Micro financing also termed as microcredit is a concept about providing financial assistance to those who are destitute in terms of financing. Technically, “Microfinance is a category of financial services targeted at individuals and small businesses that lack access to conventional banking and related services.”
Microfinance services are provided to unemployed or low-income individuals because most of those trapped in poverty, or who have limited financial resources, do not have enough income to do business with traditional financial institutions. They lack in providing collaterals and thus are prominent targets for loan sharks and are most easy victims of the interest-debt spiral.
How Microfinance Works
Microfinancing organizations supports a large number of finance related activities ranging from basic banking facilities to start-up capitals. Unlike typical financing situations, in which the lender is primarily concerned with the borrower having enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs to succeed.
In many instances, people seeking for microfinancing services are first required to under-go a basic money-management class. Once customers are educated may apply for loans. Amount for such loans range from $100 to $25000.
Banks usually do not extend loans without collateral and for small amounts. Microfinancing considers the idea that poverty can be eliminated through financing small amounts and without collateral. This helps individuals without collateral to pursue their business idea and initialize their business.
· Better loan Repayment rate
Microfinance tends to target women borrowers, who are statistically less likely to default on their loans than men. These loans help empower women, and they are often safer investments for those loaning the funds.
· Extending education and health
Families receiving microfinancing are less likely to pull their children out of school for economic reasons and more likely to have resources to pay for school fees or health services.
Even a small working capital loan of $100 can be enough to launch a small business in a developing country that could help the individuals pull themselves and their family out of poverty. These small businesses can help create new employment opportunities, which have a beneficial impact on the local economy.
· Improved income and nutrition
Through small loans women are able to get needed agriculture inputs such as improved seeds and fertilizers to increase productivity and nutritional content of crops and generate more income from the market.
Thus, microfinancing is an important concept because it provides resources and access to capital to the financially underserved, such as those who are unable to get checking accounts, lines of credit, or loans from traditional banks.
Nitisha Mandhanya (B.Com.)
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