Lack of credit access is severe in low income and poor families that are normally considered to have fewer opportunities to borrow from banks due to insufficient valuable assets for collateral. These low-income households face limited opportunity to acquire new technology and working capital for agricultural production and thus tend to fall behind. As a result, providing access to finance to low-income rural households has been considered an important component of any rural development strategy. Microfinance programmes, in particular, have been gradually embedded in national strategies of many developing countries as they are poverty-focused. They aim to facilitate the access to financial services such as credit for the poor who are usually disadvantaged in terms of access to conventional financial services from formal financial institutions. The objective of this book is to provide an overview of microfinance programmes in Asia focusing in particular on the determinants of the accessibility of rural households to microcredit. The book studies seven Asian countries such as China, Malaysia, Vietnam, Thailand, the Philippines, Indonesia, and Bangladesh with two specific case studies.
--> Contents:
An Overview of Microfinance (Christopher Gan, Gilbert V Nartea and Judy Li Xia)
Rural Credit Market and Microfinance in Vietnam (Phan Dinh Khoi and Christopher Gan)
Microfinance Institutions in Malaysia (Mohamad D Revindo and Christopher Gan)
Credit Market and Microcredit Services in Rural China (Mohamad D Revindo and Christopher Gan)
Microfinance System in Thailand (Satit Aditto)
Rural Financial Markets and Credit Delivery System in the Philippines (Salvador P Catelo, Maria Angeles O Catelo and Ceptryl S Mina)
Islamic Microfinance in Indonesia (Bayu Arie Fianto and Christopher Gan)
Microfinance Market in Bangladesh (Mohammad Monirul Hasan and Mohammad Abdul Malek)
Conclusions (Christopher Gan, Gilbert V Nartea and Judy Li Xia)
Accessibility and Impact of Rural Credit Cooperatives Microcredit Programmes to Rural Households: A Case Study from Hubei Province, China (Mohamad D Revindo and Christopher Gan)
Rural Microfinance Banking Viability and Outreach: A Case of Bank Rakyat Indonesia (Mohamad D Revindo and Christopher Gan)
--> --> Readership: Graduate students and researchers in the fields of international finance and Asian economies. -->Microfinance;Poverty Alleviation;Rural Credit;Asia;Grameen Bank Key Features:
The first book that presents a detailed discussion of microfinance and rural credit in seven Asian countries
A unique aspect of this book is the discussion of Islamic Microfinance in Indonesia which differs significantly from conventional microcredit institutions and providers
A special feature of the book are two case studies of microfinance institutions in China and Indonesia
*Professor in Accounting and Finance, Faculty of Agribusiness and Commerce, Department of Financial and Business System, PO Box 85084, Lincoln University, Christchurch, New Zealand â Associate Professor, Chairperson, Department of Finance, Waikato Management School, University of Waikato, Private Bag 3105, Hamilton 3240, New Zealand âĄLecturer, New Zealand College of Business, 15A Bishopdale Court, Bishopdale 8053, Christchurch §[email protected]
Microfinance has been recognised and considered as the common mechanism to provide credit for the poor and low-income people, especially people in rural areas. Since its initiation in Bangladesh in the seventies, it has been gradually embedded in national strategies of many developing countries as well as universal goal to combat with hunger and poverty in the new millennium. The chapter provides an overview of microfinance and microcredit. The chapter discusses who are the microfinance providers, who do they serve and how do they help the poor. The chapter also provides a summary of empirical evidence on the impact of microfinance.
Lack of ability to obtain credit from the formal financial sector has long been viewed as the biggest obstacle to improving householdsâ livelihood (McCarty, 2001; Pham & Lensink, 2007). To fulfil credit demand, rural households have to seek informal sources of credit at higher a interest rate to support their production and consumption. This informal debt is believed to marginalise household income and likely leads the borrower into a cycle of debt and poverty. This market failure is eminent in many developing countries where the rural financial market is not functioning well (Musinguzi & Smith, 2000). Therefore, credit inaccessibility in rural areas impedes the development of the rural sector, which potentially decelerates the development of the rural economy. To increase credit access for rural households, many governments have implemented microfinance programmes targeting agricultural and rural areas nationwide particularly in developing countries. The policies aim to assist rural poor householdsâ access to microfinance products through banks at a preferable interest rate. In addition, the governments have recognised microfinance products as a strategic tool to provide cheap credit to rural households.
