Unit-1: Introduction to Micro-finance

1.1 Introduction to Micro-finance

Microfinance is the provision of loans and other financial services to the poor. The microfinance has
evolved due to the efforts of committed individuals and financial agencies to promote self-employment
and contribute to poverty alleviation and provision of social security. Microfinance provides financial
services to those whose income is small and unstable. These people are in need of credit facilities for
several reasons

• Their needs are small and arise suddenly

• The institutional providers of finance namely the banks demand collateral security which they
cannot provide

• Most of the time, they are in needs of funds to meet their consumption demands, for example,
to meet expenses related to education, illness, funerals, weddings for which it is difficult to
obtain institution finance

• For purpose of investment in income generating activities.

1.2 Concept

Microfinance is a concept that helps the poor creating economic opportunities. It is the efforts
for rural development, women empowerment and wealth generation by providing small scale savings,
credit, insurance and other financial services to poor and low income households. Microfinance thus
serves as a means to empower the poor and provides a valuable tool to help the economic development
process. The concept of micro financing and self-employment activities in rural areas has developed
considerably over the last two decades. It is working neither on charity nor on subsidy. It is basically
rotational investment done to motivate the poor to empower themselves and practice the dictum 'Save
for the future and use those resources during the time of need. Theoretically, microfinance also known
as microcredit or micro lending means making provision for smaller working capital loans to the self-
employed or self-employment seeking poor.

“Microcredit, or microfinance, is banking the un-bankable, bringing credit, savings and other essential
financial services within the reach of millions of people who are too poor to be served by regular banks,
in most cases because they are unable to offer sufficient collateral. In general, banks are for people with
money, not for people without.”
1.3 Principles of Micro-finance

1. The poor need a variety of financial services, not just loans . Just like everyone else, poor people
need a wide range of financial services that are convenient, flexible, and reasonably priced.
Depending on their circumstances, poor people need not only credit, but also savings, cash
transfers, and insurance.
2. Microfinance means building financial systems that serve the poor . Poor people constitute the
vast majority of the population in most developing countries. Yet, an overwhelming number of
the poor continue to lack access to basic financial services In order to achieve its full potential of
reaching a large number of the poor, microfinance should become an integral part of the
financial sector.
3. Microfinance is a powerful instrument against poverty . Access to sustainable financial services
enables the poor to increase incomes, build assets, and reduce their vulnerability to external
shocks. Microfinance allows poor households to move from everyday survival to planning for the
future, investing in better nutrition, improved living conditions, and children’s health and
education.
4. Financial sustainability is necessary to reach significant numbers of poor people. Sustainability
is the ability of a microfinance provider to cover all of its costs. It allows the continued operation
of the microfinance provider and the ongoing provision of financial services to the poor.
Achieving financial sustainability means reducing transaction costs, offering better products and
services that meet client needs, and finding new ways to reach the unbanked poor.
5. Microfinance is about building permanent local financial institutions . Building financial systems
for the poor means building sound domestic financial intermediaries that can provide financial
services to poor people on a permanent basis. Such institutions should be able to mobilize and
recycle domestic savings, extend credit, and provide a range of services.
6. Microcredit is not always the answer. Microcredit is not appropriate for everyone or every
situation. The destitute and hungry that have no income or means of repayment need other
forms of support before they can make use of loans. In many cases, small grants, infrastructure
improvements, employment and training programs, and other non-financial services may be
more appropriate tools for poverty alleviation.
7. Interest rate ceilings can damage poor people’s access to financial services . It costs much more
to make many small loans than a few large loans. Unless micro lenders can charge interest rates
that are well above average bank loan rates, they cannot cover their costs, and their growth and
sustainability will be limited by the scarce and uncertain supply of subsidized funding. ……..
8. The government’s role is as an enabler, not as a direct provider of financial services . National
governments play an important role in setting a supportive policy environment that stimulates
the development of financial services while protecting poor people’s savings. Government
funding for sound and independent microfinance institutions may be warranted when other
funds are lacking. When governments regulate interest rates, they usually set them at levels too
low to permit sustainable microcredit. At the same time, micro lenders should not pass on
operational inefficiencies to clients in the form of prices (interest rates and other fees) that are
far higher than they need to be.
 9. 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.
10. The lack of institutional and human capacity is the key constraint . Microfinance is a specialized
field that combines banking with social goals, and capacity needs to be built at all levels, from
financial institutions through the regulatory and supervisory bodies and information systems, to
government development entities and donor agencies. Most investments in the sector, both
public and private, should focus on this capacity building.
11. The importance of financial and outreach transparency . Accurate, standardized, and
comparable information on the financial and social performance of financial institutions
providing services to the poor is imperative. Bank supervisors and regulators, donors, investors,
and more importantly, the poor who are clients of microfinance need this information to
adequately assess risk and returns.

1.4 Characteristics of Micro-Finance

1. Vision

A mission statement that defines the target market and services offered and is endorsed by
management and staff. It is a strong commitment by management to pursuing microfinance as a
potentially profitable market niche (in terms of people and funds).It is also a business plan stating how
to reach specific strategic objectives in three to five years.

2. Financial services and delivery methods

Simple financial services adapted to the local context and in high demand by the clients described in the
mission statement. Decentralization of client selection and financial service delivery is a key criteria for
micro-finance.

3. Organizational structure and human resources

Accurate job descriptions, relevant training, and regular performance reviews. A business plan
spelling out training priorities and a budget allocating adequate funds for internally or externally must
provide training (or both). Appropriate performance-based incentives offered to staff and management.

4. Administration and finance

Loan processing and other activities based on standardized practices and operational manuals
and widely understood by staff. The accounting systems, producing accurate, timely, and transparent
information is taken as inputs to the management information system.
5. Management information system

Systems providing timely and accurate information are key indicators that are most relevant to
operations and are regularly used by staff and management in monitoring and guiding operations.

6. Institutional viability

Legal registration and compliance with supervisory requirements are needed. Clearly defined rights and
responsibilities of owners, board of directors, and management. Second level of technically trained
manager is required.

7. Outreach and financial sustainability

The important characteristics of micro-finance are achievement of significant scale, including a

large number of underserved clients (for example, the poor and women). The Coverage of operating and
financial costs is clearly progressed toward full sustainability (as demonstrated in audited financial
statements and financial projections).

