Microfinance As A Financial Tool To Strengthen The Lives Of Poor

Microfinance is banking service that provide small loans to unemployed or low income individuals loans who otherwise do not have access to financial services

Many institutions who are working as microcredit companies provide loans as small as $100 to $25,000 which also offer additional services like checking and savings accounts and some even finance and business education. The objective of microfinance lies in providing impoverished sections of society an opportunity to become self sufficient. Microfinance institutes charge interests on loans and offer specific repayment loans.
Understanding Microfinance

Microfinance organizations provide unemployed or low income persons small loans as these people are trapped in poverty and have limited access to financial resource, these people do not have sufficient income to do business with traditional financial institutions. Despite excluded from banking services, many people live on or less than $2 per day so they try to acquire or borrow credit or insurance to make payments on their debt. Thus these poor people typically look for family, friends, and even loan sharks to meet their monetary needs.

Microfinance companies provide small business loans to people abided by ethics of lending practices. Though microfinance companies exist all around the world, but these are more prevalent in developing nations like Indonesia, Uganda, Serbia to name a few. Many microfinance companies focus on helping women in particular. Microfinance companies support different activities like providing bank saving accounts and providing startup Capital to small businesses entrepreneurs for educational programs to teach principles of investing. These programs focus on skills like bookkeeping, cash flow management and technical skills like accounting.

Unlike traditional finance institutions who are concerned with borrower to have enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs to succeed. In many cases people have to seek help from microfinance companies to learn basic lessons for management of money.  These classes include understanding interest rates, concept of cash flow, how financing agreements and savings accounts work how to budget and how to manage debt. Once educated customers can apply for loans, just as we would find at a traditional bank, a loan officer assists borrowers with applications, oversee lending process and approve loans. These loans which could be as small as $100 may not seem much to some people in developed world, but in impoverished nations this small amount is enough to start their own business and indulge themselves in other profit generating activities.

Terms and Conditions of Microfinance Loans

Microfinance companies charge interest on Loan and they offer specific repayment plans at accepted intervals. Some of the lenders allow loan recipients to put aside part of their income in a savings account which act as insurance if a borrower becomes defaulter. If the borrower repays the loan successfully then they have accrued extra savings. Empowering women particularly leads to more stability and prosperity for families. It is seen that many applicants are not able to offer collateral security thus microlenders pool many borrowers together acting as buffer. After the borrowers receive loans, recipients can repay their debts together. The success of this pool program depends on individual’s contribution therefore it creates a form of peer pressure that would ensure repayment.  For example if an individual is facing trouble while using his money to start a business, then that person can seek help from other group members or from loan officer. Through repayment, loan recipient starts to develop a good credit history which allows them to get larger loans in future. As the borrowers are qualified poor, then their repayment on microloans is often higher than average repayment rate or more in conventional forms of financing.

History of Microfinance

It is not a new concept, Small loan operators existed since 18^th century. The first credit of microfinance goes to Irish Loan Fund System, which was introduced by Jonathan Swift, who worked to improve conditions to improve conditions of impoverished Irish citizens. In its modern form, Microfinance became popular in 1970s.

The first institution to receive attention was Grameen Bank, which was started in 1983 by Muhammad Yunus in Bangladesh. Apart from providing loans Grameen Bank suggests that its customers to 16 decisions a basic list of ways by which poor can improve their lives. These 16 decisions touch upon subjects like stopping to take dowries upon a couple’s marriage, to keep drinking water sanitary. In year 2006 Nobel peace prize was given to both Yunus Muhammad and Grameen bank for their efforts in developing microfinance system.

In India SKS Microfinance serves large number of poor clients. This bank was formed in 1998 and it has now grown as one of the biggest microfinance operations in the world. SKS works in similar fashion as Grameen Bank, that pools borrowers into group of five members who work synergistically to ensure that their loans are repaid. There are other microfinance companies working throughout the world. Some larger companies work closely with the World Bank while other smaller groups operate in different nations. Some organizations ensure their funds distribution based on certain criteria like level of poverty, geographic region and type of small business.

Some organizations are targeted for specific purposes like in Uganda many women are provided small loans that provide women with capital to undertake projects such as growing eggplants or opening small cafes. While some organizations focus their efforts through their business goals to improve overall community through different initiatives like offering education, training individuals for jobs and working together to make a better environment.

Benefits of Microfinance

It is being estimated that around 500 million people around the world are benefitted directly or indirectly through microfinance or its related operations. It is also estimated that more than 120 million people are directly benefitted by microfinance. The benefit of Microfinance is that it creates jobs, trade and overall economic improvement within a community. Microfinance create small job opportunities for collection executives who collect interest on the loan amount therefore indirectly these people gets jobs. Microfinance also create job opportunities for women who want to start their own initiatives for better livelihood. These women work in self help groups and attempt to make more money from their lend amount.

Conclusion:- Microfinance is the way for financial inclusion of poor and secluded sections of the society. The rates of interest in microfinance is higher than traditional banks since there is no collateral taken against the amount given to people thus risk associated with amount recovery is also high.