Microfinance Essay

1.1 Introduction to Microfinance

An important term that is cropping up everywhere nowadays is “Microfinance”. It is important for every person interested in the field of finance to be aware of this term, as in the coming days Microfinance is expected to be one of the brightest and the most appealing sector of the Indian Economy.

Microfinance refers to provision of financial services to poor or low-income clients, including consumers and self-employed.in other words, it refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, it includes not just credit but also savings, insurance, and fund transfers.”. Promoter’s microfinance generally believes that such access will help poor people out of poverty.

Microcredit should not be mixed with microfinance, which addresses a full range of banking needs for the poor people. As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term "microfinance" helps to differentiate these services from those which formal banks provide.

A microfinance institution (MFI) is an organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks. “An MFI can be broadly defined as any organization such as credit union, down-scaled commercial bank, financial NGO, or credit cooperative, etc. that provides financial services for the poor."

1.1.1 Principles

 Poor people need a variety of financial services, not just loans.

 Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people.

 Microfinance is about building permanen...

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... productively. It has also changed the perception that poor people are not credit worthy. Records have shown that, instead, they are a good risk, with higher repayment rates than conventional borrowers. In some of the most successful microfinance institutions, repayment rates are as high as 98 per cent.

As microfinance has evolved, there has been an increasing recognition of the importance of savings, often referred to as the “the forgotten half of microfinance”. During the 1990s we came to realize that there was a pattern emerging in how poor people were using the very large microfinance networks. In the networks that offered both credit and savings services, there were often as many as five savers for each borrower. While credit is important, it is only one of the many different kinds of financial services that poor people need to improve their lives.