F.A.Q.

Click on the links below to find answers on the Frequently Asked Questions, or FAQs about microfinance and about MicroNed. If you want to find more information on microfinance than provided on the MicroNed website you can visit the websites of the Consultative Group to Assist the Poorest (CGAP) and the Microfinance Gateway.

All members of MicroNed are also members of the Netherlands Platform for Microfinance. For video's of what microfinance is, and the role of the Netherlands Platform for Microfinance, please refer to the website of the Netherlands Platform for Microfinance (NPM).

-What is microfinance?
-Can Microfinance be Profitable?
-Who are the clients of MFIs?
-How does Microfinance help Poor People?
-Does Microfinance contribute to the Millennium Development Goals?
-Can Microfinance be Profitable?
-Why do MFIs charge High Interest rates?
-When is Microcredit NOT an appropriate Tool?
-What is the government's role in microfinance?
-What efforts are underway to promote greater awareness of consumer protection?
-Do poor people really save?
-How do poor people save?
-What problems do credit-based financial institutions commonly face when developing savings services?
-How can donors support small-balance savings mobilization?
-Why have MFIs historically not emphasized savings as much as credit?
-Who are the potential clients of rural and agricultural finance?
-Who supplies rural and agricultural finance?
-Why is it difficult for rural and agricultural businesses and households to get credit?
-What is social performance?
-Why is SPM important? 
-Why is SPM good for business?
-Is social performance just another way for donors to make burdensome demands?
-I want to take action myself

What is microfinance?

Microfinance is the supply of loans, savings, and other basic financial services to the poor. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services.

The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal commercial and non-commercial money-lenders but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and mutual insurance societies that have a tendency to be erratic and insecure. Traditionally, banks have not considered poor people to be a viable market.

Providers of financial services to the poor include donor-supported, non-profit non-government organizations (NGOs), cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; wire services; post offices; and other points of sale. NGOs and other non-bank financial institutions have led the way in developing workable credit methodologies for the poor and reaching out to large numbers of the poor.

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What is a Microfinance Institution (MFI)?

A microfinance institution (MFI) is an organization that provides financial services to the poor. This very broad definition includes a wide range of providers that vary in their legal structure, mission, and methodology. However, all share the common characteristic of providing financial services to clients who are poorer and more vulnerable than traditional bank clients. MFIs are those that are subject not only to general laws but also to specific banking regulation and supervision (development banks, savings and postal banks, commercial banks, and non-bank financial intermediaries).

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Who are the clients of MFIs?

Microfinance clients are often described according to their poverty level - vulnerable non-poor, upper poor, poor, very poor. This can obscure the fact that microfinance clients are a diverse group of people - and require diverse products. While women clients make up a majority of clients - and in some instances comprise 100 percent of an MFI's clientele, 33 percent of all microfinance clients are men. From experience MFIs have learnt that women have better repayment rates than men. MFI clients operate small businesses, work on small farms, or work for themselves or others in a variety of businesses - fishing, carpentry, vegetable selling, small shops, transportation, and much more. Some of these microfinance clients are truly entrepreneurs - they enjoy creating and running their own businesses. Others become entrepreneurs by necessity when there are few jobs available in the formal sector.

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How does Microfinance help Poor People?

Poor people, with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have demonstrated that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With access to microinsurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets.

Access to credit allows poor people to take advantage of economic opportunities. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated that reliable sources of credit provide a fundamental basis for planning and expanding business activities. Many studies show that clients who join and stay in programs have better economic conditions than non-clients, suggesting that programs contribute to these improvements. A few studies have also shown that over a long period of time many clients do actually graduate out of poverty.

By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from "every-day survival" to "planning for the future." Households are able to send more children to school for longer periods and to make greater investments in their children's education. Increased earnings from financial services lead to better nutrition and better living conditions, which translates into a lower incidence of illness. Increased earnings also mean that clients may seek out and pay for health care services when needed, rather than go without or wait until their health seriously deteriorates.

