Micro Finance

                                

                                                                                     Author : Sabuz Akaash 

What Is Microfinance?

Microfinance, also called microcredit, is a type of banking service provided to low-income individuals or groups who otherwise wouldn't have access to financial services. While institutions participating in microfinance most often provide lending—microloans can range from as small as $50 to under $50,000. 

However, many banks offer additional services, such as checking and savings accounts, while others may provide micro-insurance products as well as financial and business education.

U.S. Chamber of Commerce. "Everything Your Small Business Needs To Know About Microlending."

The goal of microfinance is to ultimately allow impoverished people to become self-sufficient. 

 

• The Maine Points 
• Microfinance represents banking services for low-income individuals or groups who otherwise would not have access to financial services. 
• Microfinance allows people to take on reasonable small business loans safely and consistent with ethical lending practices. 
• Most microfinancing operations occur in developing nations, such as Bangladesh, Cambodia, India, Afghanistan, the Democratic Republic of Congo, Indonesia, and Ecuador.
• Like conventional lenders, microfinanciers charge interest on loans and institute specific repayment plans. 

Microfinance Loan Terms

Like conventional lenders, microfinanciers must charge interest on loans and institute specific repayment plans with payments due at regular intervals. Some lenders require loan recipients to set aside some of their income in a savings account, which can be used as insurance if the customer defaults. If the borrower repays the loan successfully, then they have just accrued extra savings. 

Because many applicants can't offer collateral, microlenders often pool borrowers together as a buffer. After receiving loans, recipients repay their debts together. Because the program's success depends on everyone's contributions, this creates a form of peer pressure that can help ensure repayment.

For example, if an individual is having trouble using their money to start a business, they can seek help from other group members or the loan officer. Through repayment, loan recipients begin to develop a good credit history, which allows them to get larger loans in the future.

Although these borrowers often qualify as "very poor," repayment rates on microloans are often higher than the average repayment rate on more conventional forms of financing. For example, the Grameen Bank in Bangladesh, one of the original microlenders, reports an average repayment rate of 98%. 

History of Microfinance

Microfinance isn't a new concept. Small operations of this type have existed since the 18th century. The first occurrence of microlending is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens. In its modern form, microfinancing became popular on a large scale in the 1970s.

The first organization to receive attention was the Grameen Bank, started in 1983 by Muhammad Yunus in Bangladesh.

Glasgow Caledonian University. "Chancellor Emeritus. In addition to providing loans to its clients, the Grameen Bank also suggests that its customers subscribe to its "16 Decisions," a basic list of ways people experiencing poverty can improve their lives.

 The 16 Decisions touch upon a wide variety of subjects, ranging from a request to stop the practice of issuing dowries upon a couple's marriage to keeping drinking water sanitary. In 2006, the Nobel Peace Prize was awarded to both Yunus and the Grameen Bank for their efforts in developing the microfinance system.

There are other microfinance operations around the world. Some larger organizations work closely with the World Bank, while other smaller groups operate in different nations. Some organizations enable lenders to choose exactly who they want to support, categorizing borrowers by their poverty level, geographic region, and type of small business.

The For-Profit Controversy

Although there are countless heartwarming success stories, microfinance has sometimes been the target of criticism. As microfinance interest rates are generally higher than conventional banks', critics have argued that these operations make money off people with low incomes.

In fact, some non-profit microlenders have converted to being for-profit as they've grown. One of the largest and most controversial is Mexico's Banco Compartamos. The bank was started in 1990 as a nonprofit. However, management transformed the enterprise into a traditional, for-profit company ten years later. In 2007, it went public on the Mexican Stock Exchange, and its initial public offering (IPO) raised more than $400 million.

Like most other microfinance companies, Compartamos Banco makes relatively small loans, serves a predominatly female clientele, and pools borrowers into groups.The main difference lies in how it uses the funds it nets in interest and repayments. Like any public company, it distributes them to shareholders. In contrast, nonprofit institutions take a more philanthropic stance toward profits, using them to expand the number of people they help or to create more programs. 

Other Criticisms of Microfinance

In addition to the divide between nonprofit and for-profit microfinance enterprises, other criticisms exist. Some say that individual microloans of $100 aren't enough to provide independence—instead, they keep recipients working in subsistence-level trades, barely covering basic needs like food and shelter.

A better approach, these critics maintain, is to create jobs by constructing new factories and producing new goods. They cite the examples of China and India, where the development of large industries has led to stable employment and higher wages, which in turn has helped millions to emerge from the lowest levels of poverty.

Other critics have said that the presence of interest payments is a burden. Despite the healthy repayment rates, some borrowers can't or don't, repay loans, because of the failure of their ventures, personal catastrophe, or other reasons. So, this added debt can make microcredit recipients even poorer than when they started.

The  Line of Bottom

Microfinance provides banking services to low-income individuals or groups who otherwise wouldn't have access to financial services with the intent to help impoverished people become self-sufficient. Institutions often lend $50 to under $50,000 but may also offer checking and savings accounts as well as financial education.

Criticisms of the microlending industry include high interest rates charged on small loans, profit motives clashing with the original goal of helping impoverished people, and loans so limited that borrowers cannot become self-sufficient. 

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