Human capital management in rwanda: challenges and prospects for microfinance institutions

2.3. WHAT IS MICROFINANCE? / MICROFINANCE INSTITUTION?

There is no anonymously agreed upon definition of microfinance. Let us review the following definitions. Microfinance is the provision of small loans (microcredit) to poor people to help them engage in productive activities or grow very small businesses. It may include a broader range of services, including credit, savings, and insurance ( www.pbs.org/wgbh/rxforsurvival/glossary.html).

According to Deardorff's Glossary of International Economics, microfinance refers to
«institutions that specialize in making very small loans to very poor persons in developing

countries. Instead of using collateral to assure repayment, these lenders harness social pressure within the borrower's community. Originally done on a nonprofit basis, it is now being done increasingly by for-profit companies» ( http://www-personal.umich.edu/~alandear/glossary/m.html).

2.3.1. Principles of Microfinance

According to the Consultative Group to Assist the Poor, the following are principles of microfinance. These principles were endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004 ( http://www.globalenvision.org/library/4/1051).

First, poor people need a variety of financial services, not just loans. Research shows that the poor need flexible, convenient and affordable financial services that are convenient, flexible, and affordable. But they also need other services like savings, insurance, and cash transfer services ( http://www.globalenvision.org/library/4/1051).

Secondly, microfinance fights poverty well. Microfinance services feel poor families and help them plan for the future through investments in better nutrition, housing, health, and education ( http://www.globalenvision.org/library/4/1051).

Thirdly, microfinance means building financial systems that serve the poor. The biggest share of the world population is poor and cannot deal with classic banks. Microfinance should therefore be integrated in the financial mainstream to reach this majority ( http://www.globalenvision.org/library/4/1051).

Fourthly, unlike what majority may think, the poor proved to be credit worthier than the rich. This is what makes the microfinance sector sustainable. The challenge is that lender should offer services that are more useful to the clients, and finding new ways to reach more of the unbanked poor ( http://www.globalenvision.org/library/4/1051).

Fifthly, microfinance is about building permanent local financial institutions. For this to exist
there is need to mobilize for local savings, give loans and provide other services. As local
institutions and capital markets mature, there will be less dependence on funding from donors

and governments, including government development banks

( http://www.globalenvision.org/library/4/1051).

Sixthly, microcredit is not always the answer. There should therefore availability of other tools to supplement microcredit like employment and training programs, or infrastructure improvements ( http://www.globalenvision.org/library/4/1051).

Seventhly, interest rate ceilings hurt poor people by making it harder for them to get credit. Experience shows that when governments regulate interest rates, they usually set them at levels so low that micro-credit cannot cover its costs, so such regulation should be avoided. At the same time, a micro lender should not use high interest rates to make borrowers cover the cost of its own inefficiency ( http://www.globalenvision.org/library/4/1051).

Eighthly, the role of government is to enable financial services, not to provide them directly. Its job is to put in place the environment conducive for business ( http://www.globalenvision.org/library/4/1051).

Ninthly, donor funds should complement private capital, not compete with it. This should be given on a temporary basis. The ultimate end is to see no financial institutions run by grants ( http://www.globalenvision.org/library/4/1051).

Tenthly, the key bottleneck is the shortage of strong institutions and managers. Public and private investments in microfinance should focus on building this capacity, not just moving money.

The last principle is that, microfinance works best when it measures--and discloses--its performance. There should be transparency regarding financial information and social information ( http://www.globalenvision.org/library/4/1051).