the role of microfinance in employment...
TRANSCRIPT
Admas University
The Role of Microfinance in Employment Creation
A thesis by Kadar Muse Ahmed
Date9/1/2012
The Role of Microfinance in Employment Creation
Chapter one
1. Introductions
1.1 Background
It has been estimated that there are 500 million economically active poor people in the world
operating microenterprises and small businesses women’s world banking 1995. Most of them do
not have access to adequate financial services.
To meet this substantial demand for financial services by low- income micro entrepreneurs,
microfinance practitioners and donors alike must adopt a long –term perspective. This research
is to bring together in a single source guiding principles and tools that will promote sustainable
microfinance and create viable institutions.
The goal of this research is to provide a comprehensive source for the design, implementation,
evaluation, and management of microfinance activities. Microfinance takes a global perspective,
drawing on lessons learned from the experiences of microfinance practitioners, donors, and other
throughout the world.
It offers readers relevant information that will help them to make informed and effective
decisions suited to their specific environment and objectives. Microfinance arose in the 1980s
and a response to doubts and research findings about state delivery of subsidized credit to poor
farmers.
In the 1970s government agencies were the predominant methods of providing productive credit
to those with no previous access to credit facilities –people who had been forced to pay interest
rate or were subject to rent seeking behavior.
Governments and international donors assumed that the poor required cheap credit and saw this
as a way of promoting agricultural production by small landholders.
In addition to providing subsidized agricultural credit, donors set up credit unions inspired by
the Raiffeisen model developed in Germany in 1864.
The focus of these cooperative financial institutions was mostly on savings mobilization in rural
areas in an attempt to “teach poor farmers how to save”. Beginning in the mid -1980s the
subsidized, targeted credit model supported by many donors was the subject of steady criticism,
because most programs accumulated large loan losses and required frequent recapitalizations to
continue operating.
It becomes more and more evident that market-based solutions were required. This led to a new
approach that considered microfinance as an integral part of the overall financial system.
Emphasis shifted from the rapid disbursement of subsidized loans to target populations toward
the building up of local, sustainable institutions to serve the poor. At the same time, local NGOs
began to look for a more long-term approach than the unsustainable income generation
approaches to community development.
In Asia DR. Mohammed Yunus of Bangladesh led the way with a pilot group-lending scheme
for landless people.
This later became the Grameen bank, which now serves more than 2.4 million clients (94
percent of them women) and is a model for many countries. In Latin America ACCION
international supported the development of solidarity group lending to urban vendors, and
Fundacion Carvajal developed a successful credit and training system for individual micro
entrepreneurs. Changes were also occurring in the formal financial sector.
Bank Rakyat Indonesia, a state- owned, rural bank, moved away from providing subsidized
credit and took an institutional approach that operated on market principles.
In particular, Bank Rakyat Indonesia developed a transparent set of incentives for its borrowers
(small farmers) and staff, rewarding on time loan repayment and relying on voluntary savings
mobilizations as a source of funds. Since 1980s, the field of microfinance has grown
substantially.
Donors actively support and encourage microfinance activities, focusing on microfinance that is
committed to achieving substantial outreach and financial sustainability.
Today the focus is on providing financial services only, whereas the 1970s and much of the
1980s were characterized by an integrated package of credit and training which required
subsidies.
Most of recently, microfinance NGOs (including PRODEM’ Banc sol in Bolivia, K-REP in
Kenya, and ADEMI’ BANCO ADEMI in the Dominican republic) have begun transforming into
formal financial institutions that recognize the need to provide savings services to their clients
and to access market funding source, rather than rely on donor funds.
This recognition of the need to achieve financial sustainability has led to the current “financial
systems” approach to microfinance. This approach is characterized by the following beliefs:
ÿ Subsidized credit undermines development.
ÿ Poor people can pay interest rates high enough to cover transaction costs and the
consequences of the imperfect information markets in which lenders operate.
ÿ The goal of sustainability (cost recovery and eventually profit) is the key not only to
institutional permanence in lending, but also to making the lending institution more
focused and efficient.
ÿ Because loan size to poor people is small, microfinance must achieve sufficient scale if
they are to become sustainable.
ÿ Measurable enterprise growth, as well as impacts on poverty, cannot demonstrate easily
or accurately outreach and repayment rates can be proxies for impact. One of them main
assumptions in the above view is that many poor people actively want productive credit
and that they can absorb and use it.
But as the field of microfinance has evolved, research has increasingly found that in many
situations poor people want secure savings facilities and consumption loans just as much as
productive credit and in some cases instead of productive credit.
Microfinance is beginning to respond to these demands by providing voluntary saving services
and other types of loans.
ÿ Sources of funds to finance loan portfolios differed by type of institution. NGOs relied
heavily on donor funding or concessional funds for the majority of their lending. Banks,
savings banks, and credit unions funded their loan portfolios with client and member
deposits and commercial loans.
ÿ NGOs offered the smallest loan sizes and relatively more social services than banks,
saving banks, or credit unions.
ÿ Credit unions and banks are leaders in serving large numbers of clients with small
deposit accounts. They study also found that basic accounting capacities and reporting
varied widely among institutions, in many cases revealing an inability to report plausible
cost and highlights the need to place greater emphasis on financial monitoring and
reporting using standardized practices a primary purpose of this research.
1.2 Statement of the problem
Microfinance is considered as a tool for socio-economic development, and can be clearly
distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to
generate the cash flow required to repay a loan, should be recipients of charity.
Microfinance experts generally agree that women should be the primary focus of service
delivery. Evidence shows that they are less likely to default on their loans than men are more.
People cannot understand very well in important in microfinance.
1.3 Purpose of the study
Purpose microfinance delivers quality financial services how create poor people in opportunity.
These services include micro-saving, micro-loans, micro -insurance, and other remittances.
Micro-loans are given for a variety of purposes, frequently micro-enterprise development. The
diversity of products and services offered reflects the financial needs of individuals, households,
and enterprises can change significantly over time, especially for those who live in poverty.
Because of these varied needs, and industry focus on the poor. Purpose microfinance use non-
traditional methods such as group lending or other forms of collateral not employed by the
formal financial sector.
