Question

a. Microfinance institutions (MFIs) by definition provide financial services and may also offer other services as a means of improving the ability of its clients to utilize financial services. Can you provide arguments for and against the minimalistic and integrated approaches of MFIs?

b. Discuss the differences in principles underlying group lending and individual lending in microfinance?

Answer 1

Part a:

• The minimalist approach considers the access by low-income individuals to credit as the only piece missing for income generations and, therefore, sees the providing of microcredit loans as a development strategy per se.
• On the other hand, the integrated approach emphasizes the importance of providing not only credit but a range of development-oriented services to the poor in ordet to attack the structural causes of poverty.
• Typically, these non-financial services should include educational programs, community-based development programs, and so on.
• In terms of economic sustainability, operating costs incurred in minimalistic approach is much lower as compared to those of integrated micro credit programs.

Minimalistic programs- Often adopts specific risk managing and credir analysis methods that demand some degree of social intermediation through use of loan offices but avoids the cost of additional development-oriented services or policies.

This approach is based on the premise that there is a single missing piece for economic growth among the porr, i.e, affordable short-term credit. These are implemented by MFIs such as agriculture/farming banks or credit unions. These offer only financial intermeidation such as savings, credit, insurance, and payment systems.

They offer great advantahe of having single focus which becomes more cost-effective with time.

Integrated Approach: This strategy which lies near the center of micro-finance spectrum takes a rather more wholistic view of poor in its design of poverty-reduction program. It not only offers a range of financial and sociual intermediation but adds to enterprise development services such as marketing, business and prodcution training and socisl services like health and nutrition, education and human rights mattets. The programme offers community-bankins as a solution for the poorest using a group-based model that includes compulsory savings and business training skills.

Part b:

Group Lending strategies transfer monitoring to borrowers, where joint liabilities ensures strong incentives to members to help their peers succeed.

Individual Lending strategies retain the monitoring role with the MFI, where incentive to borrowers includes exemption from additional risks, gain in privacy and time-saving.