1.5 Historical Background

The concept of microfinance is not new. Savings and credit groups that have operated for
centuries include the "susus" of Ghana, "chit funds" in India, "tandas" in Mexico, "arisan" in Indonesia,
"cheetu" in Sri Lanka, "tontines" in West Africa, and "pasanaku" in Bolivia, as well as numerous savings
clubs and burial societies found all over the world. Formal credit and savings institutions for the poor
have also been around for decades, providing customers who were traditionally neglected by
commercial banks a way to obtain financial services through cooperatives and development finance
institutions. One of the earlier and longer-lived micro credit organizations providing small loans to rural
poor with no collateral was the Irish Loan Fund system, initiated in the early 1700s by the author and
nationalist Jonathan Swift. Swift's idea began slowly but by the 1840s had become a widespread
institution of about 300 funds all over Ireland. Their principal purpose was making small loans with
interest for short periods. At their peak they were making loans to 20% of all Irish households annually.

In the 1800s, various types of larger and more formal savings and credit institutions began to
emerge in Europe, organized primarily among the rural and urban poor. These institutions were known
as People's Banks, Credit Unions, and Savings and Credit Co-operatives. The concept of the credit union
was developed by Friedrich Wilhelm Raiffeisen and his supporters. Their altruistic action was motivated
by concern to assist the rural population to break out of their dependence on moneylenders and to
improve their welfare.

Between the 1950s and 1970s, governments and donors focused on providing agricultural credit
to small and marginal farmers, in hopes of raising productivity and incomes. These efforts to expand
access to agricultural credit emphasized supply-led government interventions in the form of targeted
credit through state-owned development finance institutions, or farmers' cooperatives in some cases,
that received concessional loans and on-lent to customers at below-market interest rates. These
subsidized schemes were rarely successful. Rural development banks suffered massive erosion of their
capital base due to subsidized lending rates and poor repayment discipline and the funds did not always
reach the poor, often ending up concentrated in the hands of better-off farmers. These "microenterprise
lending" programs had an almost exclusive focus on credit for income generating activities (in some
cases accompanied by forced savings schemes) targeting very poor (often women) borrowers.

1.6 Role of Micro-finance for elevation of poverty

Microfinance helps mitigate poverty by providing low-income individuals and groups, who
typically do not qualify for traditional bank loans due to lack of collateral, with credit they can use to
start or expand businesses. Once their earnings grow, these individuals and groups can invest in
education and other income-boosting activities. Because of the vulnerability and variability of their
income, poor people have to regularly save and borrow to meet their daily needs, such as buying food;
the savings and credit services microfinance institutions provide are thus extremely useful in this regard,
notes the Consultative Group to Assist the Poor. These services increase financial stability by smoothing
out income fluctuations that the poor tend to experience. However, despite these and other benefits of
microfinance, there is no compelling evidence that the practice leads to sustained poverty reduction,
according to the Brookings Institution. Part of the problem is a paucity of high-yield investment
opportunities. Despite this, demand for microfinance remains high among low-income individuals and
groups, which is a sign that they find the services valuable, notes the Consultative Group to Assist the
Poor. Borrowers regularly apply for new loans after repayment, which is another indication that the
poor find microfinance useful.

1.7 Linkages between main stream financial services and micro-finance

Microfinance today is a far-ranging and dynamic sector that offers loans, provides savings and
remittance services, and sells insurance to more than 100 million of the poor. Microfinance companies
have increased in complexity and diversity in the income levels of the customers they serve, their use of
subsidies, regulation and governance structures, and the breadth and quality of services offered. Until
recently, these organizations devoted themselves to filling market niches, with seemingly little
interaction with the rest of the banking system. Nonetheless, in the last few years, the microfinance
industry has expanded and broadened its focus. Within the microfinance landscape and measured by
loan size and target customer, two groups of institutions are beginning to become apparent: the
microfinance commercial bank and the microfinance nongovernmental organization (NGO). The average
loan size provided by microfinance NGO is approximately less than a quarter the size of the average loan
provided by a microfinance commercial bank. Smaller loan sizes translate directly into higher relative
costs. Since poorer clients take smaller loans, reaching the very poor is associated with higher average
costs per loan which need to be covered with higher interest rates and/or subsidies. Therefore, while
microfinance commercial banks are able to attract investors seeking commercial returns, NGOs will
usually depend on subsidies.

In parallel with the expansion in complexity and diversity of microfinance institutions,

mainstream commercial banks have started targeting those at the upper rungs on low-income markets.
In particular, the best clients from microfinance commercial banks are now able to signal their
creditworthiness to mainstream commercial banks. Moreover, since these clients have now generated
financial information, the mainstream commercial bank will not need to rely on ’soft’ information in
their analysis of the customer. As a result, the prospect for interaction and direct competition has
increased sharply. Microfinance and mainstream commercial banks have recently started to take into
account the competitive interactions between these two groups and have begun to shape their products
and target segments accordingly. Hence, we are currently seeing how microfinance and mainstream
commercial banks are evolving in a direction charted by their joint strategic interaction by playing to
their competitive strengths ’vis-à-vis’ the opposing group.

However, it would be a mistake to believe that the relationship between microfinance and
mainstream commercial banks can only be of a competitive nature. The fact that each group possesses
different competitive advantages lays the ground for a cooperative relationship in which each can
contribute its own strengths. Microfinance commercial banks’ own customer platforms are
characterized by an excellent capillarity and the generation of useful financial information out of the
’soft information’ gathered from their low-income customers (the potential of these platforms were
profiled in a previous post here ). Mainstream commercial banks have more extensive internal resources
and capabilities that can be devoted to offering more comprehensive financial services and
simultaneously improving customer risk assessments.

Microfinance and mainstream commercial banks have a lot to learn from each other. Although it
has been barely analyzed, their competitive relationship is already shaping the microfinance landscape.
It is to be expected that, as the microfinance product portfolio becomes more sophisticated and
complex, the interaction between these two groups will become increasingly relevant in the direction
the industry takes in years to come.