Our value of financial services to poor families helps them to engage in productive activities or
growing their business. Purpose microfinance we give some of the poorest women give some of
amount, to encourage how create new product in small micro finance.
1.4 Objectives of the research
1.4.1 General objective
Microfinance has evolved as an economic development approach intended to benefit low-
income women and men. In addition to financial intermediation many microfinance provides
social intermediation services such as group formation, development of self-confidence, and
training in financial literacy and management capabilities among members of group.
1.4.2 Specific objective
The specific objectives are:
ÿ The promise of reaching the poor: microfinance activities can support income generation
for enterprises operated by low-income households
ÿ The promise of financial sustainability: microfinance activities can help to build
financially self-sufficient, subsidy-free, often locally managed institution.
ÿ To reduce poverty
ÿ Participation in women microfinance
1.5 Scope
The scope of the research is the role in microfinance in employment creation. This research will
apply to Hargeisa city, and especially it focuses Kaaba Microfinance Institution, which related
that Poor people borrow from informal money lenders and save with informal collectors. They
receive loans and grants from charities.
They buy insurance from state-owned companies. . They receive funds transfers through formal
or informal remittance networks. It is not easy to distinguish microfinance from similar
activities.
1.6 Significance of the study
This research is benefiting our society specially the poor people to get it in opportunity.
Microfinance has successfully enabled extremely impoverished people, especially women, to
engage in self-employment projects.
These people were previously considered un bankable, as they typically do not meet even
minimal qualifications to gain access to traditional credit, such as steady employment or a
verifiable credit history. Microfinance allows them to generate income and to begin to build
wealth and ultimately exit poverty.
1.7 Limitations of the study
There are some of limitations in the microfinance. Firstly, there are little institutions in
Somaliland to talk about microfinance.
The data collections from respondents were challenged during the primary resource
Secondly it was a problem of tool when I was preparing and writing thesis book I had not enough
computer.
Thirdly, I met director for ministry of finance I have not found any report about microfinance.
Chapter two
2. Literature review
2.1 Definition of microfinance:
Microfinance is the provision of financial services such as loans, savings, insurance, and
training to people living in poverty.
“Microfinance” is often defined as financial services for poor and low-income clients offered by
different types of service providers. In practice, the term is often used more narrowly to refer to
loans and other services from providers that identify themselves as “microfinance institutions”
(MFIs). These institutions commonly tend to use new methods developed over the last 30 years
to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods
include group lending and liability, pre-loan savings requirements, gradually increasing loan
sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully
and promptly.
More broadly, microfinance refers to a movement that predict a world in which low-income
households have permanent access to a range of high quality and affordable financial services
offered by a range of retail providers to finance income-producing activities, build assets,
stabilize consumption, and protect against risks. These services include savings, credit,
insurance, remittances, and payments, and others.
2.2 Somaliland microfinance
Somaliland became independent in 1991. Since then, it has managed to restore many aspects of
normal society and develop different aspects of socio-economic activities. However it has lost
many issues like welfare of community, creating employment opportunity, decreasing financial
problems, eradicating poverty etc all these results the establishment of microfinance institutions.
Somaliland has a traditional system which is ROSCAs (rotating savings and credit associations)
called in Somali language (Hagbad) has existed for centuries in Somaliland, mainly among
women. In English-speaking countries they are known as merry-go-rounds; in French speaking
countries they are tontines.
A group of women join together to save small amounts each month- these sums are pooled and
the money handed over to one group member. She then has a sum slightly larger than normal and
can make one purchase that for her is large.
The next month another group member gets the funds and so on round the group. When
everyone has received a payment the group may start the process again, or change its members,
or disband. People who have been in such a group have already learnt the basics of money
transactions and obligations.
2.2.1 DOH AND STAGES OF DOH LOAN PROVISION
Doses of Hope (DoH) is an NGO that works in Somaliland. It was started by three refugees in
the Netherlands. It now has two main activities, micro credit and a second section that assists
disabled children and adults. Many disabilities are the result of the Civil War.
The first stage of DoH income-generation activities involved making individual loans. The
second stage was to loan to hagbad-type groups. Each group decided itself on its maximum
membership, mostly between thirty to fifty women. Then it decided on the members who will
receive the first loans, five to ten people. Each received a loan. Repayment was in equal monthly
installments. The group met monthly for repayments and other business.
As the first loans were repaid, the money was paid out immediately to one or more other
members, depending on the total amount collected. Once every member has received and repaid
their first loan, the whole cycle could start again, with second or more loans to its members.
The third stage was to loan to groups too poor to save even the small amounts involved in the
traditional hagbad.
With the current stage of activities, over 4,000 people are now being helped, one-third of them
women. When an individual applies for a loan s/he has to produce a business plan with the help
of one of the Loan Officers. Borrowers have to organize themselves into groups of about seven,
the group members being responsible for the repayments of any one of them. Each individual has
also to find an elder to stand as guarantor.
2.2.2 Kaaba microfinance institution
Kaaba Micro finance Institution’s (K-MFI) is a financial service provider that aims to strengthen
the economic base of the low-income self-employed in Somaliland through loans and savings
services with special emphasis on low-income women. The institution offers different kinds of
help and combines cost-efficient methodologies with a very high level of customer service.
K-MFI has been operating under Doses of Hope Foundation (DOH), a non-governmental
development foundation operating in Somaliland since 1998. Started in 1999 the first
micro finance project began with 150 women beneficiaries; from 1999 to 2007 the micro finance
program has gone through profound transformation and has scaled-up financial service delivery
and improved its financial outreach.
In partnership with Oxfam Novib, DOH has in 2008 begun the transformation of the micro
finance program into an independent micro finance institution now known as Kaaba Micro
finance institution (K-MFI). This transformation process started with a financial support of
EUR 150,000 from Oxfam Novib and culminated in the legal existence of K-MFI that was
formerly registered in February 2009. K-MFI’s main goal is to provide financial services to the
low-income and poor entrepreneurs (particularly women) in Somaliland to become self reliant
and serve as agents of change in their respective communities.
