• Micro Finance

    Microfinance is the financial help provided to the poor or low income people who are not capable of getting financial help or loan from big banks or financial institutions. They can obtain the microfinance from micro financial institution (MFI’s), postal saving banks, credit unions or NGO’s. The funds are usually a small amount.

    Microfinance is not just providing loans but also a series of other financial services to the poor.

    Microcredit

    Microcredit is a form of microfinance which is equivalent to small loans provided to the poor and needy people. Microfinance provides an array of financial services while microcredits are small loans. The ultimate objective of both is to remove poverty from the society.

    Microcredit can be loan from a moneylender, friends, any specialized banks etc. The loans are remunerated back in small repayments and can also be disbursed again if the first loan is repaid completely.

    Microfinance Credit lending models:

    There is various microfinance credit lending methods used for microfinance. They are mainly

    Association: The association generally consists of a group of people of legal body which can be associated with fees collection, insurance, small credits etc.

    Community banking: An entire community is considered as one entity and loan is provided to them. These communities are generally formed with the help of NGOs.

    Cooperatives: It is a self-governing association of people who all come together to form a group in order to meet the same goal. All the members use the financing and savings scheme benefits provided by the cooperatives.

    Grameen model: This is mostly used in the rural areas where a unit bank is set up for large number of villages. The bank employees then visit these villages to identify the prospective customers and group of people eligible for microfinance loan. Then a group of 5 borrowers are formed and only 2 of them are eligible for the loan. The other members are eligible to these loans only when the 2 members have repaid their loans with interest within a period of fifty weeks. The group responsibility of the borrowers serves as the security for the loan.

    Individual model: Here, the loan is directly given to the borrower who has the full responsibility to repay the entire loan amount.

    Intermediary: They form a bridge between the lender and the borrower. These intermediaries help in increasing the credit worthiness of the borrowers by providing then training in financial services, education, opening saving accounts. The intermediary could be an individual, NGO or a microcredit programmes.

    Non Government Organizations: NGOs have always had an important role in the field of microcredit. They create awareness on the significance of microcredit, conduct workshops, training, seminars, etc. They are generally the intermediary between the lender and borrower. 

    Main characteristics of Microfinance

    • The interest rate is very high for micro finance as there is no collateral involved in the microfinance lending.
    • Generally the underprivileged and low income people are the clients of microfinance.
    • Microfinance institutions prefer women borrowers than men to improve their social standing and increase overall domestic income.
    • The main purpose of microfinance loans are mostly to start or finance small businesses, to fund education fees, housing rents, household purpose, medical expenses, weddings, etc.

    Key Advantages of Microfinance

    • Increases opportunities for poor people in rural areas
    • Improves their social standing
    • Helps to finance important funding requirements.
    • Eliminates social evils from the Society.
    • Brings entrepreneur quality among the poor people by encouraging them to start new businesses.

    Key Disadvantages/ Limitations of Microfinance

    • The target customers are concentrated to very small areas with low density population and less purchasing power. So market opportunities are less.
    • Most people lack the entrepreneurial skill to utilize the loan amount to productive activities and there is a high chance of falling into further debt.
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