Microfinance is
a concept which proved as blessing in disguise for poor. Banking and financial
services never thought about providing loans to the one who does not have funds
but to the one who already have. It was difficult for poor to enjoy financial services
and investment benefits. They do not have any security to be pledged or
mortgaged for loans and also they do not have any guarantor who can guarantee
on their behalf. So receiving repayment from such people seems impossible thus
all the doors were closed for them. They were very intellectual but lack
sources of finance. They needed small money to turn up the big ideas, which is
a distant dream because of unavailability of funds. They avails all the
domestic opportunity. Like they invest in Gold and other jewellery unlike rich
people who invests in shares and stock market.
They saves corn
to sale it on later dates.
Microfinance is
a concept of providing funds to poor people, without asking for any requirement
or without any complexity or without any security as generally demanded by
Banks and other financial institutions. As these financial services 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.
Why are they
small? Someone who doesn't have a lot of money isn't likely to want or be able
to take out a $50,000 loan, or be able to open a savings account with an
opening balance of $1,000.
It's easy to
imagine poor people don't need financial services, but when you think about it
they are using these services already, although they might look a little
different. They bury cash in the garden or stash it under the mattress. They
participate in informal savings groups where everyone contributes a small
amount of cash each day, week, or month, and is successively awarded the pot on
a rotating basis. Some of these groups allow members to borrow from the pot as
well. The poor also give their money to neighbors to hold or pay local cash collectors
to keep it safe. However widely used, informal savings mechanisms have serious
limitations. It is not possible, for example, to cut a leg off a goat when the
family suddenly needs a small amount of cash. In-kind savings are subject to
fluctuations in commodity prices, destruction by insects, fire, thieves, or
illness (in the case of livestock). Informal rotating savings groups tend to be
small and rotate limited amounts of money. Moreover, these groups often require
rigid amounts of money at set intervals and do not react to changes in their
members' ability to save. Perhaps most importantly, the poor are more likely to
lose their money through fraud or mismanagement in informal savings
arrangements than are depositors in formal financial institutions."
INDIA’S
microfinance sector was once touted as a saviour of the poor and a good bet for
investors. In recent years microfinance institutions (MFIs) have focused
increasingly on making their operations financially sustainable by charging
interest rates that are high enough to cover all their costs. This approach
ensures that they can continue to operate and indeed expand to serve more
people. If they do not make their operations sustainable then they must
continually be reliant upon subsidies from donors, which may or may not be
forthcoming, or they may have to close down altogether since they cannot cover
their costs in which case many poor people would certainly be worse off. It is
worth pointing out that as MFIs mature over time and become more efficient, transaction
costs usually decrease and this can mean lower interest rates. Furthermore, it
is also worth emphasising that the interest rates charged by MFIs are still far
below what poor people can expect to pay to local moneylenders, who often
charge annual interest rates of several hundred percent. By providing interest
free capital to MFIs through peer-to-peer lending site like lend with care, one
of our aims is to enable local institutions to lower interest rates whilst
continuing to serve the poorest in their communities.
Microfinance is
a double-edged sword: even with the best of intentions, it can both help and
harm. Microfinance has helped many people rise above poverty and transform
their lives for the better. It had be known that countless households who have
used microloans to permanently increase their cash incomes, which are then used
for longer and better education for the families' children as well as improving
health and nutrition. I believe this
type of successful outcome is the most common result of a microfinance loan.
If an MFI loan
is taken with the goal of financing a short-term business expense, then you
will likely see an immediate return that will justify the interest rate. Face
it, these loans are expensive to service and other alternatives are even worse.
If the loan is
taken to roll a previous loan or for consumption items like food, then yes,
they may end up poorer than before. Unless it's to pay off a loan shark, and
then they might be better off, due to the lower interest rate/risk of bodily
harm.
