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Lack of the basic human needs including food, clean drinking water, sanitation facilities, nutrition, health, education, clothing and shelter is generally known poverty. Human beings are unable to afford the daily needs as well as they are having a limited resources and less income than others within a society. In this world no any country can escaped from the effect of poverty but the degree of it may differ. Poor people can save and they want to save and when they do not save it is because of lack of opportunity rather than the lack of capacity. (Rutherford, 1999) Poverty is a serious problem in our society and in the world; poverty exists in different levels and various forms. At the current threshold of $1.25 a day, the World Bank estimates that around 25% of the population in developing countries lives below the poverty line (United Nations, 2009). Around 20% of the global population or 1.3 billion people are living in poverty (The World Bank Group, 2010).
Additionally, poor people have lack access to health care, quality education as well as employment opportunities that are important in improving their human capital and facilitating social mobility. Due to the profound impact, poverty has on the poor's well-being, many efforts have been made from government level and other various developmental organizations, like United Nations, International Monetary fund, CECI, CARE International provide aid to address these problems and to build systems in a developing country.
More number of the people who are under poverty is especially female. So to reduce the poverty from the world needs a specific programme to females by different income generating programmes. It can empower them and also make a sustainable development in a quality of human life. Prof. Muhammad Yunus, develops a new model working in poverty alleviation and the empowerment for poor women to create the world without poverty i.e. MF Grameen Model and received The Nobel Peace prize for 2006. In the past thirty years, microcredit has extended to every continent and benefited over 100 million families. Poverty is not in the poor people but it's in structure. Structure forces people to remain poor, so it should require a re-designing in the structure by using micro credit model in conventional activities of the financial institutions.
To addressing the structural determinants of poverty, Grameen is appropriate and practical for the economic and social development of poor women and sources of vulnerability in ways that have avoid other approaches. (Fugelsang and Chandler,1993; Hashemi and Schuler, 1997)
Microfinance moves from traditional banking services, which only target specific groups and communities in the population. It ignores the bureaucracies inherent in conventional banking by simplifying paper work and forms, and establishing banking centers in villages (Yunus, 2007)
The major and important poverty alleviation tool is microfinance, which has gained global recognition since the 1990s and has been proven to have positive effects on the level of poverty in the developing countries (Hossain & Knight, 2008; Venkataramany & Bhasin, 2009; Chemin, 2008).
1.2 Aims/Objectives of the Study:
The objective of this study entitled 'MICRO-FINANCE OUTREACH, PERFORMANCE AND CHALLENGES' is to explore the popularity of Grameen (Rural) model in the world as well as the real trends of the MF, its performance and challenges to sustain. Other related objectives are:
To identify the outreach /coverage of Microfinance in the world, South Asia as well the financial structure of the selected banks
To find out the trend, financial performance and Efficiency in the last 5 years
To analyse the impact on the poverty and quality of life of the poor
To identify and analyse the factors that affecting MF in Nepal and Bangladesh as well as other related global issues.
To identify problems / challenges faced by MFI's and recommendations to overcome it.
1.3 Context and Background of the proposal:
Microfinance is defined as financial services for deprived, poor and low income groups in the society. In other words we can say that micro finance is the provision of financial services like savings, loan, and insurance as well training to the people who live below the poverty line. It is the greatest weapon and sustainable solution which helps to reduce poverty from the world. It gives more priority to females and all members are female whose population covers more than 70 percentage of the extreme poverty. Its main objective is to empower poor women entrepreneur by providing financial support without any collateral especially who have limited access to other financial services. In this sector now thousands of institutions serve million of clients and also it helps to attract the foreign aids.
Practically, microfinance is often used more narrowly to refer to loans and other services from a provider that identifies themselves as 'Microfinance institutions' (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver small loans without any collateral. This model includes group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an impact guarantee of ready access to future loans if present loans are repaid fully.
Today, in the field of Micro-financing, many institutions or entities are involved to lending money. They are as follows:
1)Associations 2) Bank Guarantees 3) Community Banking 4) Co-operatives 5) Credit Union 6) Grameen (Rural) bank 7) Individual 8) Intermediaries 9) Non-governmental organization (NGOs) 10) Peer pressure 11) Development banks 12) Commercial Banks 13) Rotating Savings and Credit Associations etc.