Whether or not financial services lift people out of poverty, they are vital tools in helping them to cope with poverty. The poor use credit and savings not only to smooth consumption, but also to deal with emergencies like health problems and to accumulate the larger sums they need to seize opportunities (occasionally including business opportunities) and pay for big-ticket expenses like education, weddings, or funerals. There are strong reasons to believe that clients around the world value financial services as coping tools. One of such reasons is the fact that when providers make microfinance available to clients who haven't had it before, there is hardly ever a need to advertise. Customers arrive in droves, propelled by word of mouth. Another reason is that people not only take out loans, but they repay them with high reliability.

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Does Microfinance contribute to the Millennium Development Goals?

In September 2000, the member states of the United Nations unanimously adopted the Millennium Development Goals (MDGs). The MDGs commit the international community to a common vision of development-one in which human development and poverty reduction have the highest priority. The objective of the MDGs is to serve as guideposts and focus the efforts of the world community on achieving significant, measurable improvements in poor people's lives. The goals grew out of the agreements and resolutions of various development conferences organized by the UN in the 1990s.

Eradicate extreme poverty and hunger: Access to financial services enables the poor to increase income and smooth consumption flows, and thus expand their asset base and reduce their vulnerability.

Achieve universal primary education: Empirical evidence indicates that, in poor households with access to financial services, children are not only sent to school in larger numbers, but they also stay in school longer.

Promote gender equality and empower women: Overall, the experience of microfinance programs points to strong evidence that the access to financial services and the resultant transfer of financial resources to poor women, over time, lead to women becoming more confident, more assertive, and better able to confront systemic gender inequities.

Combat HIV/AIDS, malaria, and other diseases: Increased earnings and savings allow clients to seek out and pay for health care services when needed, rather than wait for conditions to deteriorate. In addition, many microfinance institutions actively promote health education.

Reduce child mortality and Improve maternal health: Several studies show positive impact of access to microfinance on different health aspects such as breastfeeding practices, contraceptive use and rates of vaccination.

Ensure environmental sustainability: There is evidence that with increased earnings the poor do invest in improved housing, water, and sanitation. Many microfinance programs provide specific loans for tube wells and for toilets.

Develop a global partnership for development: access to financial services provides the poor with the means to make improvements in their lives -in other words, to achieve most of the MDGs- on their own terms, in a sustainable way.

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Can Microfinance be Profitable?

Microfinance, or financial services for the poor, can be, and must be profitable. At the same time, some worry that an excessive concern for profit in microfinance will lead MFIs away from poor clients to serve better-off clients who want larger loans. It is true that programs serving very poor clients are somewhat less profitable than those reaching better-off clients, but this may say more about managers' objectives than an inherent conflict between serving the very poor and profitability. MFIs serving the very poor are showing rapid financial improvement.

However, there are cases where microfinance can not be made profitable, for example, where potential clients are extremely poor and risk-averse or live in remote areas with very low population density. In such settings, microfinance may require continuing subsidies. Whether microfinance is the best use of these subsidies will depend on evidence about its impact on the lives of these clients.

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Why do MFIs charge High Interest rates?

MFIs have to charge rates that are higher than normal banking rates to cover their costs and keep the service available. Acquiring funds for an MFI is more expensive than for a normal bank, for example. But even the rates charged by MFIs are far below what poor people routinely pay to village money-lenders and other informal sources, whose percentage interest rates routinely rise into the hundreds and even the thousands. The fact that interest rates are acceptable to MFI clients, shows in the high repayment rates. Worldwide it is estimates that 97-99% of all microloans are repaid.

This does not mean that all high interest charges by MFIs are justifiable. Sometimes MFIs are not aggressive enough in containing transaction costs. The result is that they pass on unnecessarily high transaction costs to their borrowers. Sustainability should be pursued by cutting costs as much as possible, not just by raising interest rates to whatever the market will bear.

 Interest rates, while still too high in some places, are dropping on average 2.3 percent a year. The microfinance industry has placed a lot of emphasis on improving efficiency in order to bring down these costs, so that poor clients are not paying unnecessarily high rates. New technology also offers to help reduce costs, so rates are expected to continue to drop as institutions become increasingly efficient at delivering services to poor people.

Some countries impose legal caps on interest rates, hoping to protect borrowers. But when government imposes a cap, it is politically difficult to set the cap high enough to cover the administrative costs of tiny loans. The result tends to be that smaller (and poorer) borrowers can't get loans, because no one can provide them without losing money.

