Microfinancing is not a new concept as it has existed since the 15th century. It didn’t have much relevance till 1970 when individuals like Muhammad Yunus, Akhtar Hameed Khan, and Al Whittaker, worked hard to promote microfinancing by bringing in many innovations and introducing initiative in the sector. Muhammad Yunus’s Grameen Bank has served as a role model for other Microfinancing Institutions.
What is Microfinancing?
Microfinancing is a way to provide financial services to underserved and financially weaker sections of the society, which do not have the means to obtain loans from banking institutions. These loans are provided for income generating activities, buying or creating assets, stabilize consumption, emergencies, and risk mitigation. The aim of Microfinancing is to provide unemployed and low-income group of people with an opportunity to be self-sustained by having access to loans, credit services, savings, payments and insurance.
Micro-credit vs. Microfinance
When talking, in general, microfinance and micro-credit are spoken of as one. But there is a difference between the two. The term Micro-credit applies only to small loans that are given to people or groups without access to a financial institution. Microfinance, on the other hand, includes loans, saving, insurance and other elements. Thus, Micro-credit is a part of the whole that is Microfinance.
Eligibility for Microfinance
The following people come within the purview of microfinance:
- People who are from low-income groups, living below or just above the poverty line are most eligible for microfinance;
- Self-employed people in the unorganized sectors of the economy;
- Street stall owners;
- People who sell products that they make from home;
- Door to door vendors;
- Small shop owners;
- Subsistence farmers;
- Small scale growers and processors of agricultural produce;
- Now the focus has shifted to women, with more focus on women collective and groups being included in microfinance.
Providers of Microfinance
Most of the microfinancing is provided by organizations that specialize in small loans. These are known as Microfinance institutions of MFIs. These can mostly be divided into the following categories:
- Money lenders, Savings Collectors, and Pawn brokers: They constitute the informal segment of microfinancing. They are mostly local operators and understand the financial situation of the people they are serving. They provide quick and convenient service.
- Self-help groups and Credit Unions: These are also local groups or organization that have local knowledge. Their services are fast and efficient. Since these are managed by poor people, their operating costs are low.
- NGOs: The NGO’s have made a huge impact on microfinancing. They have introduced innovative systems like village banking, mobile banking, and solidarity lending.
- Banks: Several banks and financial institutions have also started to provide microfinance. These include state banks, rural development banks, agriculture development banks and other non-banking institutions.
Impact of Microfinance
When analyzing the impact of microfinance, it is important to take into consideration social as well as a financial impact. While the main aim of microfinancing is to provide a livelihood, in many countries of the world it is also focusing on women empowerment, education, health, and nutrition. Overall, it has been observed that wherever microfinance has been employed, there has been a positive impact on the society.