Unit-2: Approaches to Micro-finance

2.1 Saving led approach to Micro-finance

First save and then lend (credit) approach. Savings-led microfinance is an approach to financial
services for people, who are excluded from the access of formal services, through credit or loan. Most
savings led approaches to microfinance are community-based, driven by the innovation and leadership
of poor people who are underserved by formal financial institutions. Savings activities make credit and
financial capital accumulations possible, since loans are made internally from members’ pooled savings
and interest charged on the loans increases the overall wealth of the group. However, savings-led
microfinance does not ignore credit, insurance or the other kinds of financial services that the members
need. Savings-led microfinance involves simply the voluntary association of individuals who agree to
save money together and make loans to one another from their savings. To be successful, these groups
must be well-organized and rule-bound. They do not require highly specialized knowledge like credit-
driven models linked to formal financial institutions.

How does saving-led approach work?

 People from the same community who know one another well organize themselves into small
groups (ideally between 10-30 members) for the purposes of saving and lending money.
 Members of the group establish ground rules: who can belong to the group, when it meets and
where, how much members will save, how much members can borrow and for what purposes,
how and when members will repay their loans and at what interest rate etc.
 Group members elect their own manager.
 Members save small amounts of money regularly
 Once the group has saved enough money, it begins to make loans to members.
 The loans are repaid with interest, expanding the group’s financial assets.
 Existing groups expand participation in the model by helping other groups

2.2 Credit led approach to Micro-finance

MFIs lead with credit products, that part of the MF sector is often termed “credit-led.” The key
element of credit-led microfinance is that self-help group formation is generally a originator to the
injection of working capital by the NGO or donor. Group cohesion is often not a requirement prior to the
injection of external capital. Savings may or may not be a feature of these groups. Use of capital by
groups is generally in the form of individual loans taken out by group members. Group members do not
generally control interest rates or repayment terms. Credit-led microfinance is the Grameen Bank model
of microfinance that has experienced global popularity. The credit-led approach typically involves an MFI
using donor funding to capitalize and then offering small loans, sometimes based on group- or joint-
liability lending. The vast majority of activity on the ground and donor funding is in support of the
credit-led approach (If the poor had savings, then they would already be leveraging them and would not
need microcredit.)

2.3 Donor funded micro-credit programs in Nepal

There are six major donor funded micro-credit programs that are running in the country of which some
are now in in-active stage.

 To improve the socio-economic status of rural women by accessing them to institutional

loan for their productivity the project Production Credit for Rural Women (PCRW) was
launched in 30 November 1988. ™
 To increase the economic status of the rural & urban women by providing micro-credit for
their micro businesses the project Micro-Credit Project for Women (MCPW) was launched in
15 December 1993. ™
 To increase the income & employment of the rural poor by engaging them in livestock
management & productivity the project Third Livestock Development Project (TLDP) was
launched in 1997. ™
 To increase participation of the deprived poor in Western Terai for their socio-economic
upliftment the project Poverty Alleviation Project in Western Terai (PAPWT) was launched in
1998. ™
 To increase the agriculture productivity by providing the irrigation facilities to the deprived
community's farmers for the poverty alleviation program the project Community Ground
Water Irrigation Sector Project (CGISP) was launched in March, 1999.

2.4 Grameen Bank Model

Grameen Bank concept was born in the village of Jobra, Bangladesh, in 1976. Professor Yunus, Nobel
Prize winner for peace in 2006, had a field visit with his students. He watched a lady called Sufia working
with bamboo. He was surprised to know that her status could be bonded labor if she was not able do
manage five taka (US22 cents) to buy raw materials. Sufia explained local money lenders charges 10
percent per week and even 10 percent per day and people who start borrowing with them only get
poorer. The next day Professor Yunus lent 856 taka ($US 27.00) to 42 people of the Jobra village and told
them to repay without interest. This emotional support of Prof. Yunus was institutionalized by
establishing Grameen Bank in Bangaladesh in 1983. Today Grameen Bank has 2,475 branches. It works
in 80,511 villages and has 7.4 million borrowers and recently passed the $US 6.6 Billion mark in loans to
the poor.
2.5 Replication Grameen Model in Nepal

Grameen bank system was introduced in Nepal during 1990s by the central bank establishing
five Rural Regional Development Banks, one in each development region. Nirdhan and Center for Self
Help Development (CSD) were two NGOs initiating Grameen replication in the private sector. The other
prominent MFIs-NGOs replicating Grameen in Nepal are Chhimek, Development Project Service Centre-
DEPROSC etc. With the initiation of Nirdhan to promote Nirdhan Utthan Bank, other MFI NGOs also
promoted Microfinance Development Banks like Swabalamban Bikas Bank, DEPROS Bikas Bank, and
Chimek Bikas Bank. The five private sector microfinance development banks and five regional level rural
development banks are Grameen replicates having coverage over 60% in the microfinance market in
Nepal. The Grameen bank program, has been found fast growing and has substantive share both in
breadh and depth of outreach. Experience shows it has high prospect of growth in Nepalese
microfinance market to address the financial need of the unprivileged groups.

Meeting peers
regularly

Repaying regularly Joint liability

The Grameen loan

product

Meeting loan officer Repaying in small

regularly sums

2.6 Features Grameen Model in Nepal

 Targeted to poor: This model targets the poor

 Door step service: Bank goes to clients instead of clients to bank in this system.
 Collateral less: Loans are generally disbursed without collateral.
 Repeated and increased volume of loans
 Good repayment: Repayment rate above 95% in Grameen. It is because of the methodology
and strong discipline in the system.
 Focus on women
 It is fast growing in Nepal, Grameen has been found fastest for outreach growth. This is due
to methodology (easy access to loan, easy repayment schedule, door step service, etc.) and
strong financial discipline adopted by the system.
 Managed by banking professional
 Positive impact on marginalized groups
2.7 Co-operatives

A cooperative society is a voluntary association started with the aim of service of its members.
The philosophy of the formation of cooperative society is "all for each and each for all" to pool their
resources and carry on the business for their own welfare. Cooperative is a form of business where
individuals belonging to the common bond join their hands with the objective of promoting economic
interest of its members in accordance with cooperative principles. A cooperative society is formed with
the following broad objectives:

• To render service to its members instead of making profits.

• To encourages a state mutual help in the place of competition.

• It assures a state of self-help in the place of dependence

Cooperative Values are based on the values of self-help, self-responsibility, democracy, equality
and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of
honesty, openness, social responsibility and caring for others.