Building on the success realized in the start-up phase (2008 & 2009), the current phase
(intermediate level, 2010-2012) also financed by Oxfam Novib will focus on both geographic
and number of clients expansion from 1559 in 2009 to 5000 in 2012 through set up of 2 branches
in rural and urban locations of Hargeisa, & Gabiely districts
2.2.4 REPAYMENT
Effective measures have to be in place to ensure repayment. If it becomes known that defaulting
or failure to pay is possible, it could become common. The measures are as follows:
¸ Loans are only made for business purposes, with an approved business plan.
¸ The borrower has to find an Elder as guarantor.
¸ Administrative costs are deducted before money is handed over.
¸ Repayment is made in five segments.
¸ A reluctant repair is firstly the responsibility of the group of seven who borrow with
responsibility for each other.
¸ If this fails, the Loan Officer will chase up the non-payer, look at whether the business is
failing and see how it can be got back on track.
¸ If this also fails, the guarantor ensures that Doses of Hope will be repayed but the process
takes time and trouble. A few defaulters, perhaps 5-10%, will still need to be taken to
court.
¸ It is said that Somali women repay loans but Somali men do not. The DoH records show
100% of women and most men repay without trouble.
¸ The repayment figures noted by the external auditors are now between 87% and 92.4%
2.3 Women in microfinance
WMI's goal is to help women build assets so that they can stabilize their income, raise their
standard of living and reorient themselves and their families. WMI's small loans bring big
changes to impoverished women, who use the money to build small businesses.
Example of women beneficiary In Somaliland:
Amina Saleh is a woman living in Hargeisa, the capital. In 2000 she approached DoH as an
individual. She was asked to form a group and she found five other would-be borrowers. Her
idea was to start baking bread in a pit oven. She worked out a business plan and received $200
minus $20 for administrative costs.
She used the money for ingredients, tools and also for the renting of space in a neighbor’s lock-
up where she could store things. She baked bread each morning before it was light and then took
it to the market to sell. Her profits have allowed her to repay the loan, build a proper oven, and
provide work for her husband and two paid employees. She has built two more rooms on to her
one-room hut. They were needed; she has five children. And now the children can go to school.
2.3.1 Empowering women by microfinance!?
Against the background of an increasing feminization of poverty in the developing world,
microfinance programs represent important means for promoting women’s empowerment.
However, most of these programs are only focused on individual and purely economic
empowerment but do not involve full and equal participation of women in all spheres of society.
In order to improve the effectiveness of microfinance programs for women, it is necessary to
integrate a societal and political dimension which enables women to participate in decision-
making processes above and beyond the family context.
A report by Alexandra Dobra, published in the “International Politics and Society” journal of the
Friedrich Ebert Foundation, depicts important limits of microfinance programs for women:
According to the Microcredit Summit 2005, women represent 70 percent of individuals living on
less than 1 us dollar a day. Not only do women represent the major part of the poorest
individuals, but in addition they are also the most vulnerable.
Microfinance programs have proven to be important instruments to fight against female poverty
and vulnerability in developing countries. Among the 81.9 million poor clients served by
microfinance programs in 2005, 84.2 percent were women (World Bank 2005). Microfinance, by
targeting women, allows not only improvements in gender equality but also effective decreases
in poverty through the positive effect of gender equality on development.
Using microfinance programs to give women access to financial services is a means of
mobilizing their productive capacities for the benefit of economic development. Through access
to financial resources, microfinance not only gives women access to self-employment, but also
contributes to the amelioration of family life and influences the social situation of women by
promoting self-confidence and the capacity to play an active role in society. Moreover,
extrapolating from household expenditure by working women it appears that women are more
inclined to be altruistic and spend most of their money on their families. In this way, the
wellbeing of the whole family and society is improved.
Although the social dimension of microfinance enables the emergence of female empowerment,
the latter is too underdeveloped. In most instances, microfinance programs only enhance
personal empowerment but do not involve full and equal participation of women in all spheres of
society, including decision-making and access to power. In most developing countries, women
are for example still largely under-presented in politics.
2.3.2 Measuring the Impact of Microfinance on Women's Empowerment
Given the complexity of defining women’s empowerment it is not surprising that only a few
empirical studies have tried to examine the impact of microfinance on women’s empowerment.
For the most part, empirical research on microfinance’s effect on women’s empowerment has
been conceptually ungrounded and tends to estimate an over-extended definition of
empowerment or a truncated aspect of it. A number of these studies also suffer from
methodological bias and flaws. In fact, only a few studies have successfully investigated this
impact in a rigorous manner.
The interpretation of women’s empowerment and its measurement varies across studies. Most
researchers construct an index/indicator of women empowerment. However, measuring women
empowerment by constructing indices is an inappropriate technique as it allows the use of
arbitrary weights.
Most researchers, for instance, will agree that impact of a women’s decision to buy cooking oil
for the family is different in nature from her participation in a decision to buy a piece of land.
Both these decisions have different implications and magnitude of impact on her empowerment.
As such giving equal weight to both these decisions does not make sense. At the same time,
suggesting an arbitrary weight for these decisions is also inappropriate, as it is not for the
researchers to decide the factor by which the latter decision contributes more to women
empowerment.
Other studies use Item Response Theory, where the element of analysis is the whole pattern of a
set of binary indicators that proxy for woman’s autonomy, decision-making power, and
participation in household and societal decision making. These studies have found that credit
programs allow women to take a greater role in household decision making; to have greater
access to financial and economic resources; to have greater access to financial and economic
resources; to have greater social networks and more bargaining power vis-à-vis their husbands;
and to have greater freedom of mobility.
2.4 Financial Sector Regulation and administration
One of the most important issues in microfinance today is the regulation and supervision of
MFIs. As mentioned, most informal and semiformal organizations providing financial services to
microenterprises do not fall under the government regulations that are applied to banks and other
formal financial institutions.
Many nonbank MFIs, especially NGOs, operate on the fringes of existing regulations,
especially with regard to deposit mobilization. In some instances they do so with the knowledge
of the authorities, who, for political reasons or simply for lack of time and resources, do not
interfere.
In other instances these nonbank MFIs simply avoid dealing with the issues and proceed with
deposit mobilization by calling it something else. All parties involved in microfinance in a
particular country need to understand the dynamic of these legally ambiguous operations.