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When is Microcredit NOT an appropriate Tool?

While many poor people can benefit from a microloan, not everyone wants or can use credit. To use credit effectively, clients must be able to generate income at a rate higher than the interest they are paying. Providing credit to those not able to use it productively could push already-vulnerable people into debt. 

So what other services are available beyond credit? Savings services can benefit most people, if their savings are safe. Secure savings facilities provide a means to reduce vulnerability by allowing households to better manage their risk and cash flow. Savings are an affordable way for poor families to accumulate money that can be used for investment. Often, microfinance institutions may first need to transition to a regulated legal form in order to be allowed to offer deposits to the public.

Other financial services, such as remittances, insurance and pensions, are often sorely needed by poor people. For example, remittances are a significant source of income for many poor people. Enabling cheaper, faster money transfer services would be a great benefit for many poor families who currently spend significant percentages of their earnings to move money. Moreover, many families could utilize insurance products and better pension delivery systems for greater social protection.

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What is the government's role in microfinance? 

Governments play a variety of roles in promoting improved access to financial services and improved quality from providers. Some roles - such as overseer and developer of the financial infrastructure (such as payments or credit information systems) and maintainer of macroeconomic stability - are often very supportive of an inclusive financial sector. Governments have an important role to play as protector of financial consumers. A number of recent forces - including new services, technology, delivery channels, providers, and investors - have raised the profile and urgency of consumer protection issues in microfinance. The overall challenge is to ensure that clients can make informed choices, products are designed to work for both the user and the provider, and mutual rights and obligations are understood and respected.

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What efforts are underway to promote greater awareness of consumer protection?

Many microfinance investor institutions signed the Client Protection Principles, a microfinance industry-wide Campaign for Client Protection that encourages providers to ensure low-income clients are treated fairly and protected from potentially harmful financial products. The Principles are distilled from the work of MFIs, international networks and national microfinance associations to develop pro-consumer codes of conduct and practices in an effort to define minimum standards for providers to safeguard the interests of vulnerable clients.   The six principles of client protection are:

 1. Avoidance of Over-Indebtedness. Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that non-credit, financial products, such as insurance, provided to low-income clients are appropriate.

2. Transparent and Reasonable Pricing. The pricing, terms and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) are transparent and will be adequately disclosed in a form understandable to clients. 

3. Appropriate Collections Practices. Debt collection practices of providers will not be abusive or coercive.

4. Ethical Staff Behavior. Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients. 

5. Mechanisms for Redress of Grievances. Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients. 

6. Privacy of Client Data. The privacy of individual client data will be respected, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories).

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Do poor people really save?

Yes. Poor people save because they must: their income is rarely sufficient to manage crises (such as a sudden illness or a flood), to invest when opportunity strikes, or to pay for large expected expenses, such as school fees, a wedding, or a home renovation. Numerous studies and experience worldwide confirms that the poor use informal savings devices, even though these are often neither reliable nor secure.

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How do poor people save?

The poor have limited access to deposit services offered by formal or semi-formal institutions. The consequence of the scarce availability of appropriate savings services is that most poor people save in informal ways-by tucking cash under the mattress, buying animals or jewelry that can be sold off later, joining village savings circles, or giving money to neighbors for safekeeping. The problem with these methods of saving is that they are risky- cash can be stolen, animals can get sick, the neighbor can run off.

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What problems do credit-based financial institutions commonly face when developing savings services?

For a credit-based institution, managing the shift to being a full-fledged financial intermediary is a complex challenge, bigger than simply developing new products and adapting some management systems. The transformation to a full financial intermediary fundamentally changes a financial institution. Some of the biggest challenges include:

Cost Recovery - There are two keys to viable savings mobilization: 1) attracting an adequate volume of deposits and 2) managing operating costs. Achieving this volume and level of cost control requires rigorous management, appropriate incentives, effective mechanisms for accountability and an appropriate management information system.

Developing Trust - People will entrust their savings to an institution only if they perceive it as secure, honest, professional, and stable. To gain trust, a financial institution will need to consciously develop staff, quality of service and a consistent brand image in the market. To safeguard the savings of depositors, a board or other governance body must exercise reasonable oversight, ensure sufficient discipline, and serve as a check on management performance.

