Linkages of Microfinance and Microenterprises

September 2021

Abid Hussain, PhD

Food Security Economist &

Group Lead, Socio-economics

ICIMOD, Nepal

• Low productivity and income in mountains

• High risks (climatic, natural and financial) associated with

microenterprises in mountains

• Incentivize youth, women and vulnerable groups for productive

contribution to local economy

• For efficient use of mountain resources (i.e. land, water, forest,

minerals etc.)

• For integrated growth (within and cross sectors, i.e. value chains,

water management of agriculture, clean energy across sectors etc.)

• To tap emerging opportunities and potentials (i.e. agri. value chains,

tourism etc.)

Why financial services for microenterprises in

mountain economy?

• Financial literacy on the productive use of loans, remittances,

insurance and savings)

• Overall banking/institutional financial services

• Credit/loans (In the HKH, around 40% farm HHs borrow from

informal sources with high interest rate to cope with risks and

shocks)

• Insurance facility to cover risks induced by climatic and

natural hazards

• Facility of saving accounts (individual or collective)

• Remittance transfers (inward and outward). In HKH, 38% HHs

has out-migrants who send remittances.

• Business accounts in banks/institutions

Types of financial services required for

microenterprises

• Microcredit - Small credit line facility to targeted people having

business/enterprise or development purpose

- Associated interest rate (occasionally free of interest)

- No need for physical assets as collateral

- Disbursed against personal or group guarantee

- Socially inclusive (i.e. men, women, differently able people,

small/marginal farmers, all vulnerable groups etc.)

- Meeting short term capital needs and repayment plan

Microfinance: concept and key features

• Microfinance (credit++)- Includes range of financial services, i.e. credit, deposit, saving

and insurance

- Entrepreneurship/startups remain at the core the facility

- No need for physical assets as collateral

- Disbursed against personal or group guarantee

- Socially inclusive (i.e. men, women, differently able people,

small/marginal farmers, all vulnerable groups etc.)

- Long term objective for covering risks, improving productivity,

supporting repayment capacity and welfare.

- May include social mobilization for saving and adequate use of

financial services.

Examples: services provided by Grameen Bank (Bangladesh,

Akhuwat (Pakistan)

Contd.

• Formal

- Formal institutions like banks, cooperatives, saving centres,

NGOs and other lending agencies offer financial services

• Informal

- Financial services from relatives, friends, money lenders,

middlemen etc. In many instances, high interest rate is

involved.

- Collective fund (i.e. indigenous contribution system in

South Asia, ROSCAs in Latin America, Asia and Africa)

• ‘In-cash’ plus noncredit services

- Credit is in cash with non-credit services

• ‘In-kind’ plus non-credit services - Credit is in kind with non-credit facilities (Ehsaas programme

in Pakistan)

Types of microfinance

• Individual - Credit and other services are offered based on individual

guarantee

• Group based - Financial services are offered based on group guarantee

• Government - If public sector institutions provide financial services

• Non-government - If private and non-profit organizations provide financial

services

Contd.

• High fungibility if non-credit services and monitoring systems are

inadequate

• Likelihood on increased indebtedness if fungibility occurs or risks

are not covered by insurance.

• High interest and less control over decisions if availed from

informal sources

• Constraints to digitalization in mountains (i.e. most people in

mountains do have access to electricity, mobile communication

services, internet, and smart phones)

• Lack of awareness about clean/green microenterprises and its

weak linkage with microfinance

• High transaction cost of micro amounts

• Supply and demand gap

Challenges associated with microfinance

• No requirements for collateral (suits micro-entrepreneurs with

limited assets)

• Largely, low cost businesses in mountains which require

microfinance

• Freedom for entrepreneurs to plan and execute business models

(i.e. linked to niche products and seasonality)

• Socially inclusive (all vulnerable groups can benefit from) which

suits to vulnerable mountain people

• Coverage of climate and non-climatic risks (mountains are more

prone to risks)

• Mountain services (i.e. tourism) and ecosystems may also benefit

(non need for tangible production).

What can make microfinance more

attractive in mountain microenterprises?

Thank you