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Micro Finance

- power to turn people living in poverty into prospering entrepreneurs -

What is Microfinance?

"Micro Finance is the provision of thrift, credit, and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards" – NABARD

Microfinance evolves from the fact that providing access to reliable and affordable financial services to the poor and needy population is the only meaningful way to eradicate poverty and helps create a powerful economic and social effects in the world arena. 

The idea of Micro financing gained sustainable growth everywhere including in developed countries as development practitioners have increasingly recognized that sustainable poverty alleviation requires greater coordination between programs and strategies focused on expanding household incomes and food security.

 

Microfinance is one such concept that gives the masses and underprivileged section of the society, access to business opportunities and the power to overcome hardened social structures.  It includes financial and non-financial services including skill up gradation and entrepreneurial development. Micro finance has the power to turn people living in poverty into prospering entrepreneurs and agents of change. It is all about looking forward and sees its clients not on the basis of what they are but what they can become. Unlike the banking sector, it has no limitations penetrating into rural or countryside. 

Microfinance can also help prevent the advent of loan sharks or informal moneylenders in countries like India where rural economy is developing fast and needs more secure and systematic financial services. It is estimated that nearly 200 million poor people around the world had received small loans without collateral and build up assets to earn a decent living. In short, Micro financing can be defined as a strategy that combines a possible high outreach with far fetching impact.

Why it is the best tool ?

Poverty is a global phenomenon. Lack of capital has been the chief obstacle in the path of alleviating poverty. Among the many measures, doling out money as charity and subsidy has failed to make an impact. Receiving money at no cost has been found to make the poor complacent. With grants, the recipients exhibit no accountability and rarely put the funds to any productive use. Studies have shown that one time capital has little or no effect in eradicating poverty, rather, a consistent source of credit and insurance are the tools necessary.

Cumbersome, lengthy procedures, lack of collateral and poor awareness has kept poorer sections of society away from banks and financial institutions. From a bank's perspective the cost of operation makes it an unattractive proposition as providing these services require a reach at far flung locations and large number of people to manage such operations.In such circumstances the poor have no option but to rely on local moneylenders who charge as much as 5% to 10% interest per month (effective 100 %-120% P.A) plunging the poor further into a debt trap.

Microfinance provides an ideal solution for bridging this gap – it provides capital on easier terms as well as it makes the borrower responsible. Micro finance plays a multifarious role in eliminating poverty. It increases household income, which in turn leads to food security, asset building, and funding children's education. Women account for the majority of clients for Microfinance. It is a means of self-empowerment in a society that undermines her value and dictates social structure, leaving her vulnerable. Microfinance increases her income, makes her a business owner and thereby drastically reduces her external dependence.

Today, Microfinance has become an agent of change in the economic scenario of rural and semi urban India. It is modelled on the Grameen Bank's highly successful microfinance venture with the concept of Joint Liability Group's or JLG's. Each JLG consists of 5 to 10 members who are women. To qualify, each of these women, they must be engaged in an economic activity that is lawful, sustainable and has a stable cash flow. Each member mutually backs the guarantee of the other.

 

Why Microfinance?

Why microfinance is a big question but with a very easy answer. As long as a majority of the world’s population remains poor and underserved, Microfinance can play a major role in alleviating poverty and is recognized as one of the best tools for women empowerment around the world.  The idea is simple as anyone can understand it. The concept is to provide extremely poor people with small loans so they can start and operate a business. The borrowers are able to save money and pay back the loan over time. 

Microfinance helps support financial security because it is not just a donation. The idea behind microfinance is to empower borrowers by helping them build a business which can create income and grow. Many organizations provide microcredit mainly for poor women. This is partly because women are often more excluded from financial services and educational opportunities than men. Women usually spend their money in ways that improve their families’ nutrition, health and education. Also, studies have shown that women are better than men in repaying their loans on time.

Microfinance is different from other kinds of aid. Huge organizations like the United Nations or International Monetary Fund might provide millions of dollars in aid to build systems in a developing country like India. But local people might not see the effects of such aid. Microfinance, however, is a kind of aid that helps on a small scale in ways that are direct and local. By bringing financial services to their doorsteps, microfinance companies introducing banking services to the poor as banks generally do not provide very small loans because of high administrative costs and lack of collateral security.

However, Microfinance provides poor people with a way to build savings and work toward becoming part of a country’s official financial system.