CHAPTER ONE  

INTRODUCTION  

Micro-finance refers to financial services such as cash loans, deposit savings accounts, and insurance made available in relatively small amounts to poorer populations throughout the developing world. Microfinance basically relates to all financial intermediation services such as savings, credit, funds transfers, insurance, pension and remittances among others by financial institution in both rural and urban areas to low income earners (Robinson, 2001). Microfinance promises both to combat poverty and to develop the institutional capacity of financial systems, through finding ways to cost-effectively lend money to poor households (Morduch, 2000). Three features distinguished microfinance from other formal financial products: the smallness of loans offered or savings collected the absence of asset-based collateral and the simplicity of operations (Seyed, 2011) . Loan repayment which measured portfolio quality was an essential ingredient for sustainability of MFIs. Loan repayment indicators included Portfolio at risk (PAR), credit risk measured by the sum of the level of loans past due 30 days or more (PAR>30) is negatively and significantly related to MFI sustainability (Cooper, A. Jackson, M. J . Patterson, G. A., 2003). Increased exposure to credit risk resulted to lower MFI sustainability, given that credit granting was the principal source of revenue for these institutions. There was a positive influence of

the collection of deposits from clients in form of savings and also shares. Microfinance is primarily a cash-based operation and involves member’s savings. However, to make the sorts of investment that stimulate endogenous economic growth, one needs access to financial capital that comes either from savings or from borrowing, which is difficult in environments where the formal means of either saving or borrowing are typically absent. Traditional communities had informal mechanisms for savings. For example, voluntary rotating savings and credit associations of various sorts are proliferating across Southeast Asia and Africa allowed individuals to receive periodic payouts from group contributions (Anthony, 2005).