One important danger is that as more bank and nonbank MFIs begin operating, authorities who
have been disposed to liberal interpretations of the regulations will be forced to invoke a much
stricter construction of the laws, thus tipping the balance unfavorably from the point of view of
those engaged in microfinance.
The following discussion focuses on issues that must be considered when regulating and
supervising MFIs. The information is most useful for governments that are considering
regulating the microfinance sector. It is also helpful for both practitioners and donors to
understand what is involved if and when an MFI becomes regulated so that they know how the
MFI will be affected. Furthermore, if donors and practitioners are aware of the issues involved,
they can potentially influence government decisions regarding regulation of the sector and
propose self-regulatory measures.
Financial regulation refers to the body of principles, rules, standards, and compliance
procedures that apply to financial institutions. Financial supervision involves the examination
and monitoring of organizations for compliance with financial regulation. Prudential regulation
and supervision are designed to (Chavez and Gonzalez-Vega 1995): Avoid a banking crisis and
maintain the integrity of the payments system Protect depositors
Encourage financial sector competition and efficiency.
To create an environment that is conducive to financial intermediation, governments and
policymakers must ensure that financial regulation does not result in financial repression in
regulations that distort financial markets and reduce the efficiency of financial institutions.
Examples of financial repression are imposed interest rate ceilings, subsidized credit, and tax
structures that discourage investment in microfinance.
Governments must also ensure that supervisory bodies have the authority and the capacity to
implement the regulatory standards (Chavez and Gonzalez-Vega 1994).
Despite some success stories, MFIs probably reach less than 5 percent of the potential clients in
the world today.
Serving this market will require access to funding far beyond what donors and governments can
provide. Thus many MFIs want to expand their outreach by raising funds from commercial
sources, including deposits. Most MFIs are significantly different from commercial banks in
institutional structure. Furthermore, managing a microloan portfolio differs in important ways
from managing a conventional bank portfolio.
MFIs and microloan portfolios cannot be safely funded with commercial sources, especially
public deposits, unless appropriate regulation and supervision regimes are developed. Even MFIs
that do not mobilize deposits may benefit from entry rules that ensure the adoption of accepted
good practices, as well as adequate recordkeeping and reporting.
2.4.1 Microfinance Banks
Microfinance banks come in many different varieties and structures. In some cases, these banks
are nonprofit organizations that have the goal of helping the poor. In other cases, large banks
that do business in normal markets branch out to create a banking solution for the poor.
In some countries, government organizations are set up to help facilitate microfinance lending
solutions for the needy. Regardless of the type of entity, the basic idea behind the lending is the
same.
Purpose
Many microfinance banks take this mission of providing credit to the poor very seriously. In
fact, according to Grameen Bank, credit is promoted as a basic human right that everyone should
have access to.
By providing credit to these individuals, it can help them get out of poverty and create
something better for themselves. If these loans are used correctly, they could potentially help
these poor people to create thriving businesses that help provide all of their needs in the long
run.
2.4.2The First Micro-Finance Bank
Grameen Bank was the first micro-finance bank, and has now been in existence for over 30
years. It started as a project formed in 1976 by Professor Muhammad Yunus, an Economics
Professor at Chittagong University in Bangladesh.
He wanted to help village women in Bangladesh raise themselves from poverty, lending them
money to buy cell phones, then encouraging them to charge neighbors who wanted to use the
phones. His project started based on the notion that abilities of the poor are underestimated, and
he viewed them as people who learned thrift, persistence and creativity due to living on $1 to $2
per day. What they were lacking was access to funding to start and grow businesses.
Professor Yunus received the Nobel Peace Prize in 2006 for his humanitarian work in founding
and running Grameen Bank. The bank has been profitable since 1983, but does not mark up its
interest rates to what the market will bear, which businesses typically do to maximize profits.
Professor Yunus feels the only important thing to accomplish when helping the poor is to
recover costs.
2.4.3 Success or failure
Today the micro-finance field has become full with continued rapid growth. What started out as
nonprofit work has been infiltrated with commercial investors and for-profit entities. More than
1,200 micro-finance institutions have appeared in modern years, and the industry is still growing
at 25 percent per year with approximately 64 million individuals borrowing money.
Future forecast
Success and progress can be very slow, sometimes taking more than a generation. Micro-finance
raises standards of living slowly but surely, and The Grameen Foundation, a separate nonprofit
entity from Grameen Bank, has performed several studies that support this assertion.
The ultimate outcome of micro-financing, which may take a significant amount of time, is to
change the vicious low income, low savings and low investment cycle of the poor into one that
results in the ability to create business income with a loan, make enough profit to invest more in
the business, continue growing revenue and the business, and finally have the ability to start
saving.
2.5 The principles of microfinance
Principle one:
Poor households and communities need access to a variety of financial services, not just
loan.
Like other people, the poor need access to a wide range of financial services that
are convenient, flexible, and reasonably priced. Depending on their circumstances,
poor people generally need not only credit, but also access to savings, cash transfers, and
insurance.
Principle two:
Interest rate ceilings can damage poor people’s access to financial services
The per unit costs involved in making many small loans are significantly higher than those
associated with fewer, larger loans. Likewise, operating in high inflationary environments with
weak financial markets, and engaging in uncollateralized lending to people living in remote
areas, is considerably more expensive than collateralized lending to urban residents in a
developed and stable economy.
It is therefore not appropriate to compare interest rates and fees across countries, geographical
locations, and clients. Unless microfinance providers can charge interest rates that are above
average bank loan rates, they invariably cannot cover their costs, and their growth and
sustainability will be limited by the scarce and uncertain supply of subsidized funding.
When governments regulate interest rates, they usually set them at levels too low to permit
sustainable microfinance. At the same time, microfinance providers must avoid setting a
sustainable interest rate based on an inefficient operation as this results in operational
inefficiencies and related costs being passed on to poor clients and may reduce the pressure on
the provider to improve its performance.
In order to avoid this situation, clear pricing policies and mechanisms should be in place and
shared with stakeholders and funders to ensure that all parties can together monitor interest rates
to ensure their appropriateness.
