Microfinance - Subprime Crisis

INTRODUCTION

Micro finance is a term used for the practice of providing financial services, such as micro credit, micro savings or micro insurance, to poor people. It is a kind of movement by socialist peoples that would guarantee access of poor peoples to not only credit but also other financial services as saving, insurance, fund transfer etc.

Micro finance is a term used for the practice of providing financial services, such as micro credit, micro savings or micro insurance, to poor people. By helping the poor accumulate usable sums of money, they are able to expand their choices and reduce the many risks they face. As suggested by the name, micro finance, most transactions involve small amounts of money, frequently less than $5,000. Some governmental organizations define micro finance as amounts below $25,000.

REASON FOR MICROFINANCE

Reason for not providing loan to poor peoples is their inability to payback their outstanding loans. Most of these poor peoples have almost negligible substantial assets which cannot be kept as collateral with bank. Therefore banks often refrain from lending to poor peoples. As well banks transaction cost, administration cost of accounts, revenue etc is being effected by such low-income peoples. Good financial system is necessary for healthy development of national economy. As income of nation rises, its saving also increases ultimately which is being invested creating an effect on national economy. Although banks have provided a good system of financial services its role in building income of poor peoples is almost negligible. Banks often provide loan to richer peoples whose proportion is lower in low-income countries. Microfinance in this course provides a catalyst role in building incomes of poor peoples thus bringing them into national income stream.

CHRONICLE OF MICROFINANCE

• 1800- Theorists Lysander Spooner writes about the benefits of small credit & entrepreneurship as a way out of poverty

• 1870- Launch of Friedrich Willhelm Raiffeisen's Village Bank in Germany- 1st microcredit institution

• 1895- Bank Rakyat Indonesia (BRI) is established. A very early pioneer that spearheaded the development of microcredit.

• 1972- Self sustainable micro-lending; a move out of government schemes & Foundation of Self Employed Women's Association (SEWA) in Gujrat.

• 1973- ACCION , which started in 1960s by students , begin to issue small loans in Brazil

• 1976- Launch Of Grameen Bank in Bangladesh by Mohammad Yunus.

• 1980- The 1st Women's World Banking (WWB) Global Meeting.

• 1984- FINCA starts its village banking operation in Bolivia.

• 1989- BRI reaches 1 million borrowers & 6 million savings accounts.

• 1992- BancoSol is established with assistance from ACCION. 1st one to source commercial funding on large scale

• 1996- Launch of Grameen Phone

• 1998- Grameen Shakti links microfinance & the distribution of renewable energy.

• 2005- Kiva started the 1st online lending site. Also Pierre Ornidyar launches a US $100m microfinance fund.

• 2008- SKS India, raised as the largest amount of private capital of US $75m. End of 2008 24 specialized microfinance equity funds are founded with total assets of US$1.5b

• 2009- Grameen bank begins its operation in Newyork & Kiya starts lending to clients in US .

BOUNDARIES & PRINCIPLES

These are certain principles endorsed by CGAP (Consultative Group to Assist the Poor).

1. Poor peoples need not just loans but also saving, insurance and fund transfer.

2. Microfinance must be useful to poor household: helping them raise income, build up assets and/or cushion against external shocks.

3. "Microfinance can pay for itself". Subsidies from government and other donors

4. are scarce and uncertain, and so to reach a large number of poor peoples microfinance must pay for itself.

5. Microfinance means building permanent local institution.

6. Microfinance also means integrating