2.8 Cooperative Principles

1. Voluntary and Open Membership: Cooperatives are voluntary organizations, open to all
persons able to use their services and willing to accept the responsibilities of membership,
without gender, and social, racial, political or religious discrimination.
2. Democratic Control: Cooperatives are democratic organizations controlled by their members,
who actively participate in setting their policies and making decisions. Men and women serving
as elected representatives are accountable to the membership.
3. Economic Participation: Members contribute equitably to, and democratically control, the
capital of their cooperative. At least part of that capital is usually the common property of the
cooperative. Members usually receive limited compensation, if any, on capital subscribed as a
condition of membership.
4. Autonomy and Independence: Cooperatives are autonomous, self-help organizations controlled
by their members. If they enter into agreements with other organizations, including
governments, or raise capital from external sources, they do so on terms that ensure democratic
control by their members and maintain their cooperative autonomy.
5. Education, Training and Information: Cooperatives provide education and training for their
members, elected representatives, managers, and employees so they can contribute effectively
to the development of their cooperatives. They inform the general public - particularly young
people and opinion leaders - about the nature and benefits of cooperation.
 6. Cooperation among Cooperatives: Cooperatives serve their members most effectively and
strengthen the cooperative movement by working together through local, national, regional and
international structures.
7. Concern for Community: Cooperatives work for the sustainable development of their
communities through policies approved by their members

2.9 Self Help Groups- SHG

After saving regularly and using the funds to lend small amount to each other for interest, which is
ploughed back in to group funds. Norms are laid down for the maximum size of the initial and successive
bank loans as an increasing ratio of the group’s own-funds. Broadly, under ‘SHG Model’ three SHG-credit
linkage models are functional:

Model-I: In this model, SHG are formed or promoted, guided and financed by banks directly.

Model-II (SHG-Bank Linkage Model): In this model, the SHGs are financed by banks after fulfilling certain
conditions; the SHG-Bank Linkage Program is falls under this model

Model-III (MFI-Bank Linkage Model): In this model, microfinance institutions (MFIs) avail bulk loans from
banks for on-lending to SHGs and others small borrowers. In this model SHGs are finance through the
Microfinance Institutions.

Limitations of SHGs:

(i) Lack of awareness and unenthusiastic behavior among some members.

(ii) Rigorous government regulations hinder innovative ideas of groups.

(iii) Despite improvements of thoughts and beliefs, gender sensitization has a long way to go,
especially in villages.

(iv) The final products of SHG members often do not find proper distribution channels, resulting in
inadequate sales which demoralize the spirit of members.

(v) Other hindering factors consist of caste problems, village politics, intra-group conflicts etc.
2.10 Financial Intermediary NGOs (FINGOs)

In context of Nepal

NGOs can be established under the 1978 Society Registration Act and 1991 Social Welfare Act.
The 1998 Financial Intermediary Society Act allows NGOs to provide microcredit to their members, as
financial intermediary NGOs (FINGOs). Financial NGOs fall under the 2006 Banks and Financial
Institutions Act, as Class D institutions. Nepal Rastra Bank classifies licensed institutions into four classes
(A, B, C, and D) based on the minimum paid-up capital needed for a license. All microfinance institutions
fall under category D.

Class D institution can:

 Supply credit as prescribed.

 Supply microcredit with or without any movable or immovable property as collateral or security
for operating any microenterprise. Such credit can go only to an institution’s groups or members
who have saved for the period and the amount prescribed by Nepal Rastra Bank.

 Accept deposits with or without paying interest and refund such deposits, subject to the limit
prescribed by Nepal Rastra Bank.

 Perform such other functions as prescribed by Nepal Rastra Bank.

In addition, the 2006 Banks and Financial Institutions Directives allow Class D institutions to:

1. Provide loans to deprived and low-income individuals or groups of up to NRs 40,000 to operate
microenterprises, with no more than NRs 100,000 going to a single microenterprise. In addition,
such loans should account for up to 25 percent of the institution’s total loans and advances.
2. Mobilize savings up to 30 times their core capital funds. Deposits from nonmembers are not
allowed.

2.11 Financial Access

Financial Access: The first step towards financial inclusion. Financial access refers to the ability
to use financial services, taking into consideration physical proximity, affordability and eligibility.
Indicators include number or percentage of people who access a certain type of service (credit, savings,
payments, insurance) from whom (formal or informal provider), client touch points within a certain
distance and poverty levels. Financial inclusion provides access to financial services for disadvantaged
people.
Financial Access in Nepal

The NRB is effortful to increase access to finance and is pursuing this in four ways.

1. Directed Credit: The NRB has introduced the Directed Credit Policy in 1974 for the first time. The
requirement of this policy was to invest a specified percent of total deposits in the
underprivileged sector to increase the flow of credit to small farmers and businesses. The
scheme was renamed as "Priority Sector Credit" in 1976. The lending target was fixed at 12
percent of outstanding loans and advances since 1990. NRB has directed that 12 percent of
priority sector loan including 3 percent of the total portfolio, be given to the hard-core poor
under the "Deprived Sector Credit" program since 1991/92. The priority sector lending program
was phased out since mid-July 2006 but deprived sector lending requirement still continues.

2. Services for Enhancing Access to Finance: In this regard, five Grameen Bikas (Rural
Development) Banks were established focusing on the philosophy of banking to the poor, with
the support of NRB in each of the five-development regions. This model was the replication of
the Grameen Banking model in Bangladesh. The distinctive features of these banks are collateral
free credit to the poor women on group guarantee basis. This program also provides loan to the
woman clients who are required to have mandatory saving and other social and educational
programs. In addition, the refinance rates and the lending procedures have been further eased
to facilitate special category loans targeting to women entrepreneurs and low-income groups.

3. Enhancing Confidence on Microfinance Institutions: The NRB has initiated special and follow-up
inspections of microfinance institutions. However, thousands of cooperatives operate saving
and credit related activities, virtually beyond the supervisory jurisdiction of a competent
authority. To address this issue, the NRB has submitted a proposal to GoN for introducing a
separate Microfinance Authority Act. The enactment of this Act will initiate the establishment of
a separate institution for regulating and supervising all the microfinance service providers
including Class D financial Institutions in order to enhance public confidence on them.

