Introduction of the globe. Microfinance is seen as
Introduction Delivering microfinance services to huge number of households would not be sustainable except the microfinance institutions stick to sustainability, efficiency and productivity objectives.So far more than 154 millions of poor people have been reached by 3552 Microfinance Institutions (MFIs) worldwide as of December 2007, where 69 percent are among the poorest and 83.4 percent are women (Harris, 2009). Its original aim is to eliminate poverty and boost financial inclusion. The rapid growth of the sector in the last decades has shifted the goals of microfinance institutions and a new objective is set: to become financially sustainable, self-sufficient and subsidy-free. Achieving the double bottom line of social mission and profitability is the challenge of most successful microfinance institutions. The objective of this assignment is to look at the factors that should be considered in establishing MFIs in rural communities and what can contribute to the sustainability of microfinance institutions.Global poverty has been one of the mainly critical and uncertain issues in the human history. Governments and global institutions have been jointly fighting poverty in diverse parts of the globe. Microfinance is seen as an effectual tool to assuage poverty (Rubana, 2008; Daley-Harris, 2002; Lalitha, 2008).Microfinance gives the poor an opportunity to get access to financial services like credit and savings. They can ask for small loans and use them to do small businesses such as selling tomatoes, potatoes, groceries, handicrafts, hand sown clothing and other essential agricultural products. Microfinance objective is to give financial service to poor people by offering small-scaled financial services basically savings, credit and insurance to people undertaken micro business ventures such as farming, fishing, herding and micro businesses manufacturing, reproducing, maintaining and selling goods and services (Lalitha, 2008). Microfinance institutions are most often financially supported by governments, donor institutions, international charity organizations, commercial banks, investment firms, it means that microfinance institutions relies on financial supports from donors and governments. When these financial resources and supports are over, microfinance institutions may find it difficult to continue the operation of microfinance activities; hence, the war on poverty alleviation would be defeated. Because of this, microfinance institutions encounter resource challenges and are not very self-sufficient (Zeller & Meyer, 2002). This constraint obstructs microfinance institutions’ capability to increase their services to the poor and extremely poor communities.Financial sustainabilityMost Microfinance institutions are looking for financial sustainability. Numerous MFIs are restructured in order to attain financial sustainability and finance their expansions. Financial sustainability can be defined as the ability of an activity to stay financially feasible even if subsidies and financial assistance are eliminated (Woolcock, 1999). It involves the generation of adequate profit to cover expenses whereas eliminating all subsidies, including less-obvious subsidies, such as loans made in foreign currency with repayment in local currency (Tucker and Miles, 2004). To realize the intent of reaching most poor people, microfinance institutions ought to discover ways on how to continue to exist and not rely so much on donors and governments i to be self sufficient. The institutions must be capable to cover cost and make profits on services t they give to consumers (Copestake et al., 2002). Several MFIs in Latin America, just to name a few, Prodeem, Banco Solidario, are now financially sustainable by linking up with banks and businesses to cross-sell supplementary products such as savings, pensions and insurances. Additional services can create steady income for MFIs to cover cost, make profit and be capable to serve a lot of consumers. In these instances, MFIs become more business oriented. On the other hand, too much focal point on making profit might lead to mission drift, from extremely poor to marginal or above poverty line group. It will make MFIs to target richer clients in cities to have more profit to a certain extent than target extremely poor clients in rural areas (Zeller & Meyer, 2002). However, if MFIs centers so much on offering services to the poor or very poor, they possibly will not be able to generate sufficient revenue to survive because the amount of loans and savings that the very poor apply for or are able to deposit is sometimes small, hence gives MFIs less profit than what they can get from large loans given to richer customers.When MFIs would want to meet its social objective as to outreach for poor people, MFIs ought to offer services for marginal poor people in other to have sufficient profit to sustain, develop and offer tailored made products for the extremely poor clients. There must be allotment of products and resources between diverse consumer segments so that MFIs can stay financially strong and still focus on getting to the extremely poor as its social responsibility. Taken into consideration the arguments of poverty alleviation in (Prahalad, 2005), social responsibility and financial sustainability of microfinance institutions can walk together and even generate an even ground for both the poor and the institutions. Also importantly, repayment also drives the sustainability and stability of MFIs. High repayments help MFIs to keep the institution healthy financially and also help in outreach (Robbinson, 2001).Social performance of MFIsSocial performance is defined by the “Social Performance Task Force” (SPTF) as “the effective translation of an institution’s social mission into practice in line with accepted social values that relate to 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”. It does not only rely on studying the outcome of microfinance programs, but it also assesses the social objectives put out by the MFI and the practices and measures being use by the MFI to meet its objectives. Social performance assessment (SPA) allows an institution to measure it social performance relative to its social mission and objectives. Microfinance institutions sustainability and profitability is intensified by two evidences: firstly, financially self-sufficient MFIs can enlarge their financing potentials by borrowing from banks and in private capital markets (Gibbons and Meehan, 1999), and secondly, devoid of sustainability MFIs cannot attain the objective of poverty alleviation (Otero, 1999). Moreover, CGAP stresses the need to ensure the