Microfinance - Wikipedia. Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship- based banking for individual entrepreneurs and small businesses; and (2) group- based models, where several entrepreneurs come together to apply for loans and other services as a group. In some regions, for example Southern Africa, microfinance is used to describe the supply of financial services to low- income employees, which is closer to the retail finance model prevalent in mainstream banking. For some, microfinance is a movement whose object is .
For others, microfinance is a way to promote economic development, employment and growth through the support of micro- entrepreneurs and small businesses. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance and the two are often confused.
Critics may attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact. What it does do, however, is to enhance financial inclusion. Background. This is often the case when people need the services money can provide but do not have dispensable funds required for those services, forcing them to revert to other means of acquiring them.
- What is a 'Microcredit' An extremely small loan given to impoverished people to help them become self employed. Also known as 'microlending' or 'microloan'. BREAKING DOWN 'Microcredit' Renee Loth wrote an article in 2002 for.
- The micro-credit Program provides training and loans averaging $50-250 to increase income and empower women. Marketing strategies and encouraging savings are an integral part of the program. Loans (with interest).
- In India, the National Bank. Bank of America has announced plans to award more than $3.7 million in grants to nonprofits to use in backing microloan programs.
In their book The Poor and Their Money, Stuart Rutherford and Sukhwinder Arora cite several types of needs: Lifecycle Needs: such as weddings, funerals, childbirth, education, home building, widowhood and old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and man- made events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc. Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry and precious metals. As Marguerite Robinson describes in The Micro finance Revolution, the 1.
In the 2. 00. 0s, the micro finance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty. While much progress has been made in developing a viable, commercial micro finance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to building a sound commercial micro finance industry include: Inappropriate donor subsidies. Poor regulation and supervision of deposit- taking micro finance institutions (MFIs)Few MFIs that meet the needs for savings, remittances or insurance.
Limited management capacity in MFIs. Institutional inefficiencies. Need for more dissemination and adoption of rural, agricultural micro finance methodologies. Microfinance is the proper tool to reduce income inequality, allowing citizens from lower socio- economical classes to participate in the economy. Moreover, its involvement has shown to lead to a downward trend in income inequality (Hermes, 2. Building a new home may involve saving and protecting diverse building materials for years until enough are available to proceed with construction.
Business - Microloans - Entrepreneur.com. What it is: The Small Business Administration established a Microloan Program in 1992 to increase the availability of very small loans to small-business borrowers. Vikram Akula SKS Microfinance uses about.me to show people what. Scholarship to implement a microloan program for impoverished farmers.
Microloan Program; Emergency Farm Loans.
Because all the value is accumulated before it is needed, this money management strategy is referred to as 'saving up'. A poor family might borrow from relatives to buy land, from a moneylender to buy rice, or from a microfinance institution to buy a sewing machine. Since these loans must be repaid by saving after the cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is that microcredit is addressing only half the problem, and arguably the less important half: poor people borrow to help them save and accumulate assets. Microcredit institutions should fund their loans through savings accounts that help poor people manage their myriad risks. A benchmark impact assessment of Grameen Bank and two other large microfinance institutions in Bangladesh found that for every $1 they were lending to clients to finance rural non- farm micro- enterprise, about $2. For example, a study by Wright and Mutesasira in Uganda concluded that .
The new paradigm places more attention on the efforts of poor people to reduce their many vulnerabilities by keeping more of what they earn and building up their assets. While they need loans, they may find it as useful to borrow for consumption as for microenterprise. A safe, flexible place to save money and withdraw it when needed is also essential for managing household and family risk. This microfinance project functions as an unofficial banking system where Jyothi, a .
Jyothi does her rounds throughout the city, collecting Rs. They ultimately end up with Rs. However, there are some issues with this microfinance saving program. One of the issues is that while saving, clients are actually losing part of their savings.
Jyothi takes interest from each client. When these slum dwellers find someone they trust, they are willing to pay up to 3.
There is also the risk of entrusting their savings to unlicensed, informal, peripatetic collectors. However, the slum dwellers are willing to accept this risk because they are unable to save at home, and unable to use the remote and unfriendly banks in their country. This microfinance project also has many benefits, such as empowering women and giving parents the ability to save money for their children. This specific microfinance project is a great example of the benefits and limitations of the . This is a small scale example, however Rutherford (2. Nairobi and studied her ROSCA.
Everyday 1. 5 women would save 1. This would continue for 1. At the end of the 1.
This ROSCA initiative is different from the . This initiative requires trust and social capital networks in order to work, so often these ROSCAs include people who know each other and have reciprocity. The ROSCA allows for marginalized groups to receive a lump sum at one time in order to pay or save for specific needs they have. Microfinance debates and challenges. This program was established in 2. One of the principal challenges of microfinance is providing small loans at an affordable cost.
The global average interest and fee rate is estimated at 3. Indeed, the local microfinance organizations that receive zero- interest loan capital from the online microlending platform Kiva charge average interest and fee rates of 3. For example, in Sub- Saharan Africa credit risk for microfinance institutes is very high, because customers need years to improve their livelihood and face many challenges during this time. Financial institutes often do not even have a system to check the person's identity. Additionally they are unable to design new products and enlarge their business to reduce the risk.
The high costs of traditional microfinance loans limit their effectiveness as a poverty- fighting tool. Offering loans at interest and fee rates of 3. Loan is for 4. 00,0. According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial Inclusion, more than one- third of borrowers surveyed reported struggling to repay their loans.
Some resorted to measures such as reducing their food intake or taking children out of school in order to repay microfinance debts that had not proven sufficiently profitable. Microfinance analyst David Roodman contends that, in mature markets, the average interest and fee rates charged by microfinance institutions tend to fall over time. The P2. P microlending service Zidisha is based on this premise, facilitating direct interaction between individual lenders and borrowers via an internet community rather than physical offices. Zidisha has managed to bring the cost of microloans to below 1. However, it remains to be seen whether such radical alternative models can reach the scale necessary to compete with traditional microfinance programs. Those from the private- sector side respond that, because money is fungible, such a restriction is impossible to enforce, and that in any case it should not be up to rich people to determine how poor people use their money.
Although it is generally agreed that microfinance practitioners should seek to balance these goals to some extent, there are a wide variety of strategies, ranging from the minimalist profit- orientation of Banco. Sol in Bolivia to the highly integrated not- for- profit orientation of BRAC in Bangladesh.
This is true not only for individual institutions, but also for governments engaged in developing national microfinance systems. Microfinance generally agree that women should be the primary focus of service delivery. Evidence shows that they are less likely to default on their loans than men. Industry data from 2.
MFIs reaching 5. 2 million borrowers includes MFIs using the solidarity lending methodology (9. MFIs using individual lending (5.
The delinquency rate for solidarity lending was 0. This focus on women is questioned sometimes, however a recent study of microenterpreneurs from Sri Lanka published by the World Bank found that the return on capital for male- owned businesses (half of the sample) averaged 1. It is argued that by providing women with initial capital, they will be able to support themselves independent of men, in a manner which would encourage sustainable growth of enterprise and eventual self- sufficiency.
This claim has yet to be proven in any substantial form. Moreover, the attraction of women as a potential investment base is precisely because they are constrained by socio- cultural norms regarding such concepts of obedience, familial duty, household maintenance and passivity.