PRINCIPLES OF MICROFINANCE

PRADEEP RAJ.S

MBA Student

AMC ENGINEERING COLLEGE

Abstract

Microfinance is a financial innovation in banking and financial industry products and services a

powerful tool to encourage the small/medium enterprise with the needs of financial resource this promotes both the economic activity of the country and also generates self employment and economic growth of the country .the concept of microfinance was influenced by Bangladesh government establishing the Grameen Bank of Bangladesh the purpose of this study is to understand the micro financing fundamentals, working methods, principles and practices to construct appropriate suggestions and conclusions.

Introduction

Microfinance is an innovation of financial products to satisfy the needs of the poor families and rural sector of the economy. The expression of microfinance was effectively used in 1970's when Bangladesh established its Grameen Bank of Bangladesh under the leadership of Mohammad yunus (Nobel peace prize winner in 2006) who shaped the modern microfinance industry.

Microfinance is a powerful tool of providing financial resources to the primary sector and low income group to encourage entrepreneurship and growth of economic activity in an economy.

Our study in this paper is mainly an attempt to understand the concept of microfinance and its need and importance of microfinance and its working and principles and practices of microfinance governance.

Objectives of the study

• To study the fundamentals of micro financing.
• To study and understand working method for microfinance.
• To identify the challenges and principles and practices of microfinance governance.
• To construct relative suggestions and solutions to improve microfinance institutions performance in the economy

Research methodology

The research study adopted here is mainly based on exploratory studies using secondary data on selected microfinance institutions and articles and research work by experts from ACCION International to study and analyze the principles and practices of microfinance industry.

Definition of Microfinance

"Microfinance is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks ,in most cases because they are unable to offer sufficient collateral, in general ,banks are for people with money, not for people without"-(Gert Van Maanen)

Fundamentals of micro financing

• To ensure that the responsible entrepreneurs and low income group people in the economy are the target customers.
• To provide all necessary information and educate the target customers about risk involved in credit facilities,interet rates, borrowing methods ,repayment schedules, contravention of rules and fines and penalties etc ,to bring self confidence among its customers for a responsible loan repayment to operate profitable under microfinance industry.
• To modify the traditional financing industries into modernized and specialized institutions to reduce transaction cost and provide innovative financial services through good delivery system which serves the poor people to promote their welfare and economic development of the country.

Functioning method of microfinance institutions.

• Identifying the potential customers and the target market say a particular rural area or a village.
• A careful examination of potential customer of microfinance institution.
• Developing suitable business operations which have a practicability and business viability.
• Analyzing the external and internal factors influencing the work environment
• Developing good delivery system for providing innovative financial services.
• Establishing strong business contacts with customers availing credit and loan facilities, for interest payments and repayment of principal amount.
• Taking appropriate and quick response to the problems relating to payback of interest and principal provided to customers.

Essentials f microfinance governance.

• Ownership of micro finance institution: The key to successful management  of MFIs are the structure of MFIs it can be public, nonprofit, for profit and credit union.etc
• Dual objectives: A MFI should have both financial objectives and welfarist approach also both to maintain solvency position and to serve low income group people.
• Responsibility of microfinance institutions: MFIs should have a fiduciary responsibility to provide continuous access to financial resources to low income group and use the mobilized resources from floating instruments in the local securities exchange and loans from banks wisely and carefully.
• Risk Management: MFIs should have good risk assessment techniques like collecting customer's information about their creditworthiness, skill to face increased competition, strong financial skills to mobilize savings and provide innovative financial products.
• Promoting best practices in microfinance governance: The best practice to improve MFIs governance can be to hire qualified people and appoint board and directors if the MFI has a strong corporate structure. The directors must have financial markets expertise, marketing expertise, fundraising skills, good legal and regulatory expertise knowledge in credit risk management.

Conclusion and suggestions

• Future research can be done to know the essentials of microfinance as a tool for economic growth and solve unequal distribution of income and wealth in the developing countries.
• Improvement in the financial services industry can help the MFIs to help low income group people to promote entrepreneurship and take up self employment.
  • The accounting practices, debt collection methods and interest rate determination should be well regulated and governed properly by MFI.
  • The most important debate to solve is whether the primary objective of MFIs is to improve welfare or maintain financial sustainability.

Bibliography

1. Principles and practices of microfinance governance: Rachel rock, Maria otero, Sonia Saltzman, ACCION International, august 1998.
2. Principles of microfinance, September 06, page 1 to 4, world education Australia.
3. www.nabard.org.
4. Gert Van Maanen, Microcredit: Sound Business or Development Instrument, Oikocredit, 2004.

Contact

Pradeep Raj.S

Email: pradeepraj1@live.com