What is microfinance?
Microfinance typically refers to a range of financial services including credit, savings, insurance, money transfers, and other financial products provided by different services providers, targeted at poor and low income people. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance income-producing activities, build assets, stabilize consumption, and protect against risks. Need for micro finance
The poor, like the rest of society need money for stable daily sustenance, for improving their standard of living, to build assets and to protect themselves against risks. However, they are often excluded from traditional financial institutions and banking services due to various reasons. Banks incur high delivery costs for relatively small transactions and since much of the low income population is located in rural areas that are geographically remote and inaccessible, the cost of operating a branch in such a location is financially unfeasible. Also, lack of collateral, lower financial capabilities, variable income streams, low literacy levels and inadequate financial knowledge act as a hindrance to borrowing from banks. Microfinance institutions” (MFIs) commonly tend to use new methods developed over the past few decades to provide small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. Micro finance thus seeks to fill the gap between high income and low income borrowers. Due to lack of formal financial services, low income groups traditionally relied on local money lenders to avail credit easily. However, this money is loaned at exorbitantly high interest rates which ultimately force the borrower into a classic debt trap. Also, credit from money lenders has not conventionally acted as a tool for business investment or enhancement of quality of life, but rather as a lifeline for immediate consumption or healthcare needs. Microfinance, by providing an alternative to these loans, prevents borrowers from falling into vicious debt traps. Clientele scope of microfinance
Typically microfinance caters to the needs of poor and low income people who do not have access to other formal financial institutions. Microfinance clients are often self employed, household based entrepreneurs. Their microenterprises range from small retail shops and street vending to artisanal manufacture and service provision. In rural areas, clients include farmers as well as entrepreneurs with small income generating activities such as food processing and trade. Hard data on the poverty status of clients is limited, but tends to suggest that most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population, including the destitute, are not traditional microcredit clients because they lack stable cash flows to repay loans. Most clients below the poverty line are in the upper half of the poor. It is clear, however, that some MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of clients. Over the past decade, some financial institutions have started developing a range of products to meet the needs of other clients, including pensioners and salaried workers. Although little is known about the universe of potential clients, the number of households without effective access to financial services is enormous. Functioning of MFIs
Micro finance helps the low income population access credit in multiple ways by: (1)
Providing working capital to build businesses
Infusing credit to smooth cash flows and mitigate irregularity in...
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