4. Rural Self-Reliance Fund: In 1991, just after the restoration of multi-party democracy, the GoN
established the Rural Self Reliance Fund (RSRF), with the objective of providing wholesale loans
to NGOs, Co-operatives and other financial intermediaries for lending to the poor in order to
improve their standard of living through income generating activities. The RSRF provides loan
through NGOs or co-operatives that are actively engaged in local saving mobilization and
community development activities. It provides wholesale loan to the cooperatives and NGOs at
an interest rate of eight percent.
2.12 Financial inclusion

Financial inclusion involves providing access to an adequate range of safe, convenient and affordable
financial services to disadvantaged and other vulnerable groups, including low income, rural and
undocumented persons, who have been underserved or excluded from the formal financial sector.
Financial inclusion is the state in which all working age adults have effective access to credit, savings,
payments, and insurance from formal service providers. Effective access involves convenient and
responsible service delivery, at a cost affordable to the customer and sustainable for the provider, with
the result that financially excluded customers use formal financial services rather than existing informal
options. Financial inclusion / inclusive financing is the delivery of financial services (credit, savings,
payments, remittance, fund transfer, insurance and all types of services of formal financial institutions)
at affordable costs to the sections of disadvantaged and low-income segment of society (Financial
exclusion where those services are not available or affordable). Financial inclusion is measured in three
dimensions:

(i) Access to financial services;

(ii) Usage of financial services; and
(iii) The quality of the products and the service delivery.

Financial inclusion can be defined as:

 Access to a full suite of financial services

Including credit, savings, insurance, and payments

 Provided with quality

Convenient, affordable, suitable, provided with dignity and client protection

 And financial capability

Clients are informed and able to make good money-management decisions

 To everyone

Who can use financial services excluded and underserved people

 Through a diverse and competitive marketplace

A range of providers, a robust financial infrastructure and a clear regulatory

framework
Why Financial Inclusion?

Financial inclusion is a mechanism to improve people’s livelihoods, lower poverty, and advance
economic development. Financial inclusion facilitates efficient allocation of productive resources
and thus can potentially reduce the cost of capital. Access to appropriate financial services can
significantly improve the day-to-day management of finances. An inclusive financial system can help
in reducing the growth of informal sources of credit, which are often found to be exploitative.
Financial inclusion benefits to the poor people who are excluded from the fundamental tools of
economic self-determination, including savings, credit, insurance, payments, money transfer and
financial education.

Financial Inclusion in Nepal

Banks and Financial Institutions Act (BAFIA), which governs all activities of banks in the country,
is a central path for advancing financial inclusion. NRB has been made compulsory through deprived
sector lending directive, for class A, B and C class financial institutions to make available low-cost
funds to micro finance institutions (MFIs), thereby facilitating access of financial services to the
underserved areas. Financial access has been rising with the increase in branches of financial
institutions. As at mid-July 2016, the number of branches of commercial banks stood at 1869,
followed by 1,378 branches of MFIs, 852 branches of development banks and 175 branches of
finance companies. The population per branch of financial institution remained at 6,562 at mid-July
2016.5 However, despite the rise in number of BFIs and their branches, the financial institutions are
still primarily scattered around the urban or semi-urban areas where geographical access is fairly
simple. With respect to regional distribution, as at mid-July 2016, the major branches of BFIs are
situated in the Central Development Region (45.5 percent), followed by Western Development
Region (24.0 percent) and Eastern Development Region (16.4 percent). Despite continuous efforts
from the NRB in increasing the outreach of financial services in remote areas, the progress has been
quite dismal with respect to the branch expansion in Mid-Western Development Region (9.2
percent) and Far Western Development Region (4.9 percent). Branchless banking has been
promoted taking into consideration the payment needs of people who are excluded from access to
the financial system. As at mid-July 2016, branchless banking centers aggregated 812. Similarly,
Mobile phone based payment systems have been encouraged so as to facilitate payments at
merchandise outlets. The total number of ATM terminals increased to 1,908 in mid-July 2016 from
1,721 in mid-July 2015. The total number of debit cards and credit cards issued also increased to
4,657,125 and 52,014 respectively in mid-July 2016 from 4,531,787 and 43,895 in mid-July 2015.
 Financial Access vs. Financial Inclusion

A B C
I’m taking loan from bank
I do not need loan I have no collateral. So bank is denying to grant
loan.
Current consumers of
financial services
Voluntary exclusion from
financial services: Access to Involuntary exclusion from financial
services but services:
 -No need No access to services due to:
• -High price
 -No awareness • -Non availability of product
• -Incapability due to poor -
economic condition

Financial Access = A + B
Financial Inclusion = Bringing C under A

2.13 Social Banking

Social Banking describes the provision of banking and financial services that consequently
pursue a positive contribution to the potential of all human beings to develop, today and in the future.
Example: banking for poor, lead banking, intensive banking etc. The features of social banking are:

 Socially, culturally, ecologically and ethically oriented

 Dialogue with a wider group of stakeholders,
 Emphasis on human rights and solidarity,
 Equal treatment of genders,
 Organizational structures based on participation,
 Ownership structures preventing dependency of dominant individual interest,
 Pro-active contributions to the public discussion of perceived problem areas,
 Rejection of the profit maximization principle and of speculative activities,
 Self-perception as an intermediary providing services to depositors and borrowers,
 Transparency in all business conduct,
 Triple Bottom Line approach for the simultaneous consideration of multiple success criteria.
Triple-line Bottom Approach

How does SB differ from CB?

Social Banking Commercial Banking

Basic Function Provide financial access to the weaker and Provide banking services to trade,
marginalized segments of the society. industries and commerce.
Emphasis Developmental needs of the society. Maximization of shareholder’s wealth.
Motive Bringing down the costs of providing Earning profit by accepting deposits at
services and make banking affordable to lower cost and lending at higher rates.
the common people.
Concentration Protection of eco-system and support to Maintaining liquidity and profitability
sustainable environmental practices through diversification of investment.
through lending policies.
Risk Lesser risk. More risk due to speculative activities.
Structure Organizational structure based on Organizational structure based on
participation. corporate practice.
 Unit-3: Micro-finance Institution

Microfinance has evolved as an economic development approach intended to benefit low-

income people. The term refers to the provision of financial services to low-income clients, including the
self-employed. Microfinance is not simply banking, it is a development tool. Microfinance activities
usually involve:

 Small loans, typically for working capital

 Informal appraisal of borrowers and investments
 Collateral substitutes, such as group guarantees or compulsory savings
 Access to repeat and larger loans, based on repayment performance
 Streamlined loan disbursement and monitoring
 Secure savings products.

