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Microfinance started in 1970s as a method of granting loans to those who could not get loans differently. Microfinance is used in a narrow meaning – it is granting micro loans to a large range of informal entrepreneurs or people with low income by using methodology developed by socially oriented non-governmental organizations in 1980s.
Formal financial services meant for the poor are not a new lending method. Starting from 1950s many development programs granted subsidized loans to support economically weak regions. At that time governments and donors focused on providing agricultural loans to small farmers to increase their productivity and income.
Applied “subsidized” scheme was not successful because received funds did not always reach the poor and concentrated in the hands of well-to-do farmers. Repayment rate was low, and rural banks were on the verge of bankruptcy. Imperfect program of subsidized loans experienced changes and was redirected to socially develop micro enterprises in developing countries.
This program was applied as an alternative for granting loans to the poor. From 1970s experimental programs were successfully applied in Bangladesh, Brazil and other developing countries. These programs were to provide small loans to poor women for them to invest funds into micro enterprises. This micro lending type was based on group responsibility, where members guaranteed other group members would repay loan in time.
In 1980-90s micro lending programs were improved: special methodology was developed and ultimately firmly rooted doubt regarding “granting loans to the poor” was broken. First of all it was proved that poor people, especially poor women repay their loans. Secondly, the poor want and are able to repay interests which enable microfinancial institutions to cover their expenses. Thirdly, the abovementioned reasons: high repayment rate and interests which cover expenses – allow microfinance institutions to become self-sufficient and cover more clients.
Basic micro lending principles include the following aspects: downscaling and reaching financial sustainability of micro financial institutions. It makes micro lending methodology unique among developed financial institutions. Since the main advantage of micro financial services is the fact that they are provided for a short period of time and meant for long-term relations.
According to the World Bank evaluation, at present there are over 7 000 organizations in microfinance industry which serve about 16 mln. people in 56 countries all over the world. Current situation in world microfinance industry is changing – this sector started using various methods, range of financial services is extended due to savings, insurance and money transfer services. Loans can be disbursed both on individual and group basis, loan amounts and maturity terms are getting more flexible and tailored to clients’ needs. Responding to the existing problems microfinancial institutions develop new products. In general, microfinance industry ceases to be a system of providing loans through donor funds. It is becoming a real financial intermediary tool. Innovations penetrated not only into lending programs. Innovations in insurance sphere, such as mobile staff which collects deposits form traders on a daily basis, installation of ATMs in rural areas which can distinguish fingerprints, give an access to illiterate clients to their accounts. Strategies to provide effective micro enterprises activity are enhanced, and microfinance is more than ever shows its ability to get a lot of people out of poverty.
In the Republic of Kazakhstan microfinance appeared in 1990s as Microlending Programs. These programs are presented through funds, micro lending institutions, credit unions. As a rule, these organizations are non-commercial.
The main criteria for micro lending programs in the Republic of Kazakhstan are:
• loan size – comparatively small (up to several hundred dollars)
• target users – households with low income and small businesses
• loan term. In general, short-term (about 1 year)
• loan use – to get income and develop business, as well as for education, medical services, etc.
• loan conditions – flexible conditions for providing loans tailored to local conditions of this or that community.
Current micro lending schemes can be divided into 2 main types:
Individual lending – micro lending scheme complying with a standard banking lending procedure and based on the client’s business viability evaluation, his/her lending history and recommendations available. When this scheme is applied, usually there is need to provide collateral property or present a responsible person for the loan in case of default.
Peer lending – this scheme is also called “Grameen bank model”. The basis for it is a group guarantee. Loan is disbursed to a group of people who are loan guarantors for each other. Groups choose group members themselves, and such relations create partnership pressure in the group, which helps to repay loans in time and reduce MFI’s costs to carefully select and monitor all its Clients.
In the Republic of Kazakhstan there is Association of Microfinance Organizations for Kazakhstan, the main objectives of which are: coordinating issues of AMFOK members’ interaction in microfinance sphere of Kazakhstan for sustainable access to the population, including rural population, to financial services aiming at poverty alleviation and economic growth support; provision, promotion and protection of
AMFOK
members’ general rights and interests.
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