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How can donors support small-balance savings mobilization?

Donors can help or hinder savings operations. The soft loans that donors often provide can make it less attractive for a financial institution to mobilize deposits. However, donors can help develop sound savings operations by:

• helping to strengthen regulation and supervision
• improving regulators' understanding of microfinance issues (such as the high volume of small-value transactions, alternative collateral, interest rate policy, and human resource needs)
• providing technical assistance grants
• supporting visits to successful deposit institutions
• funding savings-focused market research
• supporting a range of institutional types and delivery channels to extend services to poor and rural markets
• investing in physical or technological infrastructure to jumpstart savings mobilization in rural areas

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Why have MFIs historically not emphasized savings as much as credit?

In its first two decades, the microfinance "movement" focused more heavily on loans than on savings, for three main reasons:

1. the movement's aim was to help the poor, who were not thought of as having much money to save;

2. in most countries, new credit techniques, not new savings techniques, launched the movement, and 

3. most of the institutions involved were NGOs, which were not legally licensed to collect savings.  However, in recent years there has been an increasing recognition that most poor families do save, and that this saving is usually in non-financial form (for instance, stockpiling goods). This is not because the poor prefer non-financial savings, but because they often lack access to good formal savings facilities.

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Who are the potential clients of rural and agricultural finance?

Rural and agricultural finance clients are a complex and overlapping blend of rural households, small farmers, agribusinesses, and off-farm enterprises. These can broadly be categorized as:

• Non-farm microenterprises and rural households (non agricultural) - Households not directly related to agriculture, as well as non-agriculture related businesses
• Farm and agriculture-related enterprises - Input suppliers, farmers, producer groups, local traders and processors
• Agribusinesses (non-rural) - Agri-processors, distributors, and exporters located in urban and peri-urban areas

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Who supplies rural and agricultural finance?

The main source of credit for many farmers and agribusinesses is other agribusinesses along the value chain including input suppliers, traders, and processors. Moreover, the clients’ own savings and credit from financial institutions continues to play a role in agricultural production. Suppliers of rural and agricultural finance can be broadly categorized as:

1. Value Chain Actors: exporters/wholesalers; processors; local traders and processors; producer groups; farmers; and input suppliers.
2. Financial Institutions:
   - banks (commercial, agricultural banks, state development banks)
   - non bank financial institutions (NBFIs, commercial MFIs, other non-bank lenders, and leasing companies
   - not-for-profit MFIs, which tend to work with poorer clients
   - credit unions and agricultural cooperatives

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Why is it difficult for rural and agricultural businesses and households to get credit?

The development of microfinance and rural and agricultural financial markets often share similar environmental challenges such as an inhospitable policy, legal and regulatory framework, lack of adequate collateral, lack of registered credit history, lack of market information, and income variability among potential clients.

In addition, rural and agricultural markets have some unique characteristics that impede the supply of finance and the ability of rural households and firms to access the financial services they need. 

• Weather risk: These are often correlated risks, affecting many people in an area by a single event, such as a drought, excessive rainfall, earthquake or other disaster. Rural households often rely on informal strategies to cope with risk, but these can break down when correlated catastrophic losses take place. 
• Commodity risk: Agricultural enterprises are subject to uncertainties in the future market value of their produce and their future income, due to cost and price volatility in local, regional, and global markets.
• Seasonality: Rural farms and households are vulnerable to the cyclical or seasonal nature of the agricultural sector, even if their primary livelihood/economic base is not agriculture per se. Clients may face severe constraints in repaying a loan during certain times of the year (e.g., before the harvest comes in). Harvest season is a period of positive revenue while the planting season is characterized by a period of heavy spending and very little, if any, revenue generation. The toughest time is before the harvesting season, when liquidity is scarce and families in many regions need access to loans or other, non-agricultural sources of income.
• Geographic dispersion or distance to urban center/financial institution: Because clients live far from urban centers where financial institutions are often located, it increases the transaction cost for the borrower. These transaction costs include transportation costs and the opportunity cost of lost labor days.
• Poor physical infrastructure: Poorly developed roads or other public infrastructure can limit a borrower's access to financial institutions in urban centers or increase the time it takes to get there, thereby increasing transaction costs.
• Social exclusion: Ethnic, caste and gender divisions might be more pronounced in rural areas. Hill tribes in India, for example, are relegated to working on low productivity land thereby diminishing their attractiveness to lenders.  