3.1 Ownership and Legal Form of MFIs

The legal status of an institution determines who has ownership and who has decision-making
power. Microfinance institutions come in a variety of institutional forms (project, non-profit
organization, cooperative, private company). The choice of form will determine organizational type,
decision-making procedures and thus the institution’s governance. Institutional statutes may be more or
less formal (ranging from bank to project status). An institution may be part of the public, private or
nonprofit sectors.

 Project form: The institution is not formalized at the time of creation. Its status is one of a
development project, most often funded directly by donors.
 Non-profit organization (NGO) form: Non-profit organizations cannot mobilize savings. In cases
where savings services are offered, it is simply tolerated, usually because of the absence of a
legal framework for microfinance
 Cooperative form: An institution owned by its members who are the direct beneficiaries of the
savings and credit services offered.
 Private company form: A company (commercial bank or Finance Company, for example with
limited or unlimited liability) with a variable capital structure, depending on the origin and
motivation of the shareholders:
I. Private capital: local (local banks, employees, clients, etc.) or international
(commercial banks, social investment funds, donor investment funds, private
commercial funds).
II. Public capital: local and/or national government.
  Public entity form: A public entity is state-owned or belongs to local governments and might be
a shareholder company with public shareholders – in some cases ruled by banking law, in other
cases ruled by a special law (e.g. development banks).

3.2 Objectives of MFIs

In a World Bank study (1996) of lending for small and microenterprise projects, three objectives
were most frequently:

 To create employment and income opportunities through the creation and expansion of
microenterprises
 To increase the productivity and incomes of vulnerable groups, especially women and the poor
 To reduce rural families’ dependency on insufficient crops through diversification of their
income generating activities.

3.3 Importance of MFIs

1. The promise of reaching the poor . Microfinance activities can support income generation for
enterprises operated by low-income households.
2. The promise of financial sustainability . Microfinance activities can help to build financially self-
sufficient, subsidy-free and locally managed institutions.
3. The potential to build on traditional systems . A microfinance activity sometimes simulates
traditional systems (such as rotating savings and credit associations). They provide the same
services in similar ways, but with greater flexibility, at a more affordable price to
microenterprises and on a more sustainable basis. This can make microfinance services very
attractive to a large number of low-income clients.
4. The contribution of microfinance to strengthening and expanding existing formal financial
systems. Microfinance activities can strengthen existing formal financial institutions, such as
savings and loan cooperatives, credit union networks, commercial banks, and even state-run
financial institutions, by expanding their markets for both savings and credit—and potentially,
their profitability.
5. The growing success rate. There is an increasing number of well-documented, innovative
success stories in settings as diverse as rural banking of Bangladesh. This is in stark contrast to
the records of state-run specialized financial institutions, which have received large amounts of
funding over the past few decades but have failed in terms of both financial sustainability and
outreach to the poor.
6. The availability of better financial products as a result of experimentation and innovation . The
innovations that have shown the most promise are solving the problem of lack of collateral by
using group-based and character-based approaches; solving problems of repayment discipline
through high frequency of repayment collection, the use of social and peer pressure, and the
 promise of higher repeat loans; solving problems of transaction costs by moving some of these
costs down to the group level and by increasing outreach; designing staff incentives to achieve
greater outreach and high loan repayment; and providing savings services that meet the needs
of small savers.

3.4 Organizational structure/Ownership

Ownership is an important but often unclear issue for MFIs, particularly for those MFIs funded
with donor contribution. Owners of the MFI elect the governing body of the institution and, through
their agents on the board, hold management accountable. Formal MFIs have shareholders who own
shares that give them a residual claim to the assets of the MFI if there is anything remaining after it has
discharged all of its obligations. Shareholders have the right to vote their shares to elect board
members, who in turn control the company, having shareholders results in clear lines of accountability
between the board members and the MFI. NGOs do not generally have shareholders; rather,
management usually elects the board members. This can result in a conflict of interest if management
selects board members who will conform to the interests of senior management. NGO board members
do not usually fulfill the board’s fiduciary role by assuming responsibility for the institution’s financial
resources, especially those provided by donors.

As MFIs formalize their structures (that is, change from being an NGO into a formal financial
institution) and begin to access funding beyond the donor community, the “owners” or those that have
a financial stake in the institution can change. If the NGO remains as a separate entity, it often owns a
majority of the shares of the new institution. In spite of this majority ownership, it is important that the
relationship between the MFI and the NGO be kept at arm’s length and includes a transparent and clear
system of transfer pricing. “Owners” of formalized MFIs can generally be divided into four categories:

 NGOs
 Private investors
 Public entities
 Specialized equity funds

3.5 Ownership and Governance

As the MFI grows and management systems are developed, the need for governance arises to
ensure effective management of the MFI and, potentially, to attract people with much-needed skills.
Governance establishes a means of holding management accountable toward stakeholders. Similarly, as
the MFI grows the issue of ownership becomes apparent. This is particularly important as the MFI begins
to create a more formalized structure.

Governance refers to a system of checks and balances whereby a board of directors is

established to oversee the management of the MFI. The board of directors is responsible for reviewing,
confirming and approving the plans and performance of senior management and ensuring that the
vision of the MFI is maintained. Management is responsible for the daily operations of putting the vision
into action.

The basic responsibilities of the board are:

 Fiduciary: The board has the responsibility to safeguard the interests of all of the institution’s
stakeholders. It serves as a check and balance to ensure the MFI’s investors, staff, clients, and
other key stakeholders that the managers will operate in the best interest of the MFI.
 Strategic: The board participates in the MFI’s long-term strategy by critically considering the
principal risks to which the organization is exposed and approving plans presented by the
management. The board does not generate corporate strategy but instead reviews
management’s business plans in light of the institution’s mission and approves them
accordingly.
 Supervisory: The board delegates the authority for operations to the management through the
executive director or chief executive officer. The board supervises management in the execution
of the approved strategic plan and evaluates the performance of management in the context of
the goals and time frame outlined in the plan.
 Management development: The board supervises the selection, evaluation, and compensation
of the senior management team. This includes succession planning for the executive.

3.6 Types of financial institutions offering microfinance services

Formal institutions are defined as those that are subject not only to general laws and regulations
but also to specific banking regulation and supervision.

 Development banks
 Savings banks and postal savings banks
 Commercial banks
 Nonbank financial intermediaries.

Semiformal institutions are those that are formal in the sense of being registered entities subject to
all relevant general laws, including commercial law, but informal insofar as they are, with few
exceptions, not under bank regulation and supervision.

