Microfinance is a modern concept of financing which is focused on providing small business owners and entrepreneurs access to capital. The complex business environment and changing regulatory requirements do not allow small business owners and entrepreneurs to enjoy traditional financial resources and services from major institutions which means, it is difficult for such parties to manage loans, investments and other financial services .
Microfinance allows different financial services to small, poor and needy businesses and supports them to become self-sufficient.
Origin of Microfinance
Muhammad Yunus, economist from Bangladesh, first pronounced the concept of ‘microlending’. Muhammad Yunus conducted a study on microlending and he was awarded with Nobel Peace Price for the efforts through microcredit to create eonomic and social development, in 2006.
In 1976, Muhammad Yunus, during his visit in India, visited a village in Jobra and witnessed severe poverty. He proposed that lending small amounts of money to the villagers of Jobra would help increase self-employment and reduce poverty. To support this, Yunus provided $27 to several women in the village and earned 83 cents of interest on the loans.
In 1983, Muhammad Yunus founded Grameen Bank which is the first microlending institution in operation in the world. Through micro lending, Grameen Bank was able to encourage social innovators and small organizations. Microfinance impacted the livelihood opportunity of less fortunate people through the provision of capital.
The micro lending model became popular after its successful operation in Bangladesh after the establishment of Grameen Bank. Grameen Bank created a business lending worth $6 billion to micro entrepreneurs by 2007.
Key Features of Micro Finance
- The borrowers are either low capital businesses, entrepreneurs or individuals from a low income background.
- The lending amount is limited i.e. micro loans are granted to the borrowers.
- Microfinance loans do not require any collateral during lending.
- Microfinance lends to small groups of people who cross guarantee other members of that lending group. Group Lending ensures high repayment levels.
- Microfinance encourages investment and income generation.
Benefits of Microfinance
- Microfinance allows less opportune individuals/businesses to have access to various financial services.
- Microfinance will extend the credit facilities to small businesses and entrepreneurs encouraging investment and extending credit reach.
- Microfinance, via fund availability, disrupts the cycle of poverty. The funds available can be used to invest in housing, health care which will provide opportunities to small businesses.
- Microfinance incorporates individuals and businesses who are overlooked by corporate and commercial banks. Microfinance provides loans to women, disabilities, unemployed, and entrepreneurs.
- Microfinance induces job opportunities by encouraging small businesses and entrepreneurs to start or expand their ventures.
Microfinance Institutions are those organizations which offer various financial services to small businesses and low income populations. Microfinance Institutions (MFIs) provide loans to its customers, offer insurance service, allow customers to deposit and provide money transfer service. Microfinance Institution can range from a small non-profit organization to profit oriented commercial banks.