Microfinance and its Impact on Development Case Study Solution
Introduction of Microfinance
Microfinance can be referred as a supply of financial benefit by an institution to the individuals or groups, who do not have any other resources to arrange funds to start a new business or to enhance the existing.An individual that may fail in meeting the tough criteria of the traditional process of finance approval. Microfinance is typically provided in small amounts for aloan, savings, and insurance. Microfinance institution can be profit base or not for profit company also and are normally state bank and private banks in developing countries(Ledgerwood, 1999).
MFIfollows two different kinds of atool for financial services i.e. Relation based where one individual is engaged in micro financing has small business or group based model in which several entrepreneurs collectively apply for finance.
Microfinance institution helps in maintaining saving account and in getting life insurance, health insurance, and property insurance, etc. Ultimately microfinance is an opportunity for low-level income people to become self-reliant. Normally individual or group who have businesses like fishing, transportation, and skilled base business go for microfinance loans in developing countries. Grameen Bank was the first organization that gets attention for its success in micro financing.
Sources of fund for Microfinance institution
Most often micro financing institution don’t have all funds of their own in that case they are dependent on another source,they are broadly categorized as a donor who put forward himself or in a group form considering their social responsibility towards society, a financial institution who provides aid to Microfinance Sector and demands return. They can also be referred as debt holder where the institution is bound to fulfill covenant and private equity also regarded as profit takers.
Islamic Micro Financing
Islamic micro financing although having the same motive but worksbyShariah law. Which prohibited to deal in Riba, speculation, gambling and fixed return and forces to work through equity base and risk sharing.
Funding sources of Islamic micro financing are unlikely with Conventional micro financing, IMFi uses sukook in replacement of debt base financing as it prohibits interest and adheres Shariah element.
Product offered in Islamic micro financing
Islamic micro financing division normally offers four products considering prohibition mentioned above .i.e Murabaha buy an asset under credit for which he will pay above then cost to IMFi at maturity when his forecasted earning accomplishes, modaraba is kind of partnership where a party pays another party to another for investing in the venture. Musharakia is also a joint venture where more than one parties enter into a venturebut here all the participants in the management of the business can invest unlike modaraba. Where one rabb-ul-meal (investor) has the sole responsibility for investment andIjarah is Islamic financing is the replacement of finance lease, but here Ijarah works as an operational lease in which he has the right to use the property for a particular period although the asset here is gifted to lessee at maturity.
Failure to fulfill agreement can cause a penalty to discourage the individual from brokerage of contract this charity then goes to any registered charitable organization under particular IMFi hence not enjoyed by themselves. The amount of penalty does not also change on the timely basis to differentiate it from Riba(Mughal, 2018).
Forbes top twentyMicrofinance institutions
World Top twenty Micro financing institution according to microfinance information exchange
Risk associated withmicro financing institutions(Exchange)
Due to higher risk in the supply of microfinance to the individual or group having no collateral and weak profile. Microfinance institution charge higher interest rates as compared to a traditional loan. To hedge their risks institutions dealing in microfinance need to have experience, expertise and local understanding to the highest standard.
Risk by which these institutions are exposed to includes;
Microfinance and its Impact on Development Harvard Case Solution & Analysis
Bankruptcy risk
Bankruptcy can be caused by internal issues like following poor approach in making risk management policies which will result in using the institution resources inadequately and or if policies are right but not adhering to policies leading again towards the failure. This could only be possible if the Mfr have robust control environment, although having good internal control system of the institution can mitigate the risk of Insolvency cannot nullify it wholly. Sometimes Bankruptcy can also be caused due to external factors including natural catastrophe, political instability and unfavorable conditions of the overall market. External issues are the issues that are not in control but are highly stimulated to the Business.
Fraud risk
Fraud risk like other business presents inherently in all the business. Microfinance although facing constant risks due to having a huge sum of money and if the institution has going control system they will be proactive before the actual loss originates..................
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