Concept of Microfinance
The Nobel Prize winner Muhammad Yunus spearheaded the idea of microfinance. Microfinance aims to help the people who face financial difficulties by providing them with the necessary capital so that these people can start their own businesses and henceforth gain financial independence.
Traditionally, rural people had deficient access to institutionalized credit from commercial banks and the local lenders. Their only source of credit charged very high-interest rates, thereby depleting them. Microfinance is a solution to this problem. Microfinance aims to increase the revenue of the poor, improve the living conditions of small business entrepreneurs and their families, to empower people – especially women. With the help of microfinance and Self Help Groups, many low-income group women have come forward and started their own businesses. Microfinance has grown over the years and has a lot of women beneficiaries.
The women bear the more significant brunt of poverty. The most significant challenge the women face is the lack of financial services and training to start their businesses. Even though there are many government schemes, women hardly benefit from them financially. Hence, Microfinance has been growing to empower women.
Micro-credit is the allocation of financial services to low-income people. Its goal is to give the poor people an opportunity to become self-sufficient in the sense that these people can undertake entrepreneurial activities and can come out of the grip of poverty. The development and inclusion of the poor and the underprivileged must be the aim of the government to ensure equality within the economy.
Also Read: Sources of Finance for Small Businesses
How does Micro Finance work?
Joint Liability Groups
Microfinance institutions give loans under the joint liability group. In this, the creation of a group of 5 to 6 men/women who know each other takes place. The credit is allotted to a group, not an individual. If one of the members of the group defaults, then others must pay on the defaulter’s behalf. This way, it eliminates the need for any collateral. The reason why women are given microcredit mostly is that they are seen as responsible and trustworthy people. By adopting this repayment structure, microfinance institutions have seen a higher overall repayment rate which is often above 90%. A higher amount may be sanctioned next time if the group pays installments on time.
Microfinance is acceptable to the fund seeker as the rate of interest charged is still lower than the other institutions. They also do not have to give anything as collateral security. Money directly goes to their bank account, and hence there is no third-party involvement. The joint liability group is liable and flexible.
Microfinance accelerates the savings process. Earlier, the people belonging to poor households used to bury their savings either in the backyard or someplace where they would remain stagnant. However, because of microfinance, these people have been offered an opportunity to save their money in a savings account. Some microfinance institutions offer loans where they can earn interest and grow. For that, the individual has to agree to save a specific amount on a regular basis into a savings account. This savings process allows the financial inclusion of poor people. This way, they can have a strong base to fund their expenses. Expenses like a business, education of their children, home loans, etc. Henceforth, microfinance helps in increasing the living standards of the poor.
An occurrence of any uneventful circumstance is a constant threat to the return to poverty. For example, a health emergency or a bad growing season could easily evaporate the savings of the family. To avoid such situations, most microfinance institutions include insurance products. It will protect their clients from such events, which could deplete their clients’ savings. These institutions offer a variety of micro-insurance products. Like life insurance, weather index crop insurance, and general insurance. Certain institutions even offer basic policies to their clients for free. This ultimately provides long-term financial stability.
Most people do not have financial knowledge. That is the reason why they are not able to take advantage of the financial system. Many Micro Finance institutions initially give training to their clients to educate them on financial matters. The group members are first given the training. It will enhance their financial management skills as well as social inclusion and quality of life. The members are trained based on how to form a cohesive group. They are informed about the discipline to be ensured, loan rationalization, loan disbursement, and its utilization in repayment. Provision of training from time to time is essential. The training enables financial inclusion and also makes the people aware of the available investment options. This way, the poor people can avail themselves of the benefits of the financial system. This way, Micro Finance paves the way for their success.
Microfinance and Women Empowerment
If women are empowered by giving opportunities and financial inclusion, they can be successful entrepreneurs and great leaders. This is possible through Micro Finance. Henceforth, many countries are taking initiatives to empower women. Mainly microfinance aims at reducing gender inequality. According to reports from the World Bank, high levels of gender inequality and discrimination often have the following attributes:
High poverty levels, low economic growth, and weak governance.
There are many advantages to targeting women;
- It helps in bringing gender equality.
- Women make decisions for the well-being of the whole family. Hence targeting them brings about a multiplier effect.