Grameen Bank model is almost the reverse of the conventional banking methodology. Conventional banking is based on the principle so that most of the population of the world is deprived from the financial services. In other words, Conventional banking is based on collateral and Grameen model is collateral- free. Grameen model of MF is emerged from the poor-focussed grassroots institution, Grameen Bank, founded by Prof. Mohammed Yunus in Bangladesh. This model's bank unit is set up with a Field Manager and the number of bank workers, covering an area of about 15 to 22 villages. To familiarise with local communities the manager and workers start to visit the places where the programmes will be operating and identify the prospective clients. Additionally, it explains the purpose, functions and mode of operation of the bank to the locals. In the first stage, the groups of five prospective borrowers are formed and from them only two are eligible for and receive a loan. The group will observed for a month to see, if the members are conforming to rules of bank. If only, the first borrowers will repay the principal plus interest over a period of fifty weeks, the other members of the group become eligible for the loan. From this, it is clear that collective responsibility of the group serves as collateral on the loan. To examine the possibility of designing a credit delivery system to provide the banking services specially targeted the rural poor, Grameen Bank was origin in 1976 by Prof. Muhammad Yunus. The word 'Grameen' means 'rural' in Bangla language. (www.grameen-info.org)
Finally, Grameen Bank creates a banking system based on mutual trust, accountability, participation and creativity. Additionally GB focuses on women and objectives is to provide financial services to the poor, particularly poorest of the poor women. (www.grameen-info.org)
1.3.1 South Asia and Microfinance:
South Asia includes the countries; Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Poverty in this region is measurable and modern microfinance movement starts from Bangladesh from 70's. Modern micro finance effectively started during a time, when poverty was extensively examined. Most of the financial institutions and banks are in the urban areas in south Asian country but the majority of the population lives in the rural areas and have limited access in banking activities and lack of collateral as well there was lack of formal financial institutions. However, the gap fulfilled and provides millions of families through MFI and its programme and benefited lower income groups. Microfinance movement in South Asia has changed the looks of the financial sector through innovation and challenges to traditional thinking. MF tried to empower the south Asia's underserved population and to contribute substantially to economic growth.
(Figure 1: Map of South Asia) (Source: www.globaleducation.edna.edu.au)
This study based on the following two banks which follows Grameen(Rural) model:
Paschimanchal (Western Region) Grameen Bikas Bank Nepal:
PGB Bank Limited Nepal was registered in 1994 as a public limited company under the company act 1974. It is based in Butwal, Lumbini. Now, it is operating under the Bank and Financial Institutions Act 2006. The bank has been established to alleviate the hardship and sufferings of the rural people within the Western region of Nepal, as a microfinance bank. Main objective of the bank is to alleviate the poverty from the rural poor through credit delivery system of the western region of Nepal. Main vision of Pashchimanchal Grameen Bikas Bank Limited is to be an excellent microfinance bank, which helps to uplift the socio-economic conditions of the rural poor. At the beginning of the year 2010, number of clients served by bank is 43413, number of active borrower is 36258, and number of active depositor is 43413. (www.grameenbanknepal.org, www.bwtp.org)
Grammen Bank Bangladesh:
Grameen bank (1976), provides credit to the poorest of the poor peoples of the rural Bangladesh without any collateral. The popularity of Microfinace goes to Prof. Muhammad Yunus, who is the founder of the Grameen Bank in Bangladesh and awarded the Nobel Peace Prize 2006. Yunus, pioneered implementation through group liability in as a substitute to tangible collaterals when borrowing loans, and also give emphasis to the role of women in managing the credits and organizing microenterprises (Engler, 2009).As on October 2010, it served 8.33 million borrowers and of which, 97% of are women with 2565 branches and it covers 97% of total villages in Bangladesh. GBB project is in operation by taking following objectives:
To extend banking facilities to the poor
To eliminate the exploitation from money lenders to the poor
To create opportunities for self-employment i.e. unemployed people in rural Bangladesh
To empower the disadvantaged women from poorest households which helps to understand and manage by themselves
Grameen bank is continuing to expand across the nation and still provides the micro loan to rural poor and its success has inspired similar projects in more than 40 countries around the world. (www.grameen-info.org)
1.4 Preliminary Literature Review:
Most poor people manage to mobilize resources to develop their enterprises and their house, in slowly over time. Financial services could enable the poor to leverage their initiative, accelerating the process of building incomes, assets and economic security. Conventional financial institutions are hardly serving the needs of low-income groups, families and women-headed households. They are very often denied access to credit for any purpose, making the discussion of the level of interest rate and other terms of finance irrelevant. Therefore the fundamental problem is not so much of unaffordable terms of loan as the lack of access to credit itself (Kim 1995).
Microfinance institutions provide services by savings directly through taking deposits or make arrangements with other financial institutions to provide savings facilities to small savings in a flexible manner (Barry 1995).
The theory of microfinance includes all initiatives in increasing the access to the financial services as well improving the quality of the people who are really in poverty and can use or be benefited from the lent money other than the financial services instead of it micro-finance is not merely monetization but instead to address the several types of needs of poor and low income families. These needs are included the lifecycle needs, personal emergencies, disasters and investment opportunities (Rutherford, 2000)
Microfinance program is now expanding worldwide that helps to eradicate poverty and create economic growth; however, the impact of the microcredit on poverty reduction and other outcomes of the programme is still not clear. The economics literature is inconclusive; some studies claim that micro-loans can greatly improve the welfare of the poor (McKernan, 2002).
