FINANCIAL PERFORMANCE AND PROFITABILITY OF MICRO- FINANCE INSTITUTIONS
(A CASE STUDY SELECTED OF COMPANIES IN IVORY COAST)
CHAPTER- 1 INTRODUCTION
Introduction to microfinance institution
This chapter presents the definition and the importance of the microfinance institution, the various objectives of microfinance, the merits and demerits of microfinance institutions in Ivory Coast.
Nature of microfinance
In general, microfinance refers to non-profit organisations that rely on contributions and grants to achieve their core social purpose of poverty reduction. Thus, in its most basic form, microfinance is the supply of microcredit to small business owners who do not have access to the conventional banking system.
Microfinance has evolved through time from providing micro-loans to collecting savings, micro-insurance, micro-leasing, aiding with money transfer in relatively modest transactions for disadvantaged individuals, and lastly marketing and distributing clients’ products. Microfinance institutions play an important role in increasing social capital and the inclusion of disadvantaged communities, serving hundreds of millions of low-income borrowers by providing non-bankable individuals with access to loans and all the benefits of banking services.
The goal is to alleviate poverty and grow economies, particularly in Asia, America, and Africa. Furthermore, microfinance has helped smallholders to raise people’s living standards, increase income, and create jobs. A microfinance online report demonstrates a realistic framework for studying how microfinance organisations function following a typical microfinance intervention. The primary goal of microfinance is economic empowerment through the use of microcredit as a gateway to total empowerment.
Microfinance is as the name suggests, a small amount of credit granted to people with low incomes, NGOs and/or small businesses.
In Africa in general, more particularly in Ivory Coast, microfinance has put in place a policy of financing start-ups and small and medium-sized enterprises with the aim of raising the standard of living and expanding their various activities, in order to fight against poverty, banditry, rural exodus, financial insecurity and unemployment. It is the solution for African countries to get out of economic precariousness.
Several literature reviews suggest that microfinance can be used by the poor and vulnerable, including NGOs and community groups, to increase incomes by creating self-employment, meeting consumer needs and rapidly reducing poverty. We define it as a commercial bank for the poor people. This is in line with the objectives of poverty reduction through the provision of financial and non-financial services.
In this context, microcredit and microfinance are seen as a means of contributing to the achievement of the United Nations, Millennium Development Goals (MDGs) of halving poverty in the world.
Microcredit is a type of local credit. As a result, the formula is adaptable and may be tailored to specific requirements. And the requirements of individuals who borrow are more than just a need for money, on conditions that might change greatly, even depending on demand. It is a need for other services that are often connected with credit. There are three of them that accompany microcredit and are the basis of microfinance.
It’s a savings account. It is related to credit since not everyone can borrow; thus, some must lend. Deposits are received by banks at the same time that loans are granted. Finally, borrowing is not always a wise idea. Isn’t the refund obviating the need to save? It is critical that the poorest people have the chance
to save. We now know that they repay, and that they repay far better than those with more money.
It’s coverage. It is also connected to credit. It is an assurance of having money in case of emergency, such as a credit with a suspensive clause in reverse and whose interest is paid in advance. It helps individuals to live in more security, similar to how credit enhances their level of living. The poor, like the affluent, require insurance, and the poorer they are, the more so. Belonging to the group is a form of security in the tontines; there is occasionally a relief fund, and there are even tontines insurance whose only objective is to protect members from disease or death.
This is a money transfer. People in the developing world rarely have access to banks. As a result, they do not have a current account and are unable to pay by cheque or bank transfer; they can only pay in cash. However, as a result of immigration, individuals are increasingly travelling, particularly across nations. They frequently need to move money and want to be able to do it quickly and safely. There are already informal mechanisms in place for moving money from one nation to another in a timely and safe manner. This service is now included among the financial services to which the poorest people aspire.
All of these services characterise microfinance, which is local financing that adapts to requirements and is part of a logical approach to delivering financial services to a population that does not have bank access. It also adjusts to the requirements of another order, which the borrower encounters when obtaining credit. He requires help in order to properly run his small business, keep his finances, make certain choices, and make certain judgements. He desires to be able to take use of these “business support services,” which include monitoring, supervision, guidance, and training.
These support services are no longer financial services in and of themselves, but they must be coupled with financial services when directed at small enterprises and must be included in the services offered by microfinance.
Objectives of microfinance
From the general point of view, we can mention that the reduction of poverty is the main source of motivation of microfinance. The overriding objective is to bring poor populations, who very often cannot take credit with commercial banks and financial services for lack of means, to take out loans and repay them within a reasonable time. The founder of Grameen Bank, Mr. Muhammed Yunus from Bangladesh, who won the Nobel Peace Prize in 2006, is the designer and initiator of microfinance, so he created the concept that disadvantaged people should take loans through a conventional banking system, and save to repay. It states that microfinance can help millions of people who suffer from poverty in the world, well this strategy will allow them to being more independent also social success.
Microfinance also seeks to solve the financing problems of young people and NGOs without forgetting also small businesses. All this financing acquired is the work of an economic strategy to limit poverty and boost the Ivory Coast economy.