Parenthetically,
MFI's frequently sell off questionable notes before they go delinquent, in
order to pad their repayment rate figures. It's not nice but it frequently
occurs. This leads to overstated success rates. But in general MFI's are
learning valuable lessons from the crash and are implementing practices that
improve repayment rates while ensuring loans go to people who will actually
benefit from them.
In general, the
growth was driven by a mix of motives. The pursuit of profit was one,
especially in India, where MFIs brought in private-equity investors looking for
high returns. But most of the investment in microcredit has been socially
motivated and profit has not been the main lure. Thus these bursting bubbles
may be the first in history filled more by generosity than greed.
I would have to
conclude that there is no convincing evidence that microcredit raises incomes
on average. While many have sought that and many have thought it found, the
fact is, it still eludes us. It is entirely possible that a majority of
microfinance users do not invest in microenterprises but instead use the loans
to smooth their lives and continue to spend on what they see as necessities.
Microfinance is
a broad category of services, which includes microcredit. Microcredit is
provision of credit services to poor clients. Although microcredit is one of
the aspects of microfinance, conflation of the two terms is endemic in public
discourse. Critics often 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.
Microcredit is
the extension of very small loans (microloans) to impoverished borrowers who
typically lack collateral, steady employment and a verifiable credit history.
It is designed not only to support entrepreneurship and alleviate poverty, but
also in many cases to empower women and uplift entire communities by extension.
The idea of
microfinance was originated in the mind of Bangladesh based entrepreneur
mohhammmad yunus, who founded Gramin bank as world’s first Microfinance
Institution. His idea was rejected by almost all famous banks. But he succeeded
with 99% repayment rate. In 1976, during visits to the poorest households in
the village of Jobra near Chittagong
University, Yunus discovered that very small loans could make a
disproportionate difference to a poor person. Jobra women who made bamboo furniture had to take out usurious
loans for buying bamboo, to pay their profits to the moneylenders. His first
loan, consisting of US$27.00 from his own pocket, was made to 42 women in the
village, who made a net profit of BDT 0.50 (US$0.02) each on the loan.
Accumulated through many loans, this vastly improving Bangladesh's ability to
export and import as it did in the past, resulting in a greater form of
globalisation and economic status. Yunus finally succeeded in securing a loan
from the government Janata Bank to
lend it to the poor in Jobra in December 1976. The institution continued to
operate by securing loans from other banks for its projects. By 1982, the bank
had 28,000 members. On 1 October 1983 the pilot project began operations as a
full-fledged bank and was renamed the Grameen Bank (Village Bank) to make
loans to poor Bangladeshis. Yunus and his colleagues encountered everything
from violent radical leftists to the conservative clergy who told women that
they would be denied a Muslim burial if they borrowed money from the Grameen
Bank. As of July 2007, Grameen Bank has issued US$ 6.38 billion
to 7.4 million borrowers. To ensure repayment, the bank uses a system of
"solidarity groups". These small informal groups apply together for
loans and its members act as co-guarantors of repayment and support one
another's efforts at economic self-advancement. Gramin bank became a corporate
bank in 2002. Today it is 90% owned by its borrowers (the rural poor) and 10%
by the government. It is estimated that nearly nine million people are
borrowers from the Grameen Bank in Bangladesh and 95% of them are women. Yunus
received the Nobel Prize in 2006 for his work in alleviating poverty in rural
areas but he was controversially removed from his post as head of the Grameen
Bank by the Central Bank of Bangladesh in 2011 because of his age (70 years
old). The move was widely seen as a political attack by the Bangladesh Prime
Minister, Sheikh Hasina, a long-term critic of Yunus and the Grameen Bank who,
she claimed, were making money from poor people by charging high interest
rates.
The success of
the Grameen model has encouraged the growth of many more microfinance
institutions in Latin America, Africa and Asia such as Kiva and PRODEM (later
Banco Sol). It is the growth of these institutions and the increased
involvement of commercial banks with neoliberal principles that has caused a
debate about the true value of microcredit as a means of reducing poverty.
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