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The traditional approach to microfinance funding focuses on development aid, prioritizing social impact over financial returns, and relies heavily on grants and concessional loans from NGOs and government programs. In contrast, the financial approach views MFIs as sustainable financial institutions that balance social objectives with economic viability, utilizing market-based funding strategies like commercial loans and client savings. This shift encourages MFIs to achieve financial self-sufficiency while still serving low-income clients, often charging interest rates that reflect the true cost of lending.

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36 views1 page

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The traditional approach to microfinance funding focuses on development aid, prioritizing social impact over financial returns, and relies heavily on grants and concessional loans from NGOs and government programs. In contrast, the financial approach views MFIs as sustainable financial institutions that balance social objectives with economic viability, utilizing market-based funding strategies like commercial loans and client savings. This shift encourages MFIs to achieve financial self-sufficiency while still serving low-income clients, often charging interest rates that reflect the true cost of lending.

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merlinxavi869
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Traditional Approach to MFI Funding

The traditional approach to microfinance funding is rooted in the concept of development aid and social
intermediation. Here Microfinance Institutions (MFIs) are seen as tools for poverty alleviation, aiming to
serve vulnerable populations who lack access to formal banking systems (like poor, women and the
poorest of the poor). Funding sources under this approach typically include grants, donations, and
concessional loans (loans with very low interest rates and longer repayment time) provided by non-
governmental organizations (NGOs) and government aid programs. Funds under this approach are
usually offered at little or no cost, and often come with conditions focused on outreach, gender equality,
rural inclusion, or community development.

With this approach, social impact is prioritized over financial return. MFIs operate under the assumption
that poor clients cannot afford market-based interest rates, so the institutions keep rates low and rely on
external funding to sustain operations. There is also limited pressure to generate profits or achieve
financial self-sufficiency. The traditional approach tends to view financial sustainability as secondary to
social intermediation.

Inorder to get fund through the traditional approach from Donors and Philantrophy sources, a detail
propel has to be drawn describing detailly all information patterning to the use of the funds. It is mostly
done in the form of business plan presented to the stakeholders.

While this model plays a critical role in expanding financial access, especially in the early stages of MFI
development, it often leaves institutions vulnerable to funding shortages and unsustainable growth, as
they depend heavily on donor support.

Financial Approach to MFI Funding

The financial approach to microfinance funding treats Microfinance institutions as viable financial
institutions that must balance social objectives with economic and financial sustainability. This approach
emerged as microfinance evolved from charitable interventions into a more professionalized sector with
financial sustainability and intermediation in view. The financial approach emphasizes market-based
funding strategies, including the use of commercial loans, client savings, equity investments, and debt
instruments such as bonds or microfinance investment vehicles (MIVs). Rather than depending on donor
aid, MFIs are expected to raise capital from financial markets and generate enough income through
interest and fees to cover their operational costs.

A key principle of the financial approach is financial self-sufficiency. MFIs are encouraged to operate
efficiently, manage risks effectively, and implement strong governance and transparency measures.
While they still serve low-income clients, they may charge interest rates that reflect the real cost of
lending, especially considering the high transaction costs and risk involved in microfinance. This
approach supports the idea that even the poor can be reliable borrowers and can be served

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