Principle three:
Credit is not always appropriate
Credit is not appropriate for everyone or every situation. The destitute and hungry
who have no income or means of repayment typically need other forms of support
before they can make effective use of loans. In many cases, small grants, community
infrastructure improvements, health and education services, employment and training programs
and other non-financial services may be more appropriate tools for poverty alleviation.
Wherever possible, poor clients should be encouraged and supported to build a small savings
base and develop basic money management skills prior to taking on the risks associated with
credit.
Principle four:
Donor subsidies should complement, not compete with private sector capital
Donors should use appropriate grant, loan, and equity instruments on a temporary basis to build
the institutional capacity of financial providers, develop supporting infrastructure (like rating
agencies, credit bureaus, audit capacity, etc.), and support experimental services and products.
In some cases, longer-term donor subsidies may be required to reach sparsely populated and
otherwise difficult-to reach populations. To be effective, donor funding must seek to integrate
financial services for the poor into local financial markets; apply specialist expertise to the
design and implementation of projects, require that financial institutions and other partners meet
minimum performance standards as a condition for continued support; and plan for exit from the
outset.
Principle five:
The importance of financial and outreach transparency
Because microfinance has a social agenda and involves a wide range of stakeholders, it is
important that accurate and comparable information be available to monitor and assess the social
and financial performance of programs.
This information is required by bank supervisors, regulators, donors, investors and clients so that
they can adequately assess the risks and returns associated with various providers and services.
The microfinance industry is vulnerable to political interference because of its need to charge
higher than usual levels of interest to poor clients.
Transparent financial and outreach reporting can help to mitigate concerns related to unfair
pricing of products and thereby promote the sustainability of the microfinance industry as a
whole.
Principle six:
The role of governments is as an enabler, not as a direct provider of financial services.
Governments play an important role in setting a supportive policy environment that
Stimulate the development of financial services while protecting poor people’s savings.
Governments can best support microfinance by promoting macroeconomic stability, avoiding
interest-rate caps and refraining from distorting the market with unsustainable, subsidized loan
programs.
Governments can also support financial services for the poor by improving the business
environment for micro-entrepreneurs, clamping down on corruption, and improving access to
markets and infrastructure.
Government’s are not well placed to provide financial services directly to clients, and tend to
distort the market and reduce the quality and level of service provision when they do so. In
certain situations, government funding for sound, independent microfinance institutions may be
warranted when other funding sources are not available.
Principle seven:
Microfinance means building financial systems that serve the poor.
In many countries, microfinance continues to be seen as a marginal sector and primarily a
development concern for donors, governments, and socially responsible investors. In order to
achieve its full potential of reaching a large number of poor people, microfinance needs to
become an integral part of the financial sector. This requires the involvement of conventional
financial service providers, regulators and related industry bodies.
2.7.0 Islamic in microfinance
2.7.1 Mudarabah
Mudarabah has the potential to be adapted as Islamic microfinance scheme. Mudarabah is where
the capital provider or microfinance institution (rabbul mal) and the small entrepreneur
(mudarib) become a partner. The profits from the project are shared between capital provider and
entrepreneur, but the financial loss will be borne entirely by the capital provider.
This is due to the premise that a mudarib invests the mudarabah capital on a trust basis; hence it
is not liable for losses except in cases of misconduct. Negligence and breach of the terms of
mudarabah contract, the mudarib becomes liable for the amount of capital.
Mudarabah structure could be based on a simple or bilateral arrangement where Islamic bank
provides capital and the micro-entrepreneur acts as an entrepreneur.
Mudarabah structure may also be based on two-tier structure or re-mudarabah where 3
parties i.e. capital provider (public, government, zakat, waqf etc.), intermediate mudarib (Islamic
Bank) and final mudarib (micro entrepreneur).
The profit-sharing ratio on mudarabah is pre-determined only as a percentage of the business
profit and not a lump sum payment. The profit allocation ratio must be clearly stated and must be
on the basis of an agreed percentage. Profit can only be claimed when the mudarabah operations
make a profit. Any losses must be compensated by profits of future operations.
After full settlement has been made, the business entity will be owned by the entrepreneur. The
entrepreneur will exercise full control over the business without interference from the Islamic
bank but of course with monitoring. On the practical side, there is a problem to determine the
actual total profit to be shared because micro entrepreneurs normally do not have proper
accounts or financial statement [Dhumale and Sapcanin 1999].
Meanwhile, muzara’ah is a form of mudarabah contract in farming where Islamic bank can
provide land or monetary capital for farming product in return for a share of the harvest
according to the agreed profit sharing ratio. In the context of microfinance, the capital provider
may need huge capital and expertise to manage such initiative and may need to manage higher
risk because the Islamic bank need to involve directly in the farming sector through provision of
asset such as land.
In the case of mudarabah, the Islamic bank may face capital impairment risk as loss making
operations of micro entrepreneurs expose the Islamic bank to the risk of capital erosion.
In addition, since in mudarabah the Islamic bank should not request collateral may expose
Islamic bank to credit risk on these transactions. As part of risk mitigation, even though the
entrepreneur exercises full control, Islamic bank can still undertake supervision [Iqbal and
Mirakhor 1987].
2.7.2 Musharakah
Musharakah can also be developed as a micro finance scheme where Islamic bank will enter
into a partnership with micro entrepreneurs. If there is profit, it will be shared based on pre-
agreed ratio, and if there is loss, it will then be shared according to capital contribution ratio.
The most suitable technique of musharakah for microfinance could be the concept diminishing
partnership or musharakah mutanaqisah.
Musaharakah Mutanaqisah
A: (Islamic Bank 80%) B: (Micro Entrepreneur 20%)
Another form of musharakah is musaqat. Musaqat is a profit and loss sharing partnership
contract for orchards. In this case, the harvest will be shared among all the equity partners
(including entrepreneur as a partner) according to the capital contributions. All the musharakah
principles will be applicable for this form of musharakah.
This scheme, however, could be of high risk, since it needs the capital and expertise to directly
involve in the business especially in managing the orchards. Musharakah capital may also be
subjected to capital impairment risk, where the capital may not be recovered, as it ranks lower
than debt instruments upon liquidation [Haron and Hock 2007].
