems, insufficient

human resources, or breaches of integrity &i.e. fraud( will result in une2pected losses.

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This risk is a function of internal controls, information systems, employee integrity, and

operating processes. =or simplicity, this section focuses on just two types of operational risk%

transaction risk and fraud risk.

Tran-action ri-

Transaction risk e2ists in all products and services. It is a risk that arises on a daily basis

in the M=I as transactions are processed.'* Transaction risk is particularly high for M=Is that

handle a high volume of small transactions daily. hen traditional banks make loans, the staff

person responsible is usually a highly trained professional and there is a very high level of cross#

checking. Since M=Is make many small, short#term loans, this same degree of cross#checking is

not cost#effective, so there are more opportunities for error and fraud.

Fraud ri-

Hntil recently, fraud risk has been one of the least addressed risks in microfinance. Also

referred to as integrity risk, fraud risk is the risk of loss of earnings or capital as a result of

intentional deception by an employee or client. The most common type of fraud in an M=I is the

direct theft of funds by loan officers or other branch staff. "ther forms of fraudulent activities

include the creation of misleading financial statements, bribes, kickbacks, and phantom loans.

Strateic Ri--

Strategic risks include internal risks like those from adverse business decisions or improper

implementation of those decisions, poor leadership, or ineffective governance and oversight, as

well as e2ternal risks, such as changes in the business or competitive environment. This section

focuses on three critical strategic risks% overnance )isk, 1usiness 0nvironment )isk, and

)egulatory and ;egal >ompliance )isk.

*o5ernance ri-

"ne of the most understated and underestimated risks within any organi$ation is the risk

associated with inadeuate governance or a poor governance structure. The dangers of poor

governance that nearly resulted in the failure of that institution. Birection and accountability

come from the board of directors, who increasingly include representatives of various

stakeholders in the M=I &investors, borrowers, and institutional partners(. The social mission of

M=Is attracts many high profile bankers and business people to serve on their boards.

Hnfortunately, these directors are often reluctant to apply the same commercial tools that led to

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their success when dealing with M=Is. As M=Is face the challenges of management succession

and the need to recruit managers that can balance social and commercial objectives, the role of

directors becomes more important to ensure the institution/s continuity and focus.

To protect against the risks associated with poor governance structure, M=Is should

ensure that their boards comprise the right mi2 of individuals who collectively represent the

technical and personal skills and backgrounds needed by the institution. Most M=Is name

e2ecutive officers and some create special committees to fulfill specific roles on the board. In

addition, the institutional by#laws should be clear and well written, and accessible to all board

members.

Microfinance institutions are particularly vulnerable to governance risks resulting from

their institutional structure and ownership. "ne of the strongest links to effective governance is

ownership. 1oard members with a financial stake in the institution tend to have stronger

incentives to closely oversee operations. 3owever, many M=Is operate as non#governmental

organi$ations whose board members have no financial stake in the institution. 0ven many

transformed commercial M=Is are primarily owned by the former non#governmental

organi$ation &!"( and therefore the majority of their board members are not real owners. In

addition, many board members of commercial institutions represent public development agencies

and tend to think more like donors than traditional investors. Microfinance institutions that

operate as credit unions face a different type of governance issue their boards comprise client

members, most of which are net borrowers whose focus could be more on reducing lending rates

than on the institution/s wellbeing.

0ffective governance reuires clear lines of authority for the board and management. The

board should have a clear understanding of its mandate, including its duties of care, loyalty and

obedience. M=Is can demonstrate short#term financial success without effective governance, but

effective governance is needed to see the institution through difficulties that are bound to arise

over the long#term. It is the board/s responsibility to oversee senior management and hold them

accountable for strategic decisions. If board members fail to fulfill their duties effectively, the

M=I risks financial loss as a result of poor decision making or inadeuate strategic planning.

Reputation Ri-

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)eputation risk refers to the risk to earnings or capital arising from negative public

opinion, which may affect an M=I/s ability to sell products and services or its access to capital or

cash funds. )eputations are much easier to lose than to rebuild, and should be valued as an

intangible asset for any organi$ation.

