The topic which interested me recently is – Microfinance
This is how the Wikipedia defines Microfinance – Providing financial service like microcredit, microinsurance and microsavings to the poor people.
But the actual meaning of Microfinance goes far beyond. I realized this only after a detailed analysis. Some key points about microfinance and how it can help the economically weaker sections.
- Microfinance does not really target the poor people. It actually targets the micro-entrepreneurs who lack access to conventional loans from financial institutions due to their economic and social status
- Microfinance must not be confused with subsidies to the poor by the Government. We can actually split the poor people into two categories – Those who are extremely poor that a loan would never do them any good and Those who are poor but capable of entrepreneurial activities, otherwise hampered by lack of finance. Microfinance targets the second category
- Reason is very simple. Giving loans to the poor who cannot effectively use them, merely increases their burden
- Commercial Financial Institutions are unwilling to lend smaller amounts of loans in the range of 50$ to 150$ due to high percentage of processing cost. Also, interest rates on these loans are very high, thus making them less attractive from the customer perspective
- Microfinance Institutions (MFI) play the lender role in the microfinance paradigm. They lend smaller amounts to economically backward people and help them in their growth. No collaterals are required in many cases. Repayment cycles are extremely short like 6 months – 1 year
- Loans are not given to individuals but to a peer group with similar economic status, say a group of 8-10 from the same village. If anyone in the group defaults repayment, then a penalty is imposed on the entire group. Thus the peers are more cautious in selecting the group members and prompt in repayment
- Poor families are generally fed and survived by 1 or 2 family members. Sudden life loss of any of these members will ruin the family. So they are as much dependent on Life Insurance as ourselves. Thus comes the concept of MicroInsurance.
Microfinance in short – Financial Services to the economically backward micro-entrepreneurs to sustain and develop their entrepreneurial activities, to the betterment of the individual and his/her family thereof.
It is high time that the Commercial Financial Institutions join hands with the MFI and help in the promulgation of Microfinancing in Indian Villages and Towns.
For more resources: