Microfinance can be defined as a banking service dispensed to low-income individuals or groups as well as unemployed people who generally do not have access to financial services. It also refers to the credit or loans that are provided to the small and micro enterprises for the growth and expansion of their business by scaling up their operations at the same time.
Many microfinance institutions also provide additional services such as savings accounts, chequing accounts, and even micro-insurance services., and business and financial education. This promotes financial inclusion in the economy and also helps in economic and social growth in the country.
Microfinance for the Poor
Microfinance mostly targets the informal sector. There has been precedent that shows that microfinance has helped the financially poor to reduce their susceptibility to external shocks, improved income, and build feasible businesses. It also has been a potent instrument in enabling the economically weaker sections, especially women, to be self-sufficient, and become economic agents of change.
This income generated from businesses help expand business activities, contribute to household income expansion, and also aid in food security, education of the children, healthcare, etc.
Women have always been concealed from the public spaces, and interactions with such formal institutions may aid in building self-confidence among them and also a sense of empowerment.
Principles of Microfinance Institutions
1. To eradicate poverty by providing diverse financial services, and not just loans, needed by the poor.
2. Its focus is to build a financial system for the economically weaker sections.
3. Building of permanent local financial institutions that focuses on creating more domestic deposits, recycling them as loans, and also providing various other financial services.
4. The government’s duty is to enable financial services, not providing them.
Benefits of Microfinance
There are several benefits of microfinance.
Providing immediate funds
The microfinance setup helps to provide an additional level of resilient behaviour in the economy at large. It helps the households to work efficiently and effectively at large. It also helps these households to alleviate poverty. It allows the businessmen to run their companies and upscale their businesses at the same time. It provides the opportunity for the firm to get immediate resources for keeping their business on. It also helps in capital accumulation that leads to more access to funds when needed.
Access to credit
Since the credit amount is smaller when the economically weaker sections take up loans, the large banks do not partake in providing them. In addition, large banks do not provide loans to people with little or no assets. Microfinancing comes to the rescue here, as they are based on the ideology that small credit amounts can be a step towards ending the cycle of poverty. Women usually do not have proper documents for identification or certificates of land or house ownership, thereby hindering their access to formal financial institutions.
Better rates for Loan Repayment
Statistically, women are less likely to default on repayment of loans, and hence microfinance institutions tend to target women borrowers. They are the safer investment options for lenders and also help empower women. 55% percentile of women show traits of honesty and integrity while the numbers are at 48% in the case of men. Microfinance institutions recognise this and hence target women as credit borrowers, thus having a total repayment rate of more than 98% even though there are many overdue accounts at a microfinance institute at any given time period.
Provides for those who go unnoticed
Primarily women, people with disabilities, unemployed persons, and people who need to meet the basic necessities are the ones who receive microfinance products from the microfinance institutions.
It has been observed that companies with female board of directors perform better in obtaining up to 66% returns on invested capital and 42% better returns on sales than companies with only a male board of directors.
Women hold significant business leadership roles and also develop others in entrepreneurial roles, even in developed countries.
An opportunity to receive education
Children of economically weaker families either are not enrolled in school or miss their school days, as these families are mostly of agricultural background and require their children to work in order to earn and help the family financially. Microfinance products can come to the rescue of these children by providing funds to meet the financial needs of the family, thereby allowing the children to complete their education.
Suppose a girl child receives eight years of formal education. In that case, the chances of her getting married young reduce by four times, the chances of teen pregnancy decrease, and their chances of finishing school increase, and hence, they are more likely to obtain a fair-paying job or higher education.
Possibility of future investments increases
Poverty is a perpetual cycle. Scarcity of money results in a lack of food and water, leading to a lack of sanitary living conditions and malnutrition and illness, leading to people not working and, hence, a lack of money.
Microfinance aims to break this cycle by making more money available. Availability of funds means the basic needs are met. Hence, investments can improve sanitation, build better wells, and better health care, making people productive and not perpetually ill. Children can complete their education, and also, since the chances of survival increase, the average family size reduces. All of these add up to the possibility of future investments as the people can now meet their basic needs.
Creation of Real Jobs
Entrepreneurs, when they borrow credit from microfinance institutions to start their businesses, they create employment opportunities for others. An increase in employment benefits the local economy as more money circulates through local businesses and services.
Significant Economic Gains
The gains from partaking in microfinance programs entail access to better nutrition, higher consumption, and also consumption smoothing. Here the economic gains are not monetary but are from stability.
The happiness gained from microcredits is reflected in the fact that the repayment rates are high. Hence, at the core level, microfinance almost always leaves a positive effect.
Hence, microfinance has multiple advantages and is an essential tool in trying to break the cycle of poverty.