UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
DEPARTMENT OF FINANCE

FN212: MICROFINANCE
Topic one: Introduction to Microfinance

Goodhope Mkaro
MBA (Finance), B.com Accounting (Hons),
Postgraduate Diploma in Tax Management, Certified
Professional Banker (CPB), CISI (UK), CPA (T)
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 Topic Overview
• What is Microfinance?
• Evolution of microfinance institutions (MFIs)
• Objectives of MFIs
• Types of Microfinance
• Characteristics of Microfinance Institutions
• Conclusion

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 Microfinance
• Provision of small-scale financial services (loan,
savings, fund transfer and insurance) to low
income earners and the poor who are otherwise
"excluded” from the traditional
financial/banking sector.
• The means by which poor people convert small
sums of money into large lump sums
• Key issues:-
• Nature of the services offered: small scale
financial services (e.g. small loans)
• Clients served: low income earners or the
poor 3
 Microfinance Cont….
• What is viewed small or low in developed
countries will not be the same in developing
or less developed countries.
• Example:
• International point of view: Access Bank,
National Microfinance Bank, Akiba
Commercial Bank, are listed as
microfinance institution.
• Tanzanian point of view: Those
institutions are commercial banks 4
 Microfinance Cont….
• Traditional banking associate Microfinance with
– High transaction costs due to the smallness of services
demanded
– Risky clients – as they lack collateral
– Information asymmetry – most of client are in rural area
and hence they exclude this group from their services
• MFI try to adapt to the needs of small income earners and
the poor as it serves the following:-
– Accept small savings
– Offer micro-insurance
– Small loans that require no or small value of collateral
– Frequent repayment schedule (weekly, monthly, etc.)
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 Evolution of MFIs
• Loan Fund system 1700s by Jonathan Swift
• to provide small short-term loans to rural /poor
with no collateral.
• By 1840s serving 20% of all Irish households through
copying Jonathan idea.
• 1800s Friedrich Wilhelm Raiffeisen and his supporters,
came up with a concept of credit union to assist the
rural population to break out of their dependence on
money lenders and improve their welfare
• 1870-the unions expanded rapidly over a large sector of
the Rhine Province and other regions of the German
States and Europe
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 Evolution of MFIs cont…
• In Tanzania it started in 1956
• Roman Catholic Church established SACCOS in the
country
• During 2005 to 2009, the number of SACCOS
increased from 1875 to 5344, serving 991,873
people, and therefore reaching the penetration rate
of 4 percent
• In Asia, the Indonesian People’s Bank (BPR) or the Bank
Perkreditan Rakyat opened in 1895. In 1972, SEWA
Bank originated from Self Employed Women's
Association (SEWA)and was established to address
women’s lack of access to financial services
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 Evolution of MFIs cont…
• A law student, Joseph Blatchford initiated the
establishment of ACCION International to
address poverty in Latin America's cities.

• It is now among the largest microfinance

organizations in the world operating with
partners all over the world.

• Read: About Prof. Yunus and Microfinance

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 Recall
• What is Microfinance?
• Evolution of microfinance institutions
(MFIs)
• Objectives of MFIs
• Types of Microfinance
• Characteristics of Microfinance Institutions
• Conclusion
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 Objectives of MFIs
• From the definition of microfinance and
evolution of microfinance, it is clear that the
main objective of MFIs is to reduce poverty.
• Microfinance - one of the tools that can
economically and socially empower low
income earners and the poor who are
excluded from traditional banking sector.
• Types of services offered by MFIs to low
income households and the poor may show
the ways they intend to participate in
reducing poverty:- 10
 Objectives of MFIs Cont…
• To increase income of the target group
– Through access to credit, they invest and
generate more income.
• Manage Risk
– With increase in income, poor and low income earners
can save.
– Savings protect themselves from sudden financial
problems.
– Savings also allow for educational investment, improved
nutrition, better living conditions and reduced illness.
– Micro-insurance -receive treatment for health
conditions before they become grave and more costly to
treat. 11
 Objectives of MFIs Cont…
• Empower Women
• The traditional cultural settings exclude
women from managing income generation
activities and owning valuable assets through
inheritance .
• Some microfinance institutions are established
basically to empower women economically
and socially i.e. SEWA
• To offer auxiliary financial services important for
social and economic development
• Enable low income earners access other
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financial services: money transfer, etc.
 Objectives of MFIs Cont…
• To offer other non-financial services that
are important to supplement the use of
credits
• Entrepreneurial and Business
Training
• Coaching, Mentoring and Counseling
• Networking and market promotion

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 Types of Microfinance
• Depending on the purpose of MFIs,
two approaches are generally used
to categorize the different providers
of microfinance services. It can base
on:-
–Formality
–Customer/provider relationship in
the management and ownership
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 According to formality
• Depending on the extent to which the provider is
registered and regulated under formal law and
regulations that are governed under the various
regulatory organs, we have:-
1. Formal Sector
– high level of regulation and supervision
– Particular organization structure to function
effectively
– Banks (commercial, rural, savings, postal,
cooperative), development banks (state-owned or
private), finance companies, building societies and
credit unions, pension funds and insurance
companies. 15
 According to Formality
2. Semi-formal Sector
• Not be formally regulated but are often licensed
and supervised by some form of official
government agency.
• Business licenses from the Ministry of Industry,
Trade and Marketing
• savings and credit cooperatives, credit unions,
employee savings funds, village banks, registered
self-help groups, and non-government
organizations (NGOs).
• PRIDE, SEDA, SIDO some examples to refer. 16
 According to formality
3. Informal Sector
• Characterized by the absence of any
form of regulation and supervision.
• Rotating savings and credit
associations, non-registered self-
help groups, commercial money
lenders, traders and shopkeepers,
friends and family may be included
in this group. 17
 According to the client/provider
relationship
• All microfinance providers either formal,
semiformal or informal
1. Client-based microfinance institutions
• Customers are also owners of the institution
• Little direct involvement in the management
of the institution
2. Member-based microfinance institutions
• Resources are mobilized from members, who
also manage the institutions
• Example: ROSCAs 18
 Recap
• What is Microfinance?
• Evolution of microfinance institutions
(MFIs)
• Objectives of MFIs
• Types of Microfinance
• Characteristics of Microfinance
Institutions
• Conclusion 19
 Characteristics of MFIs
• Small Value Loans
• No collateral (risky to lend large amount)
• Small capital ( to serve many clients)
• High Effective Interest Rates
• Risky (no collateral)
• Transaction costs are high
• Follow up cost
• Non-Sustainability
• Many of them report losses
• Need financial aid from donors.
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 Characteristics of MFIs Cont…
• Targeted Borrowers
• Do not target the poorest of the poor
• High default, hence serve low income and
poor
• High Operational Costs
• transaction costs for many small loans
• Loan graduation practices
• Offering small loans to their clients and after
the repayment, the clients graduate to a
higher level of loans
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 Conclusion
• MFI and Conventional Banking Sector
differ in the following ways
• Size of loans
• Operations and requirements
• Collateral
• Cost of loans
• Type of borrowers
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THANK YOU!

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