Advantages of microfinance
in this part, we are showing the benefits and the importance of microfinance institutions in Africa countries precisely in Ivory Coast. what is the role of microfinance institution to reduce poverty and increase the national economy and financial performance to satisfy the population in under developed country?
Benefits of microfinance
Microfinance can be considered as microcredit that can help small and medium-sized enterprises, as well as individuals, to support themselves financially and socially. These effectively participate in the economy of their business in a sustainable way. Microfinance galvanizes start-ups and entrepreneurs by giving them the necessary tools they need to start a profitable small business. It also makes it easier for individuals to use their economy for
primary needs such as the installation of electricity and other needs if necessary for the creation of an income-generating activity; with the participation of microfinance, small and medium-sized enterprises can set up their projects for a long time wishes. Microfinance brings financial security, galloping economic growth and business opportunities. Here are the advantages among many
Access to earnings
Legal or natural persons do not very often obtain loans from large commercial banks. Microfinance loans are available if they request them to boost the income of their activities. It is often hard to see that many entrepreneurs have difficult to identify themselves or to find a certification to appropriate a financial loan from so-called commercial banks and microfinance comes to their aid by granting them adequate financial assistance with a view to repaying them in the short and long term.
The offer has a better refund rate
Microfinance provides financial assistance to natural or legal persons who have a future project in order to participate in the economic development of their nation or their region and to repay their loans granted by the microfinance institution within a reasonable time, proof of the granting of financial loans estimated at several million (CFA francs) to the entrepreneurial and dynamic women, this policy aims to give work also to young people in order to put an
end to unemployment. Loan repayment can be made weekly, monthly or per semester, sometimes even per year.
Facilitate access to education opportunities
In Africa, more precisely in Ivory Coast in the rural area, many families depend on agriculture and traditional fishing for their income, and this standard of living negatively affects the school life of their children, this being the parents. They cannot invest a lot of money in the education of their children, in such a dramatic situation, microfinance can find a fund to help parents during the start of the school year and repay little by little.
The granting of loans for future investments
Very often in the village or in rural areas, the lack of financial resources negatively affects the activities of small and medium-sized enterprises which are looking for available financial resources to meet their basic needs, this deficit in terms of financial resources can nevertheless affect negatively their financial need, microfinance has the major role here of reducing the obstacles and helping them to optimize. When all the requirements of a small and medium-sized business are implemented then future possibilities can increase effectively and monetize the income of these businesses.
The creation of job opportunities
The microfinancing of local and regional businesses promotes the creation of job offers in all areas of activity. These companies can hire young job seekers and give them the chance to discover the world of work. This opportunity can in a broader sense curb unemployment, banditry and poverty.
Reduction of the financial burden of legal persons
Microfinance institutions can help legal persons and gradually reduce monetary type problems by offering them financial services that will allow them to meet
their internal needs, for instance we can talk about monthly bills, etc. Thanks to the satisfaction of the sum of money received by these companies, they are more dedicated to work more to achieve the goals, set in the short term and also foresee the needs in the long term. Microfinance is an enriching factor and even a source because it is committed to making entrepreneurial activities more peaceful and less and less stressful.
Disadvantages of microfinance
Now, we are talk about the demerits and the limits of microfinance institutions to solve poverty issues, the level of the life of young peoples. In short word, what is the negatives aspects of the microfinance institutions missions in Ivory Coast. We can write down:
The requirement of an uncomfortable reimbursement method
Microfinance companies use a repayment method that often does not respect the terms of the contract. The contract for granting credit to clients is often not well known by the small businesses that come to ask for loans and the microfinance company manipulates its clients by threats and sanctions when they fail to repay on time so the loan granted by microfinance institution.
Microfinance gives small loan amounts for a high rate
Microfinance companies grant small sums of money to individuals and women’s associations, that is to say NGOs, not to mention small and medium- sized enterprises, unlike other financial institutions which grant large sums of money so that the companies can achieve their goal. When the microfinances institutions give the loans to their clients, these clients pay the loans with a high rate, it’s often uncomfortable.
Exorbitant and high interest rate
All microfinance companies grant loans to small and medium enterprises at a very high repayment rate therefore these companies sometimes fail to repay the credit and it becomes a debt.
One of the main drawbacks is that they can be more expensive than traditional bank loans. In fact, microcredit institutions often charge higher fees and interest rates than banks.
Microfinance shows well its limits at the level of credit, indeed micro-credit is practical’ today as a small bank that grants loans and they must be replayed necessarily. It is therefore useful for the borrower the ability to repay the loan as soon as possible so that others can use this loan to set up their business. It turns out rather that this fails to pay back the loan and the institution falls bankrupt.
features of microfinance institution
Borrowers are typically from low-income families.
Microfinance loans are often tiny in size. For example, micro loans.
The loan term is limited.
No collateral is required for microfinance loans.
These loans are often repaid at greater intervals.
The majority of microfinance loans are intended to generate revenue.