SKS Chairperson and Founder, Vikram Akula, recognized by Time Magazine as one of today's 100 most influential people 

What is microfinance?

Microfinance began as a financial system to provide poor families with very small loans (microcredit) to help members begin or sustain income-generating activities. Microcredit arose in the 1970s, through the efforts of Mohammad Yunus, a microfinance pioneer and founder of the Grameen Bank of Bangladesh.

The definition of microfinance has since broadened, and includes savings, insurance, and money transfer vehicles; the industry has realized that those who lack access to traditional formal financial institutions actually require and desire a variety of financial products.

Microcredit has largely been directed by the non-profit sector, but recently we see (as in the case of SKS) the emergence of �for-profit� MFIs. In India, these �for-profit� MFIs are referred to as Non-Banking Financial Companies (NBFCs).

What is a Microfinance Institution (MFI)?

A microfinance institution is an organization that offers financial services to low income populations. Almost all give loans to their members, and many offer insurance, deposit and other services. Various types of institutions offer microfinance: NBFCs, NGOs, cooperatives, private commercial banks and sectors of government banks.

Some NGOs offer microcredit as one slice amongst a host of non-financial development activities. SKS has opted instead to focus solely on microfinance, to develop the most efficient and effective mechanisms to deliver finance to the poor.

How does microfinance help the poor?

Microfinance plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance increases household income, which leads to attendant benefits: increased food security, the building of assets, and an increased likelihood of educating one�s children.

Microfinance is also a means for self-empowerment. It enables the poor, especially women, to become economic agents of change - they increase income, become business-owners and reduce their vulnerability to external shocks (illness, weather, etc)

When is microfinance not an appropriate tool?

Microcredit is best-suited to those with entrepreneurial capability and opportunity. This translates to those poor who work in growing economies, and who can undertake activities that generate weekly stable incomes. Microfinance is inclusive of a much larger range of clients.
However, many poor do not fit within the current structure of microfinance. One reason for this is extremely poor people (destitute and homeless) lack a stable income. Without a stable income, it is difficult to make the weekly repayments that microcredit requires. Credit requires a 98% �hit� rate to be successful, as high default rates undermine the very principles of lending.
Programs have been developed to provide these �very poor� with safety net programs that offer basic subsistence. At SKS, our NGO-arm, SKS Assist aims to do so, and endeavors to graduate members to our microfinance program.

Why do MFIs charge such high interest rates to poor people?

Providing financial services to poor people is expensive. This cost is one of the most important reasons why banks don't make small loans. For example, a Rs.2000 loan requires the same amount of resources as a Rs.100,000 loan.

Microfinance is a high-touch business: At SKS, field staff managers must perform village surveys before entering a village, conduct interviews with potential members, train members on credit discipline, travel to villages by motorbike every week to collect interest and disburse loans, and follow-up to ensure the loans are being used for their intended purpose. These personnel and administration costs easily amount to 11% of our total cost structure.

In addition, we must borrow from commercial sources to lend to our members. This cost of lending is anywhere from 10-12%. The combination of this personnel/administration costs, the cost of lending, a 1-2% loan loss provision (due to default or writing off a loan), and 1-2% profit used to expand operations, translates to an interest that appears high. However, it is the lowest possible interest we can charge to cover our costs. As the microfinance industry matures, and MFIs like SKS continue to scale and increase efficiency, our cost of lending may reduce. And, if commercial banks reduce their own rates, we can and will deliver these savings to our borrowers.

How do you know microfinance is making an impact?

Microfinance has gained popularity for several reasons. One, it is a much better alternative than the informal financial sector. In India for example, moneylenders charge rates of 36-72%. Secondly, members realize the value of assured long-term access to credit. Many SKS clients have been with us since inception in 1998, and have consistently taken loans each year.

This access to finance allows women to increase income, which benefits the entire household. How do we know this? Our return on investment (ROI) calculations demonstrate that most borrowers earn anywhere from 25%-200% more than the interest rate charged, due to low infrastructure costs, no tax or legal costs, and the overall capital cost that is just a small percentage of the total cost.

Why doesn�t SKS allow members to save?

SKS is an Non-Banking Financial Company (NBFC), and is therefore regulated by the Reserve Bank of India (RBI). RBI regulations do not allow NBFCs to hold savings deposits.

Why do you only lend to women?

Social development studies have demonstrated that women are much more likely to reinvest income into the household, for the benefit of the entire family.

Can microfinance be profitable?

Yes it can, as SKS demonstrates.

Data from the MicroBanking Bulletin reports that 63 of the world's top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies programs might have received, of about 2.5% of total assets. This lends to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream into the retail banking sector.

For more microfinance information�

� Microfinance Gateway
� Consultative Group to Assist the Poor (CGAP)
� Asian Development Bank: Microfinance
� National Bank for Agriculture and Rural Development (NABARD)
� Sa Dhan: Association of Community Development Finance Institutions
� South Asian Microfinance Portal
� Microfinance Information eXchange (MIX)
� World Bank
� Grameen Bank

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