Microfinance refers to the provision of financial services to the poor and low-income households (ADB, 2000). These services can include credit, savings, insurance, money transfers and equity investments. The feature that most distinguishes these services from those given by traditional financial institutions (FIs) is the small size of the transactions. Hence, microfinance institutions (MFIs) provide mainly microcredit, microsavings and microinsurance. New innovations in microfinance include microtransfers and microequity.
Microcredit involves lending capital in small amounts to poor people who are traditionally considered unbankable to enable them to invest in self-employment (Kasim & Jayasooria, 2001). The World Bank (2006, p. 12) describes microcredit as âa process in which poor families borrow large amounts (or lump sums) of money at one time and repay the amount in a stream of small, manageable payments over a realistic time period using social collateral in the short run and institutional credit history in the long runâ. Different forms of microcredit are available such as individual lending, group lending and village banking. Particularly, microcredit programmes have been developed to provide rural households with greater credit accessibility.
Microsavings are small amounts of money saved by poor people with FIs, mostly MFIs. Some schemes involve a daily collection system and service delivery at the doorstep of clients. As these small savings accumulate they provide a source of lump sum cash for future emergencies, investments and consumption needs of the poor (Mersland & Eggen, 2007).
In some cases, microcredit programmes would involve saving services, but the services are limited to the collection of compulsory deposit amounts from the borrowers to collateralise the loans issued. Borrowers cannot access these compulsory deposits and cannot have voluntary saving accounts in microcredit programmes (World Bank, 2006; Cornford, 2000).
Though microcredit has taken a more prominent role in microfinance, it appears that the poorest of the poor find the provision of savings opportunities more important than the provision of credit facilities (Collins et al., 2010). There is empirical evidence suggesting that in some regions of the world the poor use savings products more than credit. For example, Maes & Reed (2012) report that The Opportunity International Bank of Malawi has 45,000 borrowers and 250,000 savers, the Equity Bank in Kenya has 715,000 borrowers and 4 million depositors and the Grameen Bank (GB) has over US$1.4 billion in deposits, which is 145% of its outstanding loan portfolio of US$965 million. Khan & Ashta (2012) also report that 28 Bangladeshi MFIâs collectively have 27.8 million depositors compared with about 20.6 million borrowers with 26 out of the 28 MFIs reporting more depositors than borrowers.
Microinsurance is a programme which provides insurance services to the poor and low-income populations and small businesses. It operates similarly to regular insurance except for the fact that regular premium payments and therefore the payouts are also smaller. Just like regular insurance common types of risks covered are life, health, disability and property including agricultural production. Microinsurance could be directly provided by traditional insurance companies but could also be delivered by MFIs. Some MFIs also provide loans to cover the payment of microinsurance premiums like CARD in the Philippines (Reinsch & Metcalf, 2010).
Microtransfers are a new innovation wherein small amounts of money or remittances sent by migrants and overseas workers back to their home countries. Another new innovation is microequity, which refers to the provision of equity instead of credit to finance projects of the poor. It is so far only in its early stages of development and is being done mainly in developed countries.
1.2Who Does Microfinance Serve?
Microfinance caters to the financial needs of underprivileged groups including female heads of households, pensioners, displaced persons, retrenched workers, small farmers and microentrepreneurs (CGAP,1 2003). In addition, microfinance borrowers are typically self-employed, household-based entrepreneurs who have relatively unstable income sources and can be divided into two groups: rural and urban. In rural areas, the borrowers are usually small farmers and others who are engaged in small income-generating activities such as food processing and petty trade; while in urban areas, microfinance activities are more diverse and borrowers include shopkeepers, service providers, artisans, street vendors and smallâmedium enterprises (Sapovadia, 2006). However, the client-focus of microfinance varies in different regions. For example, in Latin America, microfinance has been developed into a business rather than an anti-poverty programme, which is a branch of commercial banking and focuses more on urban smallâmedium enterprises than the rural poor (Poyo & Young, 1999). By contrast, in Asia where the poor population is more numerous, especially in rural areas, microfinance would inevitably be directed to serve the rural poor as an anti-poverty instrument (World Bank, 2006).
The most common financial service provided by MFIs is microcredit, hence microfinance and microcredit are commonly used interchangeably, but microfinance is obviously much broader than just microcredit. In the next section, we will describe the basic characteristics of microcredit.