The normal risk mitigation techniques that can be adopted by Islamic banks are also applicable
in the case of microfinance i.e. through a third-party guarantee. This guarantee can be obtained
and structured for the loss of capital of some or all partners through the active role of the so
called Credit Guarantee Corporation (CGC) as practiced in the case of SME financing in
Malaysia.
2.7.3 Murabahah
Using murabahah as a mode of microfinance requires Islamic bank to acquire and purchase
asset or business equipment then sells the asset to entrepreneur at mark-up. Repayments of the
selling price will be paid on installment basis. The Islamic bank will become the owner of the
asset until the full settlement. This scheme is the most appropriate scheme for purchasing
business equipment. This mode of financing has already been introduced in Yemen in 1997.
In 1999, there are more than 1000 active borrowers [Dhumale and Sapcanin 1999]. Borrowers
must form a group of 5 micro entrepreneurs where all members will act as guarantor if there is
default among their group members. The benefit of this mode of financing is continuous
monitoring, and entrepreneurs with a good reputation of repayment will be offered extra loan
found to be more practical and most suitable scheme for Islamic microfinance to be provided by
Islamic banks. This is due to the fact that the buy-resell model which allows repayments in equal
installment is easier to administer and monitor.
The above diagram indicates the application of the extended concept of murabahah i.e.
Murabahah to the Purchase Orderer. This is where a micro-entrepreneur enters into a sale and
purchase agreement, or memorandum of understanding to purchase a specific kind of goods or
equipments needed by the micro-entrepreneur with the Islamic bank.
The Islamic bank then sells the goods to the entrepreneur at cost plus mark-up, and entrepreneur
can pay back later in lumpsum or by installments (bai muajal). A number of shari’ah principles
must be met for the contract to be valid [Haron and Hock 2007].
Such as the goods must in existence at the time of sale; ownership of the goods must be with the
bank; the goods must have the commercial value; the goods are not be used for a “haram”
purpose; the goods must be specifically identified and known; the delivery of goods is certain
and not conditional upon certain other events; and, the selling price is fixed at cost plus mark up
Murabahah could be easily implemented for microfinance purposes and can be further
exemplified by the used of deferred payment sale (bai’ al-muajal). Murabahah, however, may
expose Islamic bank as in the case conventional lending to credit risk.
This, however, can be mitigated by requesting for an urboun, a third party financial guarantee, or
pledge of assets. In addition, Islamic bank can also institutes direct debit from the entrepreneur’s
account, centralizes blacklisting system, and minimum non-compounded penalty to deter
delinquent entrepreneurs. Murabahah to the Purchase Orderer also exposes Islamic banks to
delivery risk where goods are not delivered, goods not delivered on time, or goods delivered not
according to specification by the entrepreneur after payment is made by the Islamic bank. To
mitigate delivery risks, Islamic bank may request a performance guarantee from the seller to give
assurance on the delivery of goods.
2.7.4 Ijarah
Ijarah by definition is a long term contract of rental subject to specified conditions as
prescribed by the shari’ah. Unlike conventional finance lease, the lessor (Islamic bank) not only
owned the asset but takes the responsibility of monitoring the used of asset and discharges its
responsibility to maintain and repair the asset in case of mechanical default that are not due to
wear and tear.
Ijarah Muntahia Bitamleek is an elaborate concept of ijarah where the transfer of ownership
will take place at the end of the contract and pre-agreed between the lessor and the lessee. The
title of the asset will be transferred to the lessee either by way of gift, token price, pre-
determined price at the beginning of the contract or through gradual transfer of ownership.
Ijarah Muntahia Bitamleek is more suitable for micro finance scheme especially for micro
entrepreneurs who are in need of assets or equipments. Islamic bank will purchase the assets
required by the entrepreneurs and rent the assets to qualified entrepreneurs.
In this case, the entrepreneurs can just rent the asset over a period of time and pay the rentals at
regular intervals. The entrepreneur as a lessee will be responsible to safeguard the asset whereas
the lessor will monitor their usage.
For ijarah, the Islamic bank may be exposed to settlement risk where the entrepreneur as a lessee
is unable to service the rental as and when it falls due.
Similarly, the Islamic bank can request an urboun from the entrepreneur which can also be taken
as an advance payment of the lease rental. Alternatively, the Islamic bank as the owner of the
asset should has the right to repossess the asset.
2.7.5 Qardhul Hasan
Another simple concept that can be advanced for microfinance purposes is qardhul hasan or
simply means an interest free loan. Islamic bank can provide this scheme to the entrepreneurs
who are in need of small start-up capital and have no business experience. The Islamic bank then
will only be allowed to charge a service fee.
The term of repayment will be on installment basis for an agreed period. The scheme is also
relevant for micro entrepreneurs who are in need of immediate cash and has good potential to
make full settlement. Here, the Islamic bank will bear the credit risk and they need to choose the
right technique to ensure repayments will be received as agreed
Chapter three
3.0 Research Methodology
3.1 Methods of data collection
This research used both qualitative and quantitative data.
When I was preparing this research paper, the research methodologies used are included:
ÿ Primary data: questionnaire and interview distribution
ÿ Secondary data: text book documents, Internet
Primary data:
The primary data of this research paper were obtained from the questionnaires and interview
distributed to the role of microfinance in employment creation.
1. Interviews: - The study use questionnaires to collect information from the people who
have a good experience in financial institutions of the organizations treat to it.
2. Questionnaires: - The research adopted this tool for the planning and gathering
information by using simple random sampling design. The questionnaire is intended to
know the precise and reliable ideas about the balancing authority and responsibility in
improving organization performance in order to ensure the organization goals in
managerial means.
Secondary data:
The researcher traced before studies relevant to this subject matter to help present evaluation,
concepts and techniques. These data were from different sources includes textbooks and internet.
3.2. Limitations of the study
The following were the limitations of the study
ÿ Difficulty of data gathering: - another remarkable limitation existed when distribution
and collection was taken more extra time. The most obstacle that I met during
contributing the questionnaire and collecting data, were the decision makers of
organizations of and their senior subordinate staff could not been seen first.
