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Micro Finance
Microfinance services have always existed. All the evidence suggests that poor people will continue to need and use these informal services alongside those of externally-supported microfinance interventions. In some cases support for separate specialist microfinance institutions or NGO microfinance programmes is not necessarily the best or only type of microfinance intervention for poverty reduction. Analysis of these informal, private sector and formal sector arrangements must therefore be a central part of any impact assessment.
An increasing body of research has shown the considerable sophistication and diversity of informal and private sector mechanisms and arrangements which exist.
· Mutual arrangements include Revolving Savings and Credit Associations, informal funeral insurance.
· Private sector arrangements include informal lending between acquaintances, livestock share arrangements and trade credit.
· There are also often private microfinance specialists including free or peripatetic savings and credit collectors, money lenders, traders and landlords.
These informal and private sector arrangements vary in:
· Degree of security of savings, insurance and pension deposits. Although and private microfinance specialists often offer good levels of security, cases of fraud and misappropriation of funds are by no means unknown.
· Accessibility to very poor or particularly disadvantaged people. Access may depend on references from reputable family members. In some cases arrangements only exist between people of the same ethnic group.
· Flexibility and accessibility of funds although money lenders often offer flexible services, other sources may be less accessible.
· Costs are highly variable. In mutual arrangements interest rates on loans may be very high in order to earn money for savers. Private sector arrangements range from interest free arrangements to high interest rates depending on the nature of the relationship between borrower and lender. Relationships range from relatively egalitarian relations whereby poor women may lend to others through to highly exploitative debt bondage. In some cases women may be charged higher interest rates than men and/or offered other less advantageous conditions including sexual harassment and highly exploitative arrangements for domestic service.
It cannot be assumed that microfinance institutions will necessarily be able to provide better services than those already available and/or fulfil the diversity of needs which poor people have. It is crucial to ensure that externally-supported microfinance interventions integrate with and complement existing arrangements rather than displacing or undermining them. There may be ways of stimulating and supporting informal sector microfinance provision working with informal sector providers to increase their access to capital, increasing efficiency and developing networks in order to decrease interest rates and/or improve the services they provide.
MICROFINANCE INSTITUTIONS
Micro-finance institutions are very diverse and the sector is currently undergoing a period of rapid innovation. While many of these innovations can intuitively be expected to increase the contribution of micro-finance to poverty reduction, empowerment and other development goals, impact assessment will be crucial to testing this.
There are a number of commonly recognised distinct categories of MFI3 which are in many countries governed by separate legal statutes and regulations:
· specialised registered professional microfinance providers or development banks
· village banks
· registered cooperatives and credit unions
· development NGOs and micro-finance intermediary facilitators
Until recently it was the first two which received most attention in microfinance debates, partly because of sustained international lobbying on behalf of a number of prominent microfinance networks like ACCION, FINCA and Grameen Bank/Grameen Trust which succeeded in persuading northern donors to take microfinance seriously. More recently there has been increasing interest in the potential of credit cooperatives and credit unions. In some countries like India where there has been responsive formal sector, there has been extensive development of intermediary NGO models linking savings and credit groups with banks.
The legal categories are crosscut by other dimensions of variation which are likely to be more significant from the point of view of both microfinance users and financial sustainability. Importantly the formal categories do not capture the many interesting innovations currently being developed. Impact assessment will therefore need to go beyond comparison of these broad legal categories.
There are differences in scale, ownership and management structures. Member-owned credit unions and cooperatives range from small self-managed and owned groups federated into Apex organisations to banks where client participation in decision-making is minimal or non-existent. Some Grameen replications have structures for client representation. To some extent levels of participation are linked to scale in that client or member representation and control over programme assets (even where they have legal 'ownership') are more complex in large organisations. It is also important to point out that scale is not necessarily correlated with either financial sustainability or 'success'. Although scale is important for insurance operations, relatively small organisations can be financially sustainable.
There is an almost infinite variety in the type and mix of microfinance service and conditions of delivery: in some countries credit and savings providers are closely regulated and NGOs cannot access deposits. In other countries rules are more relaxed. Some MFIs focus on loans, others have large savings deposits and shares, some provide insurance and/or act as insurance or pensions brokers. Recent innovations include a range of new products: new loan packages, savings facilities, insurance. The specific conditions eg voluntary/ compulsory savings or insurance, repayment schedules, interest rates and so on vary significantly, even between schemes in the same organization. Some MFIs use individual methodologies, others group methodologies, yet others combine the two for different target groups or products. The nature of group sanctions, types of support and role vary considerably. The precise details of conditions of delivery are likely to be crucial in affecting impact and there are many ways of addressing poverty reduction and empowerment aims without undermining financial sustainability. Where broader development aims are not explicitly taken into account as an integral part of programme design, many of the ways in which attempts are made to increase financial sustainability will have negative impacts.
Microfinance programmes differ in the types of complementary service they offer. This is partly because of historical differences in their origins with many having developed out of NGO development organisations. In the 1990s there was increasing pressure from donors to separate microfinance from other activities, and even to focus on minimalist microfinance. This is partly because of evidence of marginal impact of many training programmes and their high costs. Recently, however, attention has increasingly focused on the ways in which microfinance can be cost effectively integrated with other types of service and/or link clients with other service providers. This parallels debates about the need for Business Development Services and the appropriate form which these should take. A number of programmes are now experimenting with ways in which complementary services can be delivered more cost- and impact-effectively for example through group-based training/learning systems (e.g. as in CARE-Niger) and integration of savings and credit with other services (eg as in CODEC and BRAC in Bangladesh).
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