 Credit unions
 Cooperatives
 NGOs
 Self-help groups (some).

Informal providers (generally not referred to as institutions) are those to which neither special bank
law nor general commercial law applies, and whose operations are also so informal that disputes arising
from contact with them often cannot be settled by recourse to the legal system.
  Moneylenders, traders, landlords, and the like
 Self-help groups (Most)
 Families and friends.

3.7 Institutional growth and transformation (Upgrading)

When the existing structure of an organization is unable to manage the growth, there is a need of
transformation (alternation in the ownership and structure of the organization). For MFIs that are
structured as formal financial institutions, that is, development or commercial banks, the issues of
growth and transformation are not as significant. Generally, growth within a formal institution can be
accommodated within the existing structure. Transformation is rarely an issue. If MFIs that are
structured as semi-formal financial institutions, the issues of growth and transformation are significant.
Generally, growth within a semi-formal institution can be accommodated by using any one of the
following three options:

1. Maintaining the existing structure and managing growth within that structure;
2. Forming an apex institution to support the work of existing MFIs; and
3. Transforming to a new: formalized financial institution.
1. Expansion within an Existing Structure

Depending on the objectives of the MFI and the contextual factors in the country in which it works,
an NGO or cooperative may be the most appropriate institutional structure, providing the MFI can
continue to grow and meet the demands of the target market. Existing structures may be most
appropriate, because formalizing their institutions can require substantial capital and reserve
requirements. As formal financial intermediaries, they may become subject to usury laws or other
regulations that limit the MFI’s ability to operate.

2. Creating an Apex Institution

Some MFIs, particularly those partnering with international NGOs, may choose to create an apex
institution as a means of managing growth and accessing additional funding. An apex institution is a
legally registered wholesale institution that provides financial, management, and other services to retail
MFIs. These apex institutions are similar to apex institutions for financial cooperatives. Rather than
being member based, the apex institution is set up and owned by an external organization. Apex
institutions do not provide services directly to micro-entrepreneurs; rather, they provide services that
enable retail MFIs (primary institutions) to pool and access resources.

An apex institution can (i) provide a mechanism for more efficient allocation of resources by increasing
the pool of borrowers and savers beyond the primary unit, (ii) offer innovative sources of funds, such as
guarantee funds or access to a line of credit from external sources and (iii) serve as a source of technical
assistance for improving operations, including the development of management information systems
and training courses.
 3. Creating a Formal Financial Intermediary

Recently the field of microfinance has focused on the transformation of financial NGOs into formal
financial institutions. This approach involves the transfer of the NGO’s or cooperative’s operations to a
newly created financial intermediary where the original institution is either phased out or continues to
exist alongside the new intermediary. In most cases, the original MFI’s assets, staff, methodology, and
systems are transferred to the new institution and adapted to meet the more rigorous requirements of
a financial intermediary. Various means may be established to determine a transfer price for the assets
and operations of the NGO or cooperative to the new entity. However, creating a formal financial
institution also implies additional costs and restrictions as the MFI becomes regulated and supervised.
Capital requirements may be much higher than anticipated, and unless the MFI has reached financial
self-sufficiency, it will be difficult (and costly) to attract equity investors and commercial debt. The MFI
must develop the institutional capacity to manage a number of different products and services, mobilize
resources, and enhance management information systems to adhere to regulatory reporting
requirements.

3.8 Capital structure of MFIs

Fundamentally, there are two main separate categories of financing instruments that an MFI can
choose:

1. Equity financing
 2. Debt/liabilities financing

1. Equity Financing:

Equity financing refers to the act of raising money to finance business activities by issuing stocks
(common or preferred stocks) to the current owners or potential investors. This form of financing
enables firms to receive more investment funds from the current owners and potential investors with or
without borrowings for their startups or when they need to raise additional equity84 to offset existing
debts. There are two typical types of investors: social investors and commercial investors. First, social
investors, called microfinance focused funders, are individuals or institutions that invest with social
objectives as a high priority. Second, commercial investors, called private-equity funders, are profit-
driven investors from the private sector who are likely to tend to focus more on financial returns
(dividends) from their investments.

2. Debt financing:

Liabilities financing/debt financing, refers to the borrowed money which a firm must pay back to
lenders with interest after a specific agreed period of time. MFIs tend to rely on debt financing to fund
their businesses if they are well established and have steady sales, solid collateral and profitable growth.
Due to lack of sufficient funds (equity), MFIs use borrowed money as an extra source of finance to
expand their businesses.

3. Deposits

Deposits refer to the sum of savings deposited in financial institutions. They are categorized
according to the type of client (individual vs. institution) and different products. In microfinance, there is
an additional category which includes disclosures of voluntary deposits vs. compulsory deposits.

Unit-4: Product of Micro-finance

 4.1 Concept of Saving

Saving is a foundational pillar in inclusive financial system. Savings contributes to financial inclusion
at the client, microfinance institutions and industry levels. Savings services strengthen the finances of
low- income households, savings deposits strengthen the funding base or microfinance and are the basis
for a competitive, efficient and sound microfinance industry. Savings is broadly defined as a means to
secure future consumption at any time either in cash or in kind. “Saving” can be referred as “cash
deposited by clients in order to consume or invest it in a later date”. Saving is the action of keeping part
of current income to use it later. Savings defines the amount kept aside in the current period (income
minus consumption in a given period). From an institutional perspective, if deposit services are
appropriately priced, mobilizing micro and small savings can help MFIs reach financial self-sufficiency.

In fact, introducing savings facilities may considerably improve an MFI’s client outreach, while
increasing demand and controlling costs in its operations. Through deposit activities, an MFI can lower
their capital costs and build a sustainable base for expansion. By offering savings services, MFIs gain
several important advantages. These include:

 An attractive source of funds from deposits, as their financial costs are normally lower than
funds from the interbank market.
 Lower liquidity risk from a small number of withdrawals from small amounts on deposit. The
financial institution is less exposed than it would be if larger withdrawals were made from larger
savings accounts.
 A more stable funding source than donor funds or discounted lines from central banks. Small
depositors, in general, do not intervene in the bank’s day-today business as do most
governments and donors that provide funding.