ÿ This made it difficult to collect easily because every answerable person was busy and did
not try to respond as soon as you want. Due to lack of willingness to respond, some
invitees have lost the questionnaire papers.
ÿ There are some of limitations in the microfinance. Firstly, there are little institutions in
Somaliland to talk about microfinance.
ÿ The data collections from respondents were challenged during the primary resource
ÿ Secondly it was a problem of tool when I was preparing and writing thesis book I had not
enough computer.
ÿ Thirdly, I met director for ministry of finance I have not found any report about
microfinance.
Chapter Four
4. Data Analysis
4.1 Introduction
This chapter explains analysis of the collected information and it concerned the questionnaires
and interviews that the researcher collect from the respondents during the data collection and it
shows in tables and graphs which is pie chart, par chart, histogram and simple tables, the tables
will contain numbers as well as percentage of the alternative, and interpretation will be
evaluating the finding and comparing the results.
The questionnaires of this chapter are 15 questions and it mainly focuses on the role of
microfinance in employment creation there are 3 questions which have not directly related the
topic and the researcher didn’t illustrate as a table or graph because it does not give a more sense
about the topic and the analysis are as follows
1. Marital Status
90% of the respondents were single and 10% were married, this may not direct effect about the
response.
2. Age of the respondent
The respondents answered in a same age which is between 15-30
3. Level of Education
95% of the respondents were university level where as 5% of the respondents were secondary
level
Question 4.1: gender of the respondent
Table 1.1
Gender of the Respondent
Frequency Percent Valid
Percent
Cumulative
Percent
Male 15 75.0 75.0 75.0
Female 5 25.0 25.0 100.0
Total 20 100.0 100.0
Table4.1 and Chart4.1 shows that 25% of the respondents were female where as 75%of the
respondents were male; this shows that my questionnaires mostly were distributed male due to
the randomly selected method
Question4.2. Job of the respondent
Table 4.2
Job of the respondent
Frequenc
y
Percent Valid
Percent
Cumulative
Percent
Student 12 60.0 60.0 60.0
NGO 3 15.0 15.0 75.0
Microfinance instit. 2 10.0 10.0 85.0
Other job 3 15.0 15.0 100.0
Total 20 100.0 100.0
Table and Chart4.2 explains that 60% of the respondents were students which shows that mostly
and the majority of the respondents of this questionnaire were not getting working and hiring
employment while 15% were employees of NGO, 10% were working microfinance institutions
and 15% were doing other jobs
Question 4.3 Micro finance institutions have successful services
Table 4.3
Micro finance Institutions have successful services
Frequency Percent Valid
Percent
Cumulative
Percent
Agree 12 60.0 60.0 60.0
Disagree 8 40.0 40.0 100.0
Total 20 100.0 100.0
Table 4.3 and Chart4.3 shows the services and performance of micro finance institutions which
60% agreed that micro finance institutions has successful service while 40% Disagreed that
microfinance institutions performed in a successful services.
Question 4.4Microfinance has importance to the community
Table 4.4
Microfinance services has importance to the community
Frequency Percent Valid
Percent
Cumulative
Percent
Yes 16 80.0 80.0 80.0
No 4 20.0 20.0 100.0
Total 20 100.0 100.0
The above table and chart 4.4 illustrates that 80% of the respondents were answering Yes that
the microfinance institution services has importance to the community while 20% of the
respondents were answering No that micro finance has importance to the community this means
that majority were understanding the advantage of it, it also gives that microfinance services has
vital role to the community.
Question 4.5 Have you ever used in microfinance activities?
Table 4.5
Have you ever used in microfinance activities?
0
20
40
60
80
Yes No
80
20
Micro finance institutions has importance to the community
Percent
Frequency Percent Valid
Percent
Cumulative
Percent
Yes 9 45.0 45.0 45.0
No 11 55.0 55.0 100.0
Total 20 100.0 100.0
This above chart and table 4.5 explains that 45% of the respondents answering Yes that they
used the microfinance activities like borrowing money from microfinance institutions where as
55% of the respondents were answering No we never ever used the financial services. This
means that mostly of the people were not used this kind of microfinance activities.
Question 4.6 what did you have in your mind if you take a micro credit?
Table 4.6
What did you have in your mind, if you take a micro credit?
Frequency Percent Valid
Percent
Cumulative
Percent
Creating business 10 50.0 50.0 50.0
Continuing an existing
business7 35.0 35.0 85.0
Lending other people 1 5.0 5.0 90.0
Using buying goods for
luxury2 10.0 10.0 100.0
Total 20 100.0 100.0
As the table and chart above shows the respondents have their mind if they take a micro credit
that 50% will create business, while 35% continuing an existing business, where as 5% will
lending other people and the remaining 10% were answering they use buying goods for luxury.
Question 4.7 what does microfinance institutions contributed the people of Somaliland?
Table 4.7
The microfinance institutions contributed the people of Somaliland
Frequency Percent Valid
Percent
Cumulative
Percent
Employment
creation4 20.0 20.0 20.0
Source of income 8 40.0 40.0 60.0
Self dependence 2 10.0 10.0 70.0
All 6 30.0 30.0 100.0
Total 20 100.0 100.0
As the above table and chart indicates that 20% of the respondents says employment creation is
contributed the micro finance institutions while 40% responded we get as a source of income in
the microfinance institutions and only 10% were responded self dependence while the remaining
30% answered All, that the microfinance institutions were contributed the people in employment
creation, source of income and self dependence. This shows that the majority of the people
benefits as a source of income by the microfinance institutions.
Question4. 8 The relationship between micro finance and Islamic religion is;
Table 4.8
The relationship between microfinance and Islamic religion is
Frequency Percent Valid Percent Cumulative Percent
Strong relationship 18 90.0 90.0 90.0
Weak relationship 2 10.0 10.0 100.0
Total 20 100.0 100.0
Table 4.8 and chart 4.8 indicates that 18 respondents equivalent to 90% were answered there is
strong relationship between microfinance and Islamic religion and 2 respondents equivalent 10%
Respond weak relationship between microfinance and Islamic religion.
Question 4.9 did you have a job before borrowing money by the microfinance institutions?
