What is Microfinance?

Microfinance means providing financial services for poor people or those with meager income. Though the focus is on providing small loans, microfinance goes to include other vital financial services like savings, insurance and transfer of funds. Now, microfinance is an acknowledged powerful tool for easing poverty among the poor occupied with some work.

For whom is microfinance intended?

Microfinance is generally intended for working poor and people with low income, having no or limited access to formal financial services as offered by financial institutions like banks. As these people have very limited work opportunities, offering them regular salaries, they are mostly self-employed micro entrepreneurs, typically working from home. Generally, they are occupied with small businesses like street vendors selling raw or ready to eat foodstuffs, car repair, grocery shops, carpentry shop or such like. In rural areas they are generally involved with food processing, poultry, livestock and agriculture. More than sixty percent of microfinance patrons are women.

Why microfinance is so popular?

The main reason that makes microfinance popular is the realization that it offers a long lasting viable way of reducing poverty. Experience of almost four decades tells us that poor people can come out of poverty when they can access financial services like savings, insurance, loans and facilities for transferring funds. Microfinance is very different from charity. The underlying principle is that rather than serving fish to someone, it is far better to teach them how to fish. It aims to help poor people by prompting them to get engaged in some business activity and thus become self sufficient in due course of time. Though the correlation between poverty and micro financing is complex, the latter has gained popularity as it has the potential of creating an upright cycle of investment that enhances income, enabling people to come out of the cycle of poverty which enslaves lots of poor people. Once the poor entrepreneurs are offered loans over an extended duration of time their income starts going up, meaning they can progressively break the cycle of poverty on the strength of their personal efforts.

How significant is transfer of funds?

There are lots of poor people who get money from some members of their family who are working in another part of their country. Traditional sources of money transfer, costing up to 15% of funds being transferred, work out very expensive for the poor. Provision of cheaper, quicker ways of transferring money is a big benefit for the poor.

How does micro-insurance work?

Like any other insurance, micro insurance protects the poor against specified risks, the difference is that the premium is low, generally a small and fixed percentage of the amount of the loan with low coverage limits.

What types of institutions give microfinance services?

Most microfinance services were initiated by non-governmental organizations (NGOs), which subsequently progressed to formal microfinance institutions or MFIs, with their operations getting regulated by appropriate national banking or microfinance establishments. Now, a growing number of MFIs are structured to run as profit centers as it is a prerequisite for getting a license from financial institutions to tender saving services.

When is microfinance an inappropriate tool?

Though microfinance can prove to be of great help for the poor, it may be inappropriate at times. The reason is that small loans meant to be employed for the purpose of businesses are most helpful for people who can surely ascertain the viability and hence the profitability of their project and are confident of repaying the initial loan to qualify for getting additional loan. Those who are unable to payback even small loans may land into debt only to be in worse circumstances. In such cases it may be worthwhile to offer grants to the poorest of people, who would usually be more appreciative of help given to fulfill their basic requirements of food and shelter.

 

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