Microfinance: Conceptual framework
- Microfinance is the provision of financial services to low-income clients or solidarity Lending groups include consumers and the self-employed, who have historically had limited access to banks and associated services. It is more than simply providing microcredit to the needy; it is an economic development instrument that aims to help the impoverished earn their way out of poverty. It provides a broad variety of services, including credit, savings, insurance, and remittances, as well as non-financial services such as training and counseling.
- Microfinance is a kind of financial service that targets people and small enterprises that do not have access to traditional banking and associated services. Microfinance services include microcredit (small loans to low-income customers), savings and checking accounts, microinsurance, and payment systems, among others. Microfinance services are intended to reach out to excluded clients, who are often lower-income, socially stigmatized, or geographically isolated, and assist them in becoming self-sufficient.
- Microfinance began with a narrow definition: the provision of microloans to low-income entrepreneurs and small companies without access to credit. Financial services were delivered to these customers via two basic mechanisms: (1) relationship-based banking for individual entrepreneurs and small enterprises.
- (2) Group-based approaches allow entrepreneurs to seek for financing and services as a group. Microfinance has evolved into a larger movement with the goal of achieving “a world in which everyone, especially the poor and socially marginalized people and households, have access to a wide range of affordable, high-quality financial products and services, including not just credit but also savings, insurance, payment services, and fund transfers.”
- Microfinance Institutions (MFIs) in India are classified as NGOs (registered as societies or trusts), Section 25 businesses, and Non-Banking Financial businesses (NBFC). Commercial banks, regional rural banks (RRBs), cooperative societies, and other big lenders have all played key roles in providing refinancing to MFIs. Banks have also used the Self-Help Group (SHG) route to provide direct loans to group borrowers.
- Microfinance advocates often assert that such access would lift impoverished people out of poverty, including participants in the Microcredit Summit Campaign. For many, microfinance is a tool to promote economic development, employment, and growth by assisting micro-entrepreneurs and small enterprises; for others, it is a way for the poor to better manage their money and capitalize on economic possibilities while mitigating risks. Critics often point to some of the negative aspects of microcredit, such as the potential for debt accumulation. Because of the different circumstances in which microfinance works and the wide diversity of microfinance services, it is not feasible nor prudent to have a comprehensive picture of the consequences microfinance may have. Several research have attempted to analyze its effects.
- New microfinance research calls for a deeper knowledge of the microfinance ecosystem so that microfinance institutions and other facilitators may develop long-term plans that will provide social benefits via improved service delivery to low-income populations.
- Microfinance and Poverty
- Many financial operations in emerging countries, especially in rural regions, are not monetized: that is, money is not utilized to carry them out. This is typically the case when individuals seek services that money can offer but do not have the necessary finances. As a result, they are forced to seek other funding sources. In the book The Poor and Their Money, Stuart Rutherford and Sukhwinder Arora describe many sorts of needs:
- Lifecycle needs include weddings, burials, births, education, house construction, holidays, festivals, widowhood, and old life.
- Personal emergencies include illness, injury, unemployment, theft, harassment, or death.
- Disasters: such as wildfires, floods, cyclones, and man-made calamities like war or the demolition of houses.
- Investment opportunities include expanding a company, purchasing land or equipment, upgrading housing, acquiring a job, and so on.
- The constraints or hurdles in developing a strong commercial microfinance business include:
- Inappropriate donor subsidies.
- Inadequate regulation and supervision of deposit-taking microfinance institutions (MFIs).
- Few MFIs that satisfy the demands of savings, remittances, and insurance.
- Limited managerial ability in microfinance institutions
- Institutional inefficiencies
- Need for further distribution and implementation of rural, agricultural microfinance approaches.
- Members lack collateral to get a loan.