Microfinance institutions are fast reshaping social lending postulates in developing countries. Here is your guide to set one up
When Bandhan, a microfinance institution (MFI) made it to the second spot in the Forbes’ list of Top 50 MFIs of the world, it was a resounding affirmation of the growing clout of ‘social capital’ so far lying untapped at the grassroots level.
Further down the list figured Spandana, Saadhana, Asmitha Microfin and Sharada’s Women Association for the Weaker Section. Five spots in the top 50 is no mean feat. Does this imply that India is home to most of the world’s poor? The answer is no. On the contrary, this reflects a deluge of opportunities that Indian entrepreneurs have caught sight of. Microfinance is an attractive business proposition in a country where 200 million people have no access to formal financial cervices.
What is microfinance?
Microfinance has its origins in micro credit—the lending of extremely small amounts of money to the impoverished to help them be self employed. Today, it goes beyond just lending to include a number of financial services including insurance, savings and pension. Microfinance is not about the size of the lending or provisioning institution, but the size of the individual loan or service. Microcredit is not exactly a new phenomenon. It was traditionally the bastion of NGO’s and self-help groups. The earliest example perhaps is the Swashrayi Mahila Sewa Sahakari Bank setup by SEWA in 1974 with 4000 members, each contributing ten rupees each. The Bank continues to be a strong player with impressive financial performance. But not all traditional players in the self-help microcredit space have been as lucky. Since there are large shades of charity in their mode of working, sustaining and growing their activities has been a problem.
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The remedy for overcoming these bottlenecks was provided by the rise of for-profit models. India currently has around 20 such MFIs, which have realized the gaping hole that exists at the bottom of the pyramid and the non-availability of financial services for the ‘bankable poor’. Bankable poor is the section living at or below the poverty line, who, when provided sufficient capital and resources, are capable of producing commensurate returns.
Setting up an MFI
Legal structure
An MFI can operate on a not-for-profit, mutual-profit or a for-profit business model, depending on its objectives. Not-for-profit MFIs register themselves as societies under the Societies Registration Act, 1860 or as public trusts registered under the Indian Trust Act, 1882 or as non-profit companies registered under Section 25 of the Companies Act, 1956.
Mutual benefit MFIs register themselves as state, national or mutually-aided credit cooperatives. For-profit MFIs are required to register as non-banking financial companies (NBFCs) under the Companies Act, 1956. NBFCs are financial institutions registered with Reserve Bank of India (RBI) and are subject to its guidelines. Registering as an NBFC provides the MFI an edge in the form of a formal corporate structure, stability and ability to attract formal capital investments.
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Business model
A high-quality MFI model is defined by four elements—permanence, scale, outreach and sustainability. Permanence is defined by the long-term stability of the organization, which includes the stability of its organizational structure, ownership and long-term financial stability. Scale is defined by the number of clients that the MFI is capable of reaching. Depending on the geography and demographics of a region, the scale could be as low as a few hundred clients to a client base worth a million small entrepreneurs. Sparsely populated areas are usually avoided, since the cost of acquiring clients and operational costs become quite high. Outreach is the vertical penetration that an MFI is able to achieve into the stratas of poverty. Sustainability comprises operational and financial sustainability. The services offered by your MFI need to meet your clients’ demands. Financial sustainability is achieved when you are able to operate in a subsidy-independent fashion; that is, the revenue that your MFI earns from interest rates and fees are capable of covering its operational and other costs.
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written by Ralph Lauren, February 10, 2011
written by deep sharma, June 27, 2010
We can make a zero intrest loan for micro finance to small individuals (salaried and business ) .
Because now these days most of the persons are trapped in banks credit cards and personal loans .And banks are charging more than 36 % for credit cards and more than 20 % for personal loans.
How the middile and poors can came out these loans when the hardly manage there earning . And they can not out from this traps .And it will end in social disturbance.
Now Banks are working only on profit ,no social works. This greed only lead to bankinking collaspe all over the world.
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