1.3Characteristics of Microcredit
Compared to traditional lending, microcredit has its own vivid characteristics. Loans from the microcredit programmes are usually in small amounts and have relatively shorter repayment recycles. Du (2004) argues that a major difference between microcredit and conventional lending is that the former targets borrowers from the poor and low-income groups. In addition, microcredit emphasises lending to the poor women who are disproportionately represented among the worldâs poorest people. Another outstanding difference between microcredit and traditional lending is that microcredit is usually offered without the requirement of collateral compared to compulsory collateral requirement in traditional lending (Yunus, 2003). However, in place of collateral, microcredit disciplines borrowers through a special strategy such as group lending, which represents another characteristic of microcredit: mutual accountability. Borrowers form into groups to monitor each other. The potential pressure on the groups helps to keep individual repayment records transparent and the collective responsibility works as âsocial collateralâ on the loans (Hussain, Maskooki & Gunasekaran, 2001). We discuss these differences more fully below.
1.3.1Targeting the poor
A major difference between microcredit and conventional lending is that the former often targets borrowers from the poor and low-income groups. Microcredit programmes are poverty-focused, which aim to facilitate the access to financial services such as credit for the poor globally who are usually regarded as disadvantaged groups in accessing conventional financial services from formal FIs. In addition, microcredit emphasises lending to poor women who are disproportionately represented among the worldâs poorest people. According to Cheston & Kuhn (2002), about 74% of microcredit borrowers in the world are women. The rationale behind lending to women is that most women borrowers have been proven to be more credit-worthy than men, in addition to the better ability of controlling the use of loans by women (Garikipati, 2006; Ang, 2004).
1.3.2Collateral free
Collateral is always a compulsory requirement in traditional lending as a way of minimising default risk anticipated by lenders. Such collateral requirement becomes more rigid if borrowers are economically poor. However, the poor usually do not own valuable assets which can be used as appropriate collateral when applying for loans from traditional FIs, and as a result, poor people are historically considered unbankable and precluded from the traditional credit markets. Microcredit is an innovative idea that challenges the traditional lending wisdom of âno collateral means no creditâ. It deems the poor as creditworthy as the rich and provides collateral free loans to the poor to develop entrepreneurial activities.
1.3.3Group-lending scheme
In place of collateral, however, microcredit disciplines borrowers through a special scheme such as group lending. Loans are made to an individual borrower who is a member of a borrowing group. However, each individual borrower assumes responsibility for the loan repayment of his or her group members, which means all group members are jointly liable. If only one member from a group defaults, the rest in the group will be denied future access to loans from the microcredit programme. As a result, the principle of joint liability creates an incentive mechanism by which individual borrowers are stimulated to select credible members to group with, to monitor the other membersâ activities once the loan is received and to enforce repayment in case a group member fails to fulfil his or her obligation. In other words, the group-lending scheme creates a special kind of collateral called âsocial collateralâ on the loans, which reduces the costs of screening and monitoring borrowers, and ensures timely repayments for lenders (Anderson & Nina, 2000; Besley & Coate, 1995).
1.4Who are the Microcredit Providers?
A variety of organisations have been involved in the delivery of microcredit services during the last two decades. The World Bank (2006) categorises these organisations into seven types which include commercial banks, wholesale development banks/funds, retail development banks/companies, apex organisations funded by multilateral or bilateral donors and/or governments, MFIs and non-profit non-governmental organisations (NGOs), cooperatives and community-based organisations. Institutions such as wholesale development banks/funds and apex organisations provide lending only to institutions such as MFIs and cooperatives, instead of individuals; by contrast, cooperatives and community-based organisations only lend to individuals.
Different countries have fostered their own local organisations to provide microcredit and such local organisations can be generally classified as NGOs and formal FIs. For example, the Bangladesh Rural Advancement Committee (BRAC) and the Association for Social Advancement (ASA) are two major NGOs, while the GB is the biggest FI providing microcredit in Bangladesh. These three major microcredit providers serve around 11 million borrowers throughout Bangladesh (ADB, 2000). Similarly, Amanah Ikhtiar Malaysia (AIM) is the largest NGO in Malaysia providing microcredit to about 50,000 borrowers for a total loan amount of RM200 million (Kasim & Jayasooria, 2001). In addition, the Unit Desa of Bank Rakyat Indo...