Table 4.9
Did you have a job before borrowing money by microfinance institution?
Frequency Percent Valid Percent Cumulative
Percent
4 20.0 20.0 20.0
Yes 7 35.0 35.0 55.0
No 9 45.0 45.0 100.0
Total 20 100.0 100.0
Table 4.9 and chart above shows that 7 respondents equivalent 35% were answered Yes we have
a job before borrowing money by the microfinance, where as 9 respondents equivalent 45%
answered No we don’t have job, and 4 respondents equivalent 20% were not answered this
question as a whole as indicates the graph and table above..
Question 4.10 role of women in microfinance activities in Somaliland is;
Table 4.10
Role of women in microfinance activities in Somaliland is:
Frequency Percent Valid Percent Cumulative
Percent
High 8 40.0 40.0 40.0
Middle 7 35.0 35.0 75.0
Low 5 25.0 25.0 100.0
Total 20 100.0 100.0
As table and chart 4.10 indicated that 40% of the respondents says the role of in microfinance
activities in Somaliland is high, where as 35% of the respondents answered Middle and 25% of
the respondents answered Low the role of women is low, this explains that the majority of the
respondents agreed high and middle which means the role of women in microfinance activities
is more and effective.
Question 4.11 Women has more beneficial than men in microcredit activity
Table 4.11
Frequency Percent Valid Percent Cumulative Percent
Strongly agree 6 30.0 30.0 30.0
Agree 10 50.0 50.0 80.0
Disagree 3 15.0 15.0 95.0
Strongly
disagree1 5.0 5.0 100.0
Total 20 100.0 100.0
As the table and chart above demonstrates the comparison of men and women in the benefit of
microcredit activities, this shows that30 % of the respondents strongly agree that women has
beneficial than men in microcredit activity, where as 50% of the respondents agree that women
has more beneficial than men, where as 15% and 5% of the respondents disagree and disagree
respectively that women has more helpful and beneficial than men.
Question 4.12 Poor families and community are needed to
access financial services.
Table 4.12
Frequency Percent Valid Percent Cumulative
Percent
Yes 17 85.0 85.0 85.0
No 3 15.0 15.0 100.0
Total 20 100.0 100.0
The table 4.12 and chart 4.12 shows that 85% of the respondents says Yes poor families and
poor communities are needed to access financial services, where as 15% answered No poor
families are not needed the financial services, this indicates that majority of the respondents
answered the poor community are needed to access and take part the financial micro credit
services.
Chapter five
5.1 Conclusion
Microfinance is the provision of financial services such as loans, savings, insurance, and
training to people living in poverty. More broadly, microfinance refers to a movement that
predict a world in which low-income households have permanent access to a range of high
quality and affordable financial services offered by a range of retail providers to finance
income-producing activities, build assets, stabilize consumption, and protect against risks. These
services include savings, credit, insurance, remittances, and payments, and others.
Using microfinance programs to give women access to financial services is a means of
mobilizing their productive capacities for the benefit of economic development. Through access
to financial resources, microfinance not only gives women access to self-employment, but also
contributes to the amelioration of family life and influences the social situation of women by
promoting self-confidence and the capacity to play an active role in society.
Somaliland microfinance: Somaliland became independent in 1991. Since then, it has managed
to restore many aspects of normal society and develop different aspects of socio-economic
activities. However it has lost many issues like welfare of community, creating employment
opportunity, decreasing financial problems, eradicating poverty etc all these results the
establishment of microfinance institutions.
Somaliland has a traditional system which is ROSCAs (rotating savings and credit associations)
called in Somali language (Hagbad) has existed for centuries in Somaliland, mainly among
women. In English-speaking countries they are known as merry-go-rounds; in French speaking
countries they are tontines.
A group of women join together to save small amounts each month- these sums are pooled and
the money handed over to one group member. She then has a sum slightly larger than normal and
can make one purchase that for her is large.
The next month another group member gets the funds and so on round the group. When
everyone has received a payment the group may start the process again, or change its members,
or disband. People who have been in such a group have already learnt the basics of money
transactions and obligations.
Microfinance banks come in many different varieties and structures. In some cases, these banks
are nonprofit organizations that have the goal of helping the poor.
Grameen Bank was the first micro-finance bank, and has now been in existence for over 30
years. It started as a project formed in 1976 by Professor Muhammad Yunus, an Economics
Professor at Chittagong University in Bangladesh.
He wanted to help village women in Bangladesh raise themselves from poverty, lending them
money to buy cell phones, then encouraging them to charge neighbors who wanted to use the
phones. His project started based on the notion that abilities of the poor are underestimated, and
he viewed them as people who learned thrift, persistence and creativity due to living on $1 to $2
per day. What they were lacking was access to funding to start and grow businesses.
Professor Yunus received the Nobel Peace Prize in 2006 for his humanitarian work in founding
and running Grameen Bank. The bank has been profitable since 1983, but does not mark up its
interest rates to what the market will bear, which businesses typically do to maximize profits.
Professor Yunus feels the only important thing to accomplish when helping the poor is to
recover costs.
Purpose: Many microfinance banks take this mission of providing credit to the poor very
seriously. In fact, according to Grameen Bank, credit is promoted as a basic human right that
everyone should have access to.
By providing credit to these individuals, it can help them get out of poverty and create
something better for themselves. If these loans are used correctly, they could potentially help
these poor people to create thriving businesses that help provide all of their needs in the long
run.
5.2 Recommendation
I would like to recommend the following points which I hope will be more essential to how does
microfinance upgrade the role of microfinance in employment creation.
Therefore they can be:
ÿ The government of Somaliland should be establish to microfinance institution
ÿ The poor people must have know the advantage of microfinance
ÿ The government must make programs about microfinance in order people realize the
important of microfinance to small business.
ÿ The government must make roles and regulations in microfinance
ÿ The relationship between banks and microfinance activities should be strong relation
ÿ The government must planning how to create job opportunity
ÿ Microfinance institution in Somaliland is little so we need more microfinance to establish
all regions in Somaliland
ÿ Microfinance should be encourage the women because women all most poor people so
government must look after women
ÿ There is no risk in microfinance activity