The impact of these constraints on lenders are increased operating costs, greater information costs (owing to the heterogeneity among communities and farms) and higher real and perceived risks.

The high transaction costs and risk associated with agricultural production prevent financial institutions from playing a more active a role in the rural context. In urban areas, financial institutions are the primary suppliers of agricultural finance. However, in rural areas, agribusiness enterprises are the primary suppliers of finance.

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What is social performance

Social performance, or the social bottom line, is about making an organization's social mission a reality. The Social Performance Task Force defines social performance as: "The effective translation of an institution's social mission into practice in line with accepted social values such as serving larger numbers of poor and excluded people; improving the quality and appropriateness of financial services; creating benefits for clients; and improving social responsibility of an MFI."

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Why is SPM important?

Social performance measures are necessary to determine whether microfinance institutions are meeting the social goals set out in their missions. While financial measures - the most common performance indicators for microfinance - are necessary, they say little about whether social goals are being met. For example, an institution could be financially sustainable and considered extremely successful in financial terms, but charge very high interest rates and push its clients into over-indebtedness. Though this problem would not be revealed by financial indicators, it could ultimately create an institutional crisis and prevent the MFI from fulfilling its mission.

On the other hand, tracking social performance, and using that information to tailor services to improve client conditions, not only assists clients but also brings in better business for institutions. MFI managers need social performance data to meet both financial and social goals.

Further, simple social performance indicators are powerful marketing tools. They provide tangible indicators of achievement and attract funding from donors and social investors.

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Why is SPM good for business?

Social and financial performance go hand in hand. Strong financial performance allows your MFI to pursue its social objectives, and achieving your social objectives is good for business.  SPM can help your MFI stay focused on its mission and maximise both aspects of its performance. > SPM can improve your MFI's effectiveness in reaching its social mission.  SPM can also enhance your MFI's reputation, competitiveness and ability to develop products and services that bring real benefits to your clients. SPM will benefit managers, by helping you to:

• Provide more appropriate products and services Successful MFIs continually strive for innovative ways to better serve their clients based on an understanding of their needs.
• Achieve better customer service By identifying any problems early on, SPM means that customers receive better products and services. Segmenting social performance information also helps an MFI to make informed decisions when problems arise.
• Retain more clients SPM enables you to monitor whether your clients are satisfied with your programme. For an MFI, higher retention rates translate into lower costs and higher profits.
• Ensure programme growth By focusing on social performance management, you will know if you are reaching the right clients, meeting their needs and having a positive impact on their lives. In doing so, your MFI will be more attractive to potential clients, and word of mouth will increase from current clients - thus ensuring programme growth.
• Reduce operational costs As you begin to use resources more effectively (based on better understanding of your clients' needs), you reduce your operational costs because resources are targeted to where they are most effective.
• Demonstrate social performance to stakeholders SPM gives your organisation an opportunity to improve its position in a competitive funding market because you can demonstrate real benefits to clients.

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Is social performance just another way for donors to make burdensome demands?

The social performance movement seeks to put "truth in advertising". If an MFI says that it is reaching the poorest, then it should have the evidence to back it up. Many individuals, donors, foundations, and governments put money in microfinance with the belief that microfinance helps poor people. To be accountable to these tax-payers, philanthropists, and donors, MFIs must be able to report on how (or whether) microfinance helps poor people.  

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I want to take action myself

In the Netherlands, several organizations exist that can (financially) support private initiatives that  support development initiatives in the field of microfinance. All of the members of MicroNed have special programmes (some in close cooperation with other institutes) for private persons to contribute.

Organization	How to contribute?
ICCO	- you can contribute to microfinance activities, reference to account number is given on the site
Cordaid	- You can donate directly to projects online - In cooperation with ASN you can open an savings account (ASN Vrouwenspaardeposito)
Oxfam Novib	- You can donate directly to projects online
Hivos	- Internet savings account at Triodosbank (Noord Zuid Internetsparen) (initiative of Hivos and Triodos) - You can donate directly to projects online
Rabobank Foundation

 

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