financial sustainability of the operations of MFIs in order to reach a large number of poor consumers.Political climate One of the biggest risks that can impede financial institutions and MFIs sustainability when they operate in developing countries and rural areas is political instability. It is frequently the issue that the change in government leads to a review of contracts with the end result that some of them are scrapped. Added to this is the political instability in many developing countries like Nigeria, Kenya, Congo, Burundi, Togo, Burma ,Colombia , just to mention a few where the incessant stir in the political setting makes the operation of international and local MFIs difficult. In other expressions, the activity of political instability can paralysis the dream of MFIs from attaining sustainability and poses a bigger risk to investors, donors and the fight against poverty.Economic climateAnother category of risk that can militate against MFI sustainability is the prevailing economic structures in some developing countries. For example, many multinationals MFIs and financial institutions trooped to countries like Indonesia, Thailand, Zimbabwe, India and Philippines with great hope. Yet, the Asian financial crisis of 1998 had a toll on their economic activities because of the blow of the crisis on the economic system of the country. Undeniably, prudent economic management is the key feature here. In some of these developing countries, owing to the misstatement of the economy, it can lead to economic crisis which will necessitate to capital flight, redundancy, inflation, high cost of living and collapse of small and micro businesses .MFIs must consider the changes in the economic situation and put in remedial measures in other to be sustainable in developing countries since the economies of these countries are not as profound and resilient like those in the West. Of course, the recent global economic crisis affected the resilience of the West as well.Social climateAnother type of impediment to MFI sustainability is social, which has to do with the prevailing social situation in the communalities and the country in general. Because a certain section of the populace assumed others have benefited immensely from the government and international businesses, the other sections feel left out and marginalized and they may resort to pressurizing the government to include them in the developmental process. This was the case in many countries in Africa and East Asia where the minorities who lost out from the opening up of their economies resorted to social unrest and societal pressure to jeopardize the operations of MFIs, international businesses, local investment and small and micro enterprises who are clients of MFIs e.g. Andhra Pradesh in India, Morocco, Tunisia, Bangladesh and Peru. This situation can lead to high delinquency and affect the portfolio quality of the MF. This can lead into outright rejection of international businesses in many countries e.g. Zimbabwe and Venezuela. The ideology of nationalization and taking over the operations of international businesses in many countries across the world, most especially developing economies can make life complicated for international businesses, MFIs, investors and donor agencies in these countries.ConclusionMicro-finance is one of the ways of building the capacities of the poor and graduating them to sustainable self-employment activities by providing them financial services like credit, savings and insurance. To provide micro-finance and other support services, MFIs should be able to sustain themselves for a long period. The paper asserts that India is the largest emerging market for microfinance. However, the demand needs to be organised and converted into effective demand. The need for credit by the poor should be backed by willingness to pay the price for the financial services. Only then demand is sustainable. MFIs should offer sustainable financial services and reach a stage of high access and high sustainability, which is the desired level. There is emerging price competition from mainstream banks as they are able to cross-subsidize their micro-credit operations and charge interest rates below cost.It is possible to provide micro-finance services to the poor at reasonable cost provided use is made of certain methodologies – group lending, peer guarantees, and matching repayment terms with borrower cash flows. The key to MFI financial sustainability is controlling costs and bad debts, increasing volumes and by offering savings and insurance services.The ownership pattern and governance of an MFI are crucial to its sustainability. We examined all three options of ownership – “no owners”, “member-user owners” and “investor-owners”, along with the relative merits and demerits of each pattern and its impact on governance. The paper asserts that irrespective of the mode of ownership, professional management is key. While all human resources are the key to the long run sustainability of any organisation, there is a serious shortage of microfinance entrepreneurs.It will be necessary to build robust social performance indicators and highlight a positive relationship with financial performance. The lack of relationship could jeopardize the future of microfinance. It was also concluded that the repayment rate from the credit offered i.e. clients paying back loan on time also ensures the sustainability of microfinance institutions. This is because from the credit offered to the clients, the institutions get the interest, which is very necessary for the sustainability of these institutions. The study also concluded that the number of customers served and their geographical coverage influence the sustainability of microfinance institutions to a great extent. From the findings and conclusions, the study recommends that microfinance institutions should open many branches so that they can be able to reach as many people as possible which will enhance their sustainability. The study also recommends that for the microfinance institutions to survive well in the market, and also to ensure that they conform to the rules and regulations regarding registration, adherence to the government policies. The researcher also recommends that the institutions should be run by qualified members of the management. There should be effective regulations and supervision of the operations of the microfinance institutions. The institutions should consider also attracting the poorest people in their regions by giving them loans at much lower interests and also the institutions should do a thorough vetting on their customers before advancing loans to them to ensure that they are creditworthy.