| In every society, access to financial services for | | | | supported through financial sector programs, |
| every citizen is a vital part of sustained economic | | | | however, in many countries where social funds |
| development. More emphasis should be given to the | | | | operate there are no financial sector programs with a |
| roots of society: the rural sectors and working-class. | | | | strong emphasis on access to finance issues, nor are |
| But most of the time, it is very hard to identify | | | | there many viable microfinance institutions. |
| financial institutions that provide these needed | | | | The Purpose of Social Funds: |
| services, which could improve the livelihoods and | | | | Social funds are demand-driven mechanisms that |
| reduce risk. Most commercial financial institutions do | | | | channel resources to the poor and support |
| not provide the proper services needed to support | | | | subprojects that respond directly to the priority |
| these sectors, as it is not viable to provide cheap | | | | needs of the low-income population. They have been |
| services to these communities. They are also unable | | | | used in a growing number of countries to alleviate |
| to provide their services directly to the target group | | | | the social and economic effects of economic crises, |
| because of high transaction costs coupled with small | | | | cushion the impact of adjustment programs, |
| transaction size and the higher perceived risk of | | | | generate short-term employment, and finance |
| financing clients without collateral. | | | | small-scale investments in poor communities. Access |
| Therefore, may countries today use alternative | | | | to micro-credit is not sufficient, the poor also need |
| approaches instead. The goal is to bring all people into | | | | access to savings, insurance and payment services. |
| the country's financial system so that they will have | | | | Several wide-scale studies have been conducted on |
| continuous and permanent access to affordable | | | | identifying lessons, best practices, and potential |
| financial services. | | | | pitfalls; they include Panama, Yemen, and Eritrea. |
| There are several categories of financial providers | | | | Example Bosnia and Herzegovin: |
| 1) Formal Financial Institution: Professional entities such | | | | The overall aim was to jumpstart the process of |
| as licensed banks. | | | | establishing a strong microfinance sector so as to |
| Problems: The small profits that can be earned may | | | | help raise incomes, create jobs, and develop the |
| not compensate for the significant cost and effort | | | | smallest businesses. To provide access to credit to |
| involved in tailoring products and delivery systems, | | | | the economically disadvantaged, specifically |
| especially low-income people. Nevertheless, banks | | | | low-income micro-entrepreneurs who had no access |
| interested in this niche have successfully created a | | | | to credit from the commercial banking sector. |
| separate unit within the bank, or established a | | | | Problems in the past: |
| separate affiliated company before. | | | | Government policy is oriented more towards creating |
| 2) Informal Providers: Small member-managed entities | | | | employment and improving income in response to a |
| that are not licensed. | | | | crisis than toward long-term objectives. As such, |
| 3) Semi-Formal Institutions: NGO, small financial | | | | social fund activities were not geared towards |
| cooperatives, and community-based financial | | | | strengthening or reforming the microfinance sector, |
| organizationsa) Cooperative Financial Institutions | | | | but rather towards using existing microfinance |
| (Cooperative banks, credit unions to small village | | | | programs as channels for expanding employment. |
| based cooperative entities)b) Microfinance | | | | Further problems range from governments and |
| Non-Governmental Organizationsc) Community Based | | | | donors using these organizations to channel cheap |
| Financial Organizations (village savings, loan | | | | credit to rural populations to mismanagement of |
| associations, savings and credit associations, self-help | | | | funds. |
| groups)d) Traditional village-based providers (money | | | | The Purpose of Credit Unions: |
| lenders, small shops and input suppliers who provide | | | | A credit union is a community based financial |
| goods on credit, and informal savings and credit | | | | institution with representation from all socioeconomic |
| groups) | | | | levels. Main purposes are the economic, social, and |
| The formal financial institutions approach focuses on | | | | political promotion of democracy and securing of |
| building strong, stable financial systems that serve | | | | financial stability, and to provide competitive and |
| the entire population. This is the preferred approach | | | | quality financial services responsive to the needs of |
| when there are Labor banks, microfinance institutions, | | | | its members to improve their livelihood. All credit |
| and financial cooperative/ credit union networks that | | | | unions operate within a common bond, such as |
| are interested in broadening their outreach to the | | | | employment- all members must work for the same |
| low-income society. The community-based institutions | | | | group of employers or industry or in the same |
| approach focuses on building strong informal or | | | | occupation. Credit unions are for service rather than |
| semi-formal community financial institutions, and then | | | | for profits. |
| linking them with the formal financial sector. | | | | What is the right approach? |
| The Purpose of Microfinance: | | | | Consulting with communities to identify the demand |
| Microfinance is the provision of financial services, | | | | for and supply of financial services among the |
| including savings, credit, insurance and payment | | | | working-class and rural areas to be covered. What |
| services, to low income people. Typically, low-income | | | | financial services are provided, by whom, and how? |
| people, especially those living in rural areas, have been | | | | What are the gaps in coverage, in terms of types of |
| unable to obtain quality services at a reasonable price | | | | customers served, types of services provided, and |
| from the formal financial sector. Microfinance is best | | | | geographical reach? |