Question

1. A microfinance institution is expected to have sustainable programs to enable its customer to access financial services in the long-run. Explain the measures that economies and their financial markets put in place to ensure that the credit delivery system and sustainable?
2. Interest rates are important in the provision of microfinance service. Explain how interest rate influences the provision of microfinance.
3. According to Maria Otera microfinance should be geared towards achieving various objectives. state and explain each of these objectives giving examples.

Answer 1

1. Measures that economies and their financial markets put in place to ensure the credit delivery system and sustainability are:

a) Policy environment: Lack of policy environment for microfinance in many countries is a major issue inspite of financial sector reform. Broadening the financial sector reform and including the microfinance as a major component is the solution of it's sustainability. It must focus on the interest rate reform of microfinance and savings.

b) Financial infrastructure: Financial infrastructure must be such that which provide sustainable micro finance to the customers. For this financial infrastructure must be improved to have a reliable system, which includes effective information system and training facilities.

c)Institutional development: Institutional development is important for sustainability and expanding the credit availability. Good governance is required to provide quality services to poor on a permanent basis. mobilizing resources to the needy, providing products and services to the poor which are cost effective and offering competitive prices to the client are all part of good governance.

d)Social Intermediation: Social intermediation is important by making the poor actively participating in the microfinance market. It can be achieved by awareness building program, information dissemination on service providers, basic literacy program and social mobilization.

2. Interest rate is an important provision in the micro finance industry as it effects the poor. In many countries interest rate regimes are liberalized to encourage small scale lending. It's highly sensitive to charge high interest rates on small loans as it caters to poor and can be controversial. To avoid this it is important to control the interest rate regime by having an important decision on interest rates cap. To control the interest rate regime is important for the sustainability of lending institutions. For example, allegations of unreasonable high interest rate results in the closure of many branches of micro finance institutions in the Indian state of Andhra Pradesh in 2006.

3. Maria Otero suggests that microfinace should be geared toward various objectives. These objectives are

Economic development: By providing smooth financial services to poor people at affordable rates can contribute to economic development as poor will be able to run small business, can contribute to literacy which will ultimately contribute to economic development.

Improve overall quality of life: Availability of micro finance will smooth the cash flow to poor which will result in productive investments, building assets, investing in education. All these factors will contribute in improving the quality of life.