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

2.3.2. Advantages of Microfinance Institutions

The documented success in terms of outreach and the increasing popularity of MFIs is
attributable to a variety of factors - both economic and humanitarian. From an economic

perspective, MFIs provide superb opportunities to correct both capital market failure and efficiency loss due to central planning by governments. This coupled with the direct aid to the poor is the duality that makes microfinance so desirable ( christopher.darrouzetnardi.net/experiences/de.microfinance.doc).

Capital market correction by MFIs operates in three ways. The first is the lack of access to capital by many poor people in LDCs. This forces them to face strict, if not absolute, borrowing constraints. Small businessmen in LDCs often cite lack of access to capital as a primary reason for their inability to expand business. By providing financial services MFIs help correct borrowing constraints ( christopher.darrouzet-nardi.net/experiences/de.microfinance.doc).

The second way MFIs correct capital market failure is by increasing the efficiency of providing loans and subsequent capital investment. MFIs are able to screen potential borrowers. Most commercial banks lack the resources or economic incentive to screen potential borrowers. MFIs are also willing and able to advise borrowers financially. Generally, this involves offering simple operational or entrepreneurial recommendations. A final manner in which MFIs can benefit financial markets in LDCs is their ability to coordinate loans from the country's commercial institutions. Even if not recovering costs, MFIs do receive donations and hence can enter into sound financial arrangements with domestic financial institutions. Through this conduit, countries are able to expand their financial infrastructure ( christopher.darrouzetnardi.net/experiences/de.microfinance.doc).

Foreign aid in the form of microfinance allows for a circumvention of inefficient central planning by recipient country governments. MFIs stand to utilize donations more efficiently compared to LDCs who either choose to central plan or have a history of central planning. The crippling effect of these policies has been to force small private businesses into the informal sector (Douglas Snow & Terry Buss, 2001). By reintroducing individuals into the formal economy by the way of business expansion, MFIs foster economic growth ( christopher.darrouzet-nardi.net/experiences/de.microfinance.doc).

From a humanitarian perspective MFIs provide great benefits to the poor. These benefits include
increased income, an end to handout dependency, and in general terms poverty alleviation.

While this paper seeks mainly to emphasize the potential economic benefits of microfinance, humanitarian motives are equally valid and supported strongly by microfinance ( christopher.darrouzet-nardi.net/experiences/de.microfinance.doc).

2.3.3. Who Are the Clients of Microfinance Institutions?

It is worthy asking such a question. The answer to this question has been answered by the Consultative Group to Assist the Poor ( http://www.cgap.org/p/site/c/template.rc/1.26.1304/).

Microfinance clients are often described according to their poverty level - vulnerable non-poor, upper poor, poor, very poor. This can obscure the fact that microfinance clients are a diverse group of people - and require diverse products. While women clients make up a majority of clients - and in some instances comprise 100 percent of an MFI's clientele, 33 percent of all microfinance clients are men ( http://www.cgap.org/p/site/c/template.rc/1.26.1304/).

These clients operate small businesses, work on small farms, or work for themselves or others in a variety of businesses - fishing, carpentry, vegetable selling, small shops, transportation, and much more. Some of these microfinance clients are truly entrepreneurs - they enjoy creating and running their own businesses. Others become entrepreneurs by necessity when there are few jobs available in the formal sector. Indeed, some clients have been helped to graduate out of poverty ( http://www.cgap.org/p/site/c/template.rc/1.26.1304/).

Success in reaching poorer people with microfinance is determined by the mission of a microfinance institution, and its ability to translate that mission into effective products and services. With the industry's renewed focus on social performance - the term used within the microfinance industry to mean the effective translation of mission into action - we expect to see more clients over all, and very poor people in particular, served with appropriate, varied products from a variety of institutions ( http://www.cgap.org/p/site/c/template.rc/1.26.1304/).

Human capital management in Rwanda: Challenges and prospects for Microfinance Institutions 2.3.4 Types of microfinance institutions

Ledgerwood (1999), discusses three types of microfinance institutions, namely formal, semi formal and informal providers. Their defining characters have been discussed below:

Formal institutions are defined as those that are subject not only to general laws and regulations but also to specific banking regulation and supervision. They include public development banks, private development banks, savings banks and postal savings banks, commercial banks, non bank financial intermediaries.

Semi formal providers are those that are formal in the sense that they are registered entities subject to all relevant general law including commercial law, but informal insofar as they are, with few exceptions, not under banking regulations and supervision. They include credit unions, multipurpose cooperatives, NGOs, some self help groups.

Informal providers are those which are neither subject to commercial law neither to bank regulation and supervision. In other words, litigations there from cannot be dealt with in courts. These include pure moneylenders, most self help groups, rotating savings and credit associations, families and friends.