| Micro-Financing: A Comprehensive Approach of Financial Services By Christian Louis |
| Micro-finance is a type of banking service provided to groups who would otherwise be underserved by the financial industry or have no other means of gaining financial services or would have to rely on informal sources of financing, such as family, friends, informal lenders. Ultimately, the goal of microfinance is to give members of such groups, access to means of saving money, borrowing money, build assets and cover all kind of risks. Micro-finance is not a new concept. Small operations of micro-finance have existed since 1700. Operations of micro-finance in developing countries aim at bringing fresh money for short term loans in rural and urban areas and lend the money, typically for working capital, at much lower rate than the one of the market, to disadvantaged groups of farmers, handcrafters or street vendors. At that time, the concept of micro-credit was used instead of the one of micro-finance. Micro-Credit became well-known, particularly at the level of International Donors and Community Development Practitioners in the mid 1980s, after the experiments of the Grameen Bank led by Professor Mohammed Yunus, in Bengladesh ; in 2006, Professor Yunus won the Nobel Peace Prize. Historically, Micro-finance programs were only not-for-profit operations with high rate of payment default, (large portion of microfinance loans seem to be used for consumption). The “Joint Liability Group” approach replaces the lack of a Credit Reporting System or an insufficient credit history. Later, these programs introduced the idea of promoting savings patterns, as a strategy not only to increase the availability of funds for loans, but also to reduce the rate of default on loan payment. Now, Micro-finance encompasses a broad range of financial services aimed at accommodating household needs and including: loan, saving, hedging, financing education and health care, consumer staples. More recently, the private financial marketplace has been evolving in micro-finance activities, joined by Consumer Finance Companies like General Electric Finance and Citi Finance and the Mortgage Industry offering loans to first-time low-income home buyers at a rate greater than the prime rate (rate commercial banks charge their most creditworthy clients) and higher fee for service ; the share of subprime mortgages to total originations increased from 9% in 1996, to 20% in 2006, based on www.wikepedia.com Different types of micro-finance institution have different characteristics and seek better strategies and methods to reach and serve their specific niche-markets of consumers. But generally speaking, the work of a micro-finance practitioner could be defined as a process that accomplished, both of the following : • Assessing the client’s personal situation and financial goal • Establishing a plan to achieve the client’s goal and improve his/her personal skills and financial situation It is recommended that Micro-Finance Practitioners take a comprehensive approach considering and integrating all aspects of the client personal and financial situation, thus helping to ensure complete objectivity and effective performance. At Capital Seeds Corporation, we believe that microfinance can generate on one side: Profits for those who have made the investment, but on the other side, the engineering of something more than just profits: A “Social Objective”, including: the incubation of new small businesses professionally managed and socially responsible, the creation of a new pool of consumers for the new businesses and as a consequence, poverty alleviation. In 2007, the microfinance market served more than 33 million borrowers and 48 million savers all over the world and 80% of the potential market has not yet been reached (Statistics provided by Unitus). A number of trends having important implications for practitioners engaged in Micro-finance have emerged in the United States. Our input lays on the following factors : • Immigrant communities in the United States have become increasingly visible as well as economically important : 11% of the US population as a whole, 13% of the labor force, 10% of Business ownership (Source: Ben Bernanke, April 2004). • The issue of the Subprime Lending Market. Sub-prime loans recently increase the rate of homeownership in the United States. The subprime lending opportunities turned into a subprime mortgage financial crisis in the middle of 2007, beginning with the bursting of the housing bubble in the United States. • People in the United States are living longer. According to Don A. Taylor and C. Bruce Worsham of the American College (one of the leader in financial education), Government statistics indicate that the average life expectancy for 65 year-old males is now over 16 years and for 65-year-old females, is now over 19 years. • The increasing volatility of the American economy particularly observed in the credit market and the stock market. The release on January 22, 2008 of the Federal Open Market Committee of the Federal Reserve Board of Governors has decided to lower its target for the federal funds rate 75 basis points (three quarters of a percentage point) to 3-1/2 percent, "in view of a weakening of the economic outlook and increasing downside risks to growth". The surprising interest rate cut of yesterday, represent the biggest drop in the overnight interbank lending rate in more than 23 years, according to CNBC . We believe that the development of economically sound and professionally well-operated businesses in a free market environment is the best path for prosperity and sustainable economic development. That’s why, at Capital Seeds Corporation, we encourage highly educated professionals in underdeveloped countries to organize themselves into a socially responsible technocracy dedicated to establish the required institutional and macro-economic framework to attract international investors and entrepreneurs and raise their country to the rank of pre-emerging and emerging market for the global economy. |