While others suggest that the impact of such programs is exaggerated because of self-selection and endogenous program placement (Coleman, 1999). Other study suggests that integrating business training into micro-finance programs can improve their effectiveness and pay for itself (Karlan and Valdivia, 2006).
In Asia, MFIs like Grameen Bank, has led to the rapid expansion of similar programmes in South America, Africa, Europe and around world. Thousands of micro financial institutions' have been established and run all over the world mainly based on the principles followed by Grameen Bank. MFIs' have been acting as a developmental catalyst in the eradication of poverty and empowerment of many parts of the world. (Roy,AM 2003).
Multilateral organizations like United Nation development program, World Bank have also recognized the potential of microfinance as a poverty alleviation tool and have contributed significantly to develop its programs (Midgley, 2008).
The United Nations has also declared in 2005 as the "International Year of Microcredit", and openly acknowledges that provision of financial services to low-income populations is an important step towards realizing its number one Millennium Development Goal (MDG), which is to halve global poverty by 2015 (United Nations Capital Development Fund [UNCDF], 2005).
Microcredit programs in Nepal faced - extreme poverty, wide gender gap and unfavourable climate for small business, which contributes to relatively poor performances - that might have contributed to their relatively poor performance. (Basnet, 2007)
Grameen Bank has more than 1,000 branches and becomes more than 6 million members, and its repayment rate is 98 percent.(Midgley, 2008)
By developing the innovative ways to reach to the poor, MF revolution has challenged many traditional assumptions about poverty reduction strategies in one side and financial markets in other side. MF programmes have rapidly increased their outreach across South Asian countries through Grameen Bank model followed by NGOs, self-help organizations, saving/credit groups, village banks, cooperative etc. (The Himalayan Times, 29 Nov 2010)
Through the implementation of MF programme, poverty has reduced to 25.4 percent, around seven million Nepalese are still under poverty line, so to reach there, MFIs are the key in reaching poor. (The Himalayan Times, 28 October 2010)
The Glasgow Caledonian University (GCU), Scotland authorities and Prof. Muhammad Yunus signed a deal to replicate the Grameen Bank model in Glasgow to help reduce poverty in the Scottish city. (The Daily Star, 20 Feb 2009)
In this year, first microfinance lender, Grameen Bank will open its first branch in Glassgow. This organization planned to make microloans to the financially excluded people in Scotland to help them set up their own business by using a model similar to the one used in Bangladesh, where the microfinance model was invented. In the lecture at Royal Society for the Encouragement of Arts in London, Prof. Yunus added that; this model has already been completed pilot successfully in New York, where the banks made a loan of about $1000 or $1500 to poor people who were interested in setting up their own business and also said that repayment rate is 99.3% in New York. (Third Sector Online, 27 May 2010)
1.5 Statement of the problem:
Micro-finance institutions are facing different obstacles to implement and extend the program by the different internal and external environmental factors. To make the proper long term planning to reduce poverty, MFIs' are facing problems regarding to the marketing and commercialization of the products.
1.6 Rationale of the Study:
Microfinance is one of the great weapons that help to reduce the poverty in world. Many other strategies are failed to work in the grass root levels, so this MF program can reach and fulfill the gap of the lacking while implementing the program. It deems me highly important to conduct a research study on Microfinance and other related issues to overcome the problems as well as other issue facing by MFIs to perform well.
1.7 Scope, Methodology and Sources of data:
The findings and recommendations of this research are expected to be helpful for the development agencies in general and for further intervention of the microfinance programme and strategies. It is also expected that this dissertation will be interest to policy makers, microfinance professionals, academics, researchers, microfinance promoting organisations, students and all stakeholders in the microfinance sector.
MF outreach, coverage and trend analysis objectives will be achieved by presenting Number of clients, number of active borrowers, deposits etc. and presented in graphical chart
Performance will be measured through financial ratio analysis like Return on assets, Return on equity, Operational self sufficiency etc
Efficiency will be analysed by operating expenses/loan portfolio, personal expenses/loan portfolio etc.
Impact of the poverty will be analysed by presenting stories of the benefited people through MF program in South Asia including Nepal, Bangladesh and other continents from the different sources; which helps to make specific strategic plan towards the poverty alleviation
Factors that affecting MF and other related issues like commercialization, marketing will be analysed through Political, Economic, Socio-cultural, Technical, Environmental and Legal (PESTEL) factor in a nationwide and internationally.
The study will be conducted through secondary quantitative evidence (previous research, reports, journals, magazines, newspapers, micro bulletins, annual report, financial progress report, microfinance related official networks and their websites, official websites of the MFIs etc) and combined with qualitative questionnaire and contacts with concerned personnel and institutions through email and internets with MFIs, rural banks and stakeholders.
1.8 Anticipated Outcomes
It is predicted that Micro Finance Grameen banks are performing well and is in increasing trend. It is an effective tool towards the rural economic development to change the extreme poverty of the female and poor families and expanding the model in developed country as well.
Deadlines for submission of the Dissertation: before 28th June 2011