4.2 Importance of Savings to MFIs

1. Deepening & expanding outreach:

 Large numbers of customers choose to use savings services instead of credit, but
limited access.
 Savings help the poor to better organize their financial lives and deal with
emergencies.
 Accumulation of assets from savings helps improve quality of life.
 Savings is equally if not more important that credit in development.
 Low usage of savings services is not an indication of low demand.
 Access to savings is the key to financial inclusion.
2. Sustainability & growth

The main Funding source for sustainable growth is savings, it is

 It’s less costly than loans which many MFIs rely on.
  Stable source of funding
 Improves public image & confidence.

2.1 Organization Culture

 Instills strong demand oriented business model.

 Creates the desired organization culture
 Forced MFI to improve product variety & efficiency of service.

2.2 Intermediation

 Provides an environment for effective financial intermediation

4.3 Making savings attractive to customers

 Security – from fraud, collapse of MFI is paramount even in the face of inflation.
 Low transaction costs – proximity & convenience
 Appropriately designed products – frequent deposits of small variable amounts,
quick access contractual deposits
 Interest rates – when transaction costs are low, savings takes place even with
negative real returns.
 Connectivity – ability to transact at different branches or parts of the country.
 Payment facilities– facilities to pay bills, fees or transfer money.
 Recent innovations with potentials: mobile banking – especially when connected to
savings accounts and bill payments, agency banking – allowing banks to appoint
agents that can make certain transactions on behalf of banks or MFIs and a
combination of the two has great potential.

4.4 Saving Mobilization

Saving mobilization is one of the most important services that microfinance institutions can offer to
low income clients. Saving mobilization is a systematic process of collecting and managing money (cash
and noncash items) from individuals, groups and organizations whereby the depositor can withdraw the
amount of the savings together with the interest, if any, as per the agreement between the depositor
and the institution (the one who collects the savings). Many poor people lack access to good quality,
formal deposit services, and as a result rely on informal mechanisms to save. Informal mechanisms to
save include putting money under mattresses, buying animals or jewelry that could be sold off at a later
stage, or stockpiling inventory or building materials.

However there is significant risk associated with these informal methods of saving, as cash can be
easily stolen, animals can fall sick or die. These methods of saving often render the money illiquid also, if
money is saved in the form of animals or expensive jewellery, it is impossible to sell simply a part of
these if there is a need for a small amount of cash. Thus there is a great demand for secure and
convenient deposit services that allow for small balances and an easy access to savings and funds. Many
low-income clients are unable to find access to savings services from traditional banks however, due to a
limited branch network, and because banks are unwilling to deal with small amounts of money. Through
offering savings mobilization services, the MFI is able to enhance its fund base. Furthermore, saving
mobilization strengthens the asset base of the MFI, reduces risks faced by the institution and enhances
financial viability. In order to mobilize savings, MFIs must fulfill two legal requirements:

 Regarding licensing and

 Regarding reserve requirements.

An MFI must have a license in order to collect savings, which means that is usually subject to
some form of regulation. Some MFIs who collect savings solely from borrowers or members and who
proceed to lend these funds or deposit them in a formal financial institution do not necessarily have to
be licensed and are not regulated or supervised closely in their deposit activities. However, to accept
deposits from the general public, and MFI must have a license and is subject to regulatory supervision.

Reserve requirements mean that a percentage of deposits accepted by the MFI must be placed in
safe and liquid form in a central bank or other institution, to ensure that the depositors‘ funds are both
safe and accessible .

4.5 Consideration for Savings Mobilization

1. Know your market

 Conduct research, document & share widely in MFI
 Products based on research finding.
 Learn from others – don’t re-invent the wheel.

2. Focus on front office services

 Delivery of Credit services requires strong back office to control risks.
 Delivery of Savings services requires very strong front office skills to not only attract
customers but most importantly to listen & know what they want savers vote with their
feet.

3. Interest Rate policy

 Set appropriate interest policies for savings accounts
 Avoid blind competition for deposits
 Plan to scale-up savings portfolio to at least 8 times that of credit portfolio

4.6 Types of savings

1. Compulsory Savings

Compulsory savings (or compensating balances) represent funds that must be contributed by
borrowers as a condition of receiving a loan, sometimes as a percentage of the loan, sometimes as a
nominal amount. For the most part, compulsory savings can be considered part of a loan product rather
than an actual savings product, since they are so closely tied to receiving and repaying loans. (For the
borrower compulsory savings represent an asset while the loan represents a liability; thus the borrower
may not view compulsory savings as part of the loan product). Compulsory savings are useful to:

 Demonstrate the value of savings practices to borrowers

 Serve as an additional guarantee mechanism to ensure the repayment of loans
 Demonstrate the ability of clients to manage cash flow and make periodic contributions
(important for loan repayment)
 Help to build up the asset base of clients.

However, compulsory savings cannot be withdrawn by members while they have a loan
outstanding. In this way, savings act as a form of collateral. Clients are thus not able to use their savings
until their loan is repaid.

2. Voluntary Savings

As the name suggests, voluntary savings are not an obligatory part of accessing credit services.
Voluntary savings services are provided to both borrowers and non-borrowers who can deposit or
withdraw according to their needs. (Although sometimes savers must be members of the MFI, at other
times savings are available to the general public.) Interest rates paid range from relatively low to slightly
higher than those offered by formal financial institutions. The provision of savings services offers
advantages such as consumption smoothing for the clients and a stable source of funds for the MFI.
There are three conditions that must exist for an MFI to consider mobilizing voluntary savings:

 An enabling environment, including appropriate legal and regulatory frameworks, a

reasonable level of political stability, and suitable demographic conditions
 Adequate and effective supervisory capabilities to protect depositors
 Consistently good management of the MFI’s funds.
 The MFI should be financially solvent with a high rate of loan recovery.

4.7 Pricing of saving product

The price of the saving product i.e. the interest rate paid on deposits is based on the prevailing
deposit rates of similar products in similar institutions, the rate of inflation, and market supply and
demand. Risk factors such as liquidity risk and interest rate risk must also be considered based on the
time period of deposits. Finally, the costs of providing voluntary savings also influences deposit pricing
policies. Savings products need to be priced so that the MFI earns a spread between its savings and
lending services that enables it to become profitable. Labor and other nonfinancial costs must be
carefully considered when setting deposit rates. However, there are a number of unknowns at the
beginning of savings mobilization. For example, a highly liquid savings account that is in high demand
can be quite labor intensive and thus costly, especially if there is a large number of very small accounts.