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What is Microfinance – Types, Concept, History & Working

What is Microfinance?

Microfinance is also known as microcredit. The concept of Microfinance is a to provide services related to banking and financial support for unemployed and those who are getting very less salary and their living becomes are in that amount. People who are willing to start their own business a but having shortage of money then they can reach to MicroFinance firms and get their loans approval as per their project. Each Microfinance firm have their terms & conditions on which they finances different people and organizations. More importantly, the goal of microfinance is to finance impoverished individuals and give them a chance at self-sufficiency.

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Microfinance services are made available to impoverished individuals due to the fact that most of them are in poverty and have access to only a limited amount of resources and do not have sufficient finances to transact business with the other traditional financial institutions. No longer do impoverished people have to secure loans from individuals and other financial institutions at exorbitant interest rates.

Microfinance provides individuals with the opportunity to get them involved in small businesses through business loans in a manner in compliance with lending practices. Despite the popularity of microfinance companies all over the world, a good majority of them are found in developing countries such as; such as Uganda, Indonesia, Serbia and Honduras. A lot of microfinance institutions are more involved in women empowerment.

How does Microfinance Works

Microfinance organizations provide a wide range of support services, ranging from business loans to educational programs, that empower people with skills for successful entrepreneurship. In contrast to the traditional finance institutions who always look to find out if the borrower is able to present enough capital for the loan, microfinance organizations put more efforts into the success of entrepreneurs.

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Concept of Microfinance

Just like other conventional lenders, microfinance companies, charge interest on the loans they provide. They also put in place specific plans for repayment which have been organized into installments. Some repayment plans require that borrowers set aside a section of their income in a saving account to act as insurance for defaulted payments. If the borrower is able to repay this loan, he is given control of his account.

Due to the fact that loan applicants cannot offer any collateral, microfinance companies engage in the use of buffer. This means they pool the borrowers together. After the loans are received, borrowers offset their loans collectively. This system gives room for a form of peer pressure and ensures loan repayment. The repayment of loans allows for a good credit history, and give them the chance to obtain better loans in the future.

And this bonding between the finance firm and the client grows this financing business further. Like next time, user comes with bigger business plan and some big loan amount. If Microfinance company finds interest in that project then they give the required amount and start their client to grow their new business. And collects back the loan money with interest amount in the form of installments with profit.

History of Microfinance

Microfinance is not a concept that just came in the last 15 years. Small operations similar to microfinance operations have been in existence since the 18th century. The first recorded occurrence of microfinance was the Irish Loan Fund System, which was established to improve the condition of impoverished Irish citizens.

In the modern form, microfinance has been made popular since the 1970s.

There are a lot of microfinance companies all over the world. The larger microfinance companies work hand in hand with the World Bank, while the smaller companies are found in operation in a lot of nations. Microfinance efforts are most times targeted at specific sectors such as agriculture and education. Other efforts are targeted at increasing the success of entrepreneurial activities.

Benefits of Microfinance

According to the World Bank, over 500 million people have benefited from the activities of microfinance companies, either directly or indirectly. The International Finance Corporation (IFC) also estimates that over 130 million people have benefited from the operations of microfinance companies as at 2014. It is however important to note that these operations are available to about 20% of the 3 billion poor people all over the world.

The reason behind the limited approach of Finance companies to only 20% of the world’s population is some hard and fast rules or policies and money is involved in this scenario, that’s why no companies take this lightly. And no all people can fulfil their loan taking eligibility.

But it also impacts that category of society indirectly. Like if some get loan from these finance companies and starts their business then they need  employees recruitment for running business smoothly and also for growth. Here that category of society get a chance to earn some good money in form of jobs.

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The benefits of microfinance are not just about the direct effects of giving out loans to people. The creation of entrepreneurs by microfinance companies helps to create jobs and improve the overall standard of living in communities. The empowerment of women by these companies are also important in the stability and prosperity of families in these developing regions.

Concerns about Microfinance

Some individuals insist that the loans offered by microfinance companies are not enough to guarantee independence. These critics insist that a better approach is the reduction of loans and the creation of more jobs through investment in the construction of new companies and factories.

Other critics believe that the so-called low interest rates of microfinance companies are still a burden to borrowers. It is believed that this added debt will not alleviate poverty but serve to impoverish borrowers further.

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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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