Microcredit: a Financial Innovation

Only available on StudyMode
  • Topic: Microfinance, Poverty, Microcredit
  • Pages : 17 (5940 words )
  • Download(s) : 75
  • Published : December 3, 2011
Open Document
Text Preview
“MICROCREDIT: A FINANCIAL INNOVATION AND ITS WELFARE EFFECTS”

Dr. Alpana Trehan, Reader, IMS,DAVV, Indore, India : alpana_48@yahoo.co.in

Ms. Devika Trehan, Student MBA (FA), IMS,DAVV,Indore,India : shivanitrehan@yahoo.com

Ms. Kshama Jaiswal , Lecturer, Renaissance College, Indore, India : kshama_jaiswal@rediffmail.com

ABSTRACT
“Microcredit is the extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. Microcredit is based on different set of principles, which are distinguished from the general financing or credit. Micro credit emphasizes building capacity of a micro-entrepreneur, employment generation, trust building and help to the micro entrepreneur on initiation and during difficult times.” This paper has discussed about the Micro credit which was introduced in India during eighties. It had a great impact to the urban poor community since they were not considered “creditworthy” enough. In such a scenario, micro-credit came as a blessing because micro-credit institutions lend small sums of money at a reasonable interest rate without any collateral to people who need it the most which led to the development of this financial innovation in India. This paper also discusses about the welfare effects of microcredit, which plays an important role for the social and economic development of the country such as reduction of vulnerability, formation of micro clusters, to eradicate poverty, child labour, helps in skills training, women education and empowerment, creation of wealth and assets and alleviate the rural masses from the clutches of poverty hence improving their standard of living.

INTRODUCTION:-
"If we are looking for one single action which will enable the poor to overcome their poverty, I would focus on credit" - Grameen Bank's founder, Dr. Muhammad Yunus Microcredit: “Microcredit is the extension of very small loans (microloans) to those in poverty designed to spur entrepreneurship. Microcredit is based on different set of principles, which are distinguished from the general financing or credit. Micro credit emphasizes building capacity of a micro-entrepreneur, employment generation, trust building and help to the micro entrepreneur on initiation and during difficult times.” The poor and vulnerable continue to face a dearth in banking and financial service in India- the number of household facing financial exclusion in the country is at around 120 million. Over the past decades microcredit has played an important role in filling this gap. Micro finance Institutions are uniquely positioned to facilitate financial inclusion, and provide microcredit to a clientele poorer and more vulnerable than the traditional bank clientele. There is no comprehensive regulatory frame work for the microfinance sector in India: MFI’s exist in many legal forms. Many mid size and large MFI’s are, however, acquiring and floating new companies to get registered on non banking financial companies which will help them achieve scale. The term microfinance refers to small scale financial services both credit and saving- that are extended to the poor in rural, semi-urban, and urban areas. The poor need microfinance to undertake economic activity, smoothen consumption, mitigate vulnerability to income shocks (in times of illness and natural disasters), increase saving and support self empowerment.

Microcredit is the extension of small loans to enterpreneurs too poor to qualify for traditional bank loans. It has proven an effective and popular measure in the ongoing struggle against poverty, enabling those without access to lending institutions to borrow at bank rates, and start small business. Microcredit is a programme extending small loans, and other financial services such as savings, to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families. In many developing countries the self employed comprise more than 50%...
tracking img