Micro Finance Institutions

Topics: Microfinance, Microcredit, Poverty Pages: 4 (915 words) Published: August 12, 2013
MICROFINANCE INSTITUTIONS : INTRODUCTION:
Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.” Microfinance is not just about giving micro credit to the poor rather it is an economic development tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like credit, savings, insurance, remittance and also non-financial services like training, counseling etc. FEATURES:

* Borrowers are from the low income group
* Loans are of small amount – micro loans
* Short duration loans
* Loans are offered without collaterals
* High frequency of repayment
* Loans are generally taken for income generation purpose PURPOSE:

Traditionally, banks have not provided financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved are. For example, although the total gross revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000, it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. The fixed cost of processing loans of any size is considerable as several things—assessment of potential borrowers, their repayment prospects and security; administration of outstanding loans, collecting from delinquent borrowers, etc.—have to be done in all cases. There is a break-even point in providing loans or deposits below which banks lose money on each transaction they make. Poor people usually fall below that breakeven point. A similar calculation resists efforts to deliver other financial services to poor people. OBSTACLES:

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