Most successful M=Is cultivate their reputations carefully with specific audiences, such

as with customers &their market(, their funders and investors &sources of capital(, and regulators

or officials. A comprehensive risk management approach and good management information

reporting helps an M=I speak the +language- of financial institutions and can strengthen an

M=I/s reputation with regulators or sources of funding.

Eterna, 3u-ine-- en5ironment ri-

1usiness environment risk refers to the inherent risks of the M=I/s business activity and

the e2ternal business environment. To minimi$e business risk, the microfinance institution must

react to changes in the e2ternal business environment to take advantage of opportunities, to

respond to competition, and to maintain a good public reputation. In 1olivia, for e2ample, many

microfinance institutions have lost clients and reported lower profit margins as a result of

increased competition in the past couple of years. As in most businesses, it is often easier to

focus on internal risks than to recogni$e shifts in the e2ternal marketplace that can potentially

affect the M=I.M=Is need to check the validity of their assumptions against reality on a periodic basis,

and respond accordingly. A risk management framework establishes a discipline in which those

uestions are encouraged and asked freuently &e.g., compare actual results to budget and assess

the reasons for variances(. hile e2ternal business risks are out of an M=I/s direct control, the

M=I can still anticipate them and prepare for their impact.

Anticipating and preparing for possible events or risks is the M=I/s responsibility. In

1angladesh, microfinance institutions face the risk of floods, which can increase their credit and

liuidity risk when borrowers businesses are slowed or destroyed or their homes are damaged

and in need of immediate repairs. Some M=Is maintain higher cash reserves during the flood

season. As M=Is become formal financial institutions and more linked to the financial and

political economy, they become more vulnerable to e2ternal risk e2posures. hile microfinance

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institutions can rarely prevent e2ternal risks from occurring, they can often take preventative

actions to minimi$e their impact on the institution.

In general, the best way for an M=I to reduce e2ternal risks is to integrate an effective

system of risk management into its culture and operations. An effective risk management system

should encourage directors and senior managers to ask whether they are prepared for certain

possible internal and e2ternal situations and whether they have built in sufficient cushion for

une2pected events.

RISB MANA*EMENT PROCESS FO))OWED &$ MFI

!7 Identify2 a--e--2 and prioriti4e ri--

The first step in risk assessment is to identify risks. To identify risks, the M=I reviews its

activities, function by function, and asks several uestions. =or e2ample, the M=I e2amines the

credit and lending operations, and reviews funding sources, loan transactions and portfolio

management processes. hile this can create a laundry list of minor risks &many of which should

be managed by branch, regional, or product managers(, it should also highlight the major risks

that are most significant to the M=I and reuire management/s close attention. Since product

differentiation is becoming more prevalent in M=Is, the M=I should assess each product/s

specific risk profile. =or e2ample, housing loans are likely to have higher delinuency and loss

rates than the loans for income#generating activities.

In this case, the relative si$e and severity of risk in that housing portfolio reuires

management/s special attention. In addition, the M=I should evaluate risks in individual lending

separately from peer group lending. 1ecause individual loans tend to be larger and are often

made without co#guarantees, individual loan portfolios can be riskier and represent a different

type of risk e2posure than group lending portfolios. 1y categori$ing and evaluating activities

according to their risk profiles, M=Is can better understand risks and can take action to reducelarge e2posures and avoid losses.

"7 De5e,op -trateie- to mea-ure ri-

After the board and management define priorities, they can develop strategies that guide

the organi$ation/s management of those risks. The board typically develops policies and sets the

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outer parameters for the business activities of an organi$ation. ithin those broad policies,

management then develops guidelines and procedures for day#to#day operations.

The board of directors is responsible for reviewing and approving policies that minimi$e

risk to the M=I &within its business strategy(, protect the fiduciary interests of investors and

depositors, and ensure that the M=I fulfills its mission. The 1oard usually reviews these polices

on an annual basis &unless an event prompts a more freuent review( to ask whether any

adjustments are needed or if management recommends any changes. These policies set the

tolerable range of risk, within which management should operate. Management develops the

detailed guidelines and operational policies and procedures that fit within those broad policies.

Management should recommend any changes in policies to the board, along with a rationale for

each proposed change.

The goal is to make conscious, informed decisions about which risks to take, what is an

acceptable level of risk, and what cost#benefit tradeoff is reasonable. It is the board/s

responsibility to ensure that the M=I is making informed decisions about how much risk is

tolerable and that there is sufficient capital and liuidity for the M=I to absorb any financial loss,

should it occur. M=Is can make several choices on how to mitigate a risk. They can% accept the

risk as part of doing business &e.g. a cost of credit risk is annual loan losses( mitigate the risk to

bring it to reasonable levels through carefully#designed policies and procedures &e.g. centrali$ed

disbursement, group lending, etc( eliminate the risk entirely &e.g. security to prevent physical

property loss or computer back#up for the management information systems( or transfer the risk

to someone else &e.g. buy insurance against certain losses(.

In each case, management and the board must evaluate the cost4benefit tradeoffs. 0ach of

these strategies entails some cost, either in staff time, e2penses, or opportunity costs. =or

e2ample, trying to eliminate credit risk would not be a good use of an M=I/s resources. It would

reuire changes in the target customer, and additional personnel to monitor borrowers closely

and pursue delinuent loans to avoid loss. The costs to the M=I in terms of increased personnel,

lower productivity, fewer loans to new customers &opportunity cost(, and significant management

time, would e2ceed the potential benefit of protected revenues. Alternatively, the M=I should set

a range of acceptable loan loss and delinuency rates, and monitor its portfolio carefully,

watching for trends that suggest that those ranges might be e2ceeded.

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It is important to distinguish reasonable risk from risk avoidance or elimination. Too

much emphasis on risk avoidance can translate into incentives for staff to avoid poorer borrowers

and weaken the mission of the M=I. Many M=Is design a set of controls and indicators that

allows them to monitor the outcomes of their policies on borrower composition and target

customer base.

%7 De-in operationa, po,icie- and procedure- to mitiate ri-

In most cases, an M=I lives with certain risks and designs a lending methodology and

system of controls and monitoring tools to ensure that a( risk does not e2ceed acceptable levels,

and b( there is sufficient capital or liuidity to absorb the loss if it occurs. These controls might

include%

• 9olicies and procedures at the branch level to minimi$e the freuency and scale of the

risk &e.g. dual signatures reuired on loans or disbursements of savings(.

• Technology to reduce human error, speed data analysis and processing.

• Management information systems that provide accurate, timely and relevant data so

managers can track outputs and detect minor changes easily.

• Separate lines of information flow and reconciliation of portfolio management

information and cash accounting in the field to identify discrepancies uickly.

These are all e2amples of the internal controls M=Is use to maintain reasonable levels of risk

in their activities ex-ante, before operations. They are built into program design, procedures and

daily operations.

=or e2ample, an M=I that offers individual loans in addition to group loans, must adapt the

operational guidelines and procedures to mitigate the risks of individual lending. The borrower

screening and business assessment process will be different since the M=I is relying on the cash

flow from the business to repay the loan rather than group co#guarantees. hile loan

disbursement procedures may remain the same as in traditional lending, loan monitoring may

reuire more freuent client visits, due to the lack of co#guarantors. ood management

information systems are critical to monitoring and mitigating risk. As >harles aterfield noted in

his article on MIS systems, +As microfinance institutions scale up their operations the needs for

timely and accurate information increases indeed the reliability of the management information

systems is often the difference between the success and failure of the institution.-

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Managers cannot monitor or manage risk without timely and relevant information. =or

e2ample, M=Is that operate through a decentrali$ed branch or unit office network have

encouraged branch#level cash reconciliation and management reporting to detect problems early

and act uickly, reducing the risk that small problems grow into larger ones. 1ranch managers

can review delinuent borrowers and reconciliation of cash and program numbers on a daily or

weekly basis, allowing prompt corrective action. Many M=Is hold branches accountable for

being a profit center, giving branch managers responsibility for cash and program reconciliation,

choosing whether to fund loans with savings or borrow from head office, and tracking e2penses

relative to interest and fee income.

Becentrali$ed branch networks have other risk management advantages. =raud or personnel

problems tend to be locali$ed to a branch or region, limiting the scale of potential financial loss

compared to that within a highly centrali$ed M=I. 3owever, such decentrali$ed M=Is need a

strong organi$ational culture and good information system to ensure that policies and procedures

are standardi$ed and consistently followed. ithout a high level of discipline, operational and

transaction risks increase.

/7 Imp,ement into operation- and a--in re-pon-i3i,ity

The ne2t step is for management to integrate those policies, procedures and controls into

operations and assign managers to oversee them. In the implementation process, management

should seek input from operational staff on the appropriateness of the selected policies,

procedures and controls. "perational staff can offer insight into the potential implications of the

controls in their specific areas of operation. If it is possible that the control measure will have an

impact on clients, then management should speak with line staff to understand the potential

repercussions.

In addition, M=Is can use client surveys or interviews to understand clients/ reactions to a

new operational procedure or internal control measure. Some might believe that since the M=I

integrates all employees into the risk management system, it is unnecessary to assign

responsibility. 3owever, there is an old adage that says, +If something is everyone/s

responsibility, it is no one/s.- To effect change, the risk management system must assign clear

responsibility to someone to implement the risk controls and ensure that they are respected.

Ideally, the person should be a senior manager with operations e2perience and authority.

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The M=I must determine who is responsible for monitoring and ensuring that the right

senior managers &or board of directors( receive relevant and useful infor mation, and that specific

personnel will be held accountable for implementing changes. The designated person must be

accountable to the board and senior management and must have the authority to implement

changes as needed. 1y assigning this level of responsibility to the position, the M=I reinforces

the importance of risk management throughout the organi$ation. >learly identifying a risk

manager and making his or her responsibilities very clear, increases the likelihood that the steps

will be implemented successfully.

07 Te-t effecti5ene-- and e5a,uate re-u,t-

Management must regularly check the operating results to ensure that risk management

strategies are indeed minimi$ing the risks as desired. The M=I evaluates whether the operational

systems are working appropriately and having the intended outcomes. The M=I assesses whether

it is managing risks in the most efficient and cost#effective manner. 1y linking the internal audit

function to risk management, the M=I can systematically address these uestions. To fully verify

the accuracy of the M=I/s accounts and reduce uncontrolled fraud and credit risks, the M=I

should incorporate client visits into the audit processes. ood management reporting is essential

to understanding whether these controls are effective, i.e. yielding the intended results. =or

e2ample, South Shore 1ank in >hicago has monthly board meetings to review a series of reports

with key ratios e2pressed as monthly trends. These include monthly loan asset uality reports

&delinuency by aging category is e2pressed as a percentage of total loans, loan losses as a

percentage of total loans and total loan disbursements( and funds management reports &liuidity

measured by loans to deposits and cash available to lend, investment portfolio mi2, interest rate

risk, and any funding risk for grantfunded activities(.

Trend and ratio reporting is the most efficient way for directors or senior managers to

absorb large amounts of information uickly. =ollowing trends allows the institution to +manage

by e2ception.- Managers can scan the trends in key ratios and focus on those areas where the

trends are not positive or where there has been a change, thereby focusing their limited time on

the most important issues. )atio analysis is one of the most useful tools in managing financial

institutions, since the relationships between different numbers are often more important than the

absolute numbers. This is especially true for large scale or uickly growing M=Is. Management

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reporting should provide information on actual results compared to budget, showing the

variance, and tracks key ratios and numbers relevant to the M=I/s operations.

97 Re5i-e po,icie- and procedure- a- nece--ary

1ased on the summary reporting and internal audit findings, the board reviews risk

policies for necessary adjustments. To be most effective, the internal audit should report directly

to the M=I/s board of directors. hile only significant internal audit findings are reported to the

board, the directors should ensure that necessary revisions are uickly made to the systems,

policies and procedures, as well as the operational workflow to minimi$e the potential for loss.

The internal audit report may make specific recommendations on how to strengthen risk

management areas depending on the audit scope. Management is responsible for designing the

specific changes, and in doing so should seek input from the internal audit team as well as branch

staff to ensure that operational changes are appropriate and will not result in unforeseen, negative

conseuences to the M=I or its clients. M=Is are increasingly adapting and adding new products

to offer customers more choices and to differentiate their products from the competition. ith

new products and product changes come new credit risks, operational risks, and liuidity risks,

which reuire new risk management strategies.

Ten *uide,ine- f

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