What is “microfinance” Microfinance, also called microcredit, is a type of banking service provided to unemployed or low-income individuals or groups who do not otherwise have no other access to financial services. While institutions involved in microfinance are most commonly associated with loans (microloans can range from $100 to $25,000), many offer additional services, including bank accounts and microinsurance products. , and provide financial and business training. Ultimately, the goal of microfinance is to give poor people the opportunity to become self-sufficient. Say no to plagiarism. Get Customized Essay on “Why Violent Video Games Should Not Be Banned”?Get Original Essay “Microfinance” Microfinance services are provided to unemployed or low-income people because most of them are trapped in poverty or have limited resources. enough income to do business with traditional financial institutions. However, even if they are excluded from banking services, those who live on only $2 a day try to save, borrow, acquire credit or insurance and repay their debts. As a result, many seek help from family, friends and even loan sharks, who often charge exorbitant interest rates. Microfinance allows individuals to securely obtain reasonable small business loans in a manner consistent with ethical lending practices. Although they exist all over the world, the majority of microfinance operations take place in developing countries, such as Uganda, Indonesia, Serbia and Honduras. Many microfinance institutions (MFIs) focus particularly on helping women. How Microfinance Works Microfinance organizations support a wide range of activities, from business start-up capital to educational programs that help individuals develop the skills needed to succeed as an entrepreneur. These programs can focus on skills such as bookkeeping, cash flow management, and even technical or professional skills. Unlike traditional financing situations, in which the lender is primarily concerned with ensuring that the borrower has sufficient collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs succeed. In many cases, people interested in joining microfinance organizations must first complete a basic financial management course. Courses focus on understanding interest rates and the concept of cash flow, how financing agreements and savings accounts work, budgeting and debt management. Once informed, customers then have access to loans. Just like in a traditional bank, a loan officer approves and assists borrowers with their applications and monitoring. The typical loan, sometimes as little as $100, doesn't seem like much to many in developed countries. But for many poor people, this figure is enough to start a business or engage in other profitable activities. Microfinance Loan Terms Like conventional lenders, microfinanciers must charge interest on loans and establish specific repayment plans with payments due at regular intervals. Some require loan recipients to set aside a portion of their income in a savings account used as insurance in case of default; if the borrower repays the loan successfully, he can of course use this account. Since many applicants cannot offer any collateral, microlenders often group borrowers together as a buffer. After receiving loans, beneficiaries repay their debts together. Because the success of the program depends on everyone's contributions, a form of peer pressure helps ensure loan repayment. For example, if a person is having trouble using their money to start a business, they can seek help from other members of the group or the loan officer. Through repayment, loan recipients begin to develop a good credit history, which allows them to obtain larger loans in the long term. Interestingly, even though borrowers are often considered very poor, repayment rates for microcredits are often higher than the average rate for more conventional forms of financing. For example, microfinance institution Opportunity International reported repayment rates of around 98.9% in 2016. History of Microfinance Microfinance is not a new concept: small operations have been around since the 18th century. The first appearance of microcredit is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve the conditions of poor Irish citizens. But in its modern form, microfinance became popular on a large scale in the 1970s. The first organization to gain attention was the Grameen Bank, established in 1976 by Muhammad Yunus in Bangladesh. In addition to providing loans to its customers, Grameen Bank also suggests that its customers subscribe to its "16 Decisions", a basic list of ways in which poor people can improve their lives. The “16 Decisions” touch on a wide variety of topics, from calling for an end to the practice of issuing dowries upon a couple's marriage to ensuring that drinking water remains hygienic. In 2006, the Nobel Peace Prize was awarded to Yunus and Grameen Bank for their efforts to develop the microfinance system. Indian company SKS Microfinance also serves a large number of poor clients. Created in 1998, it has become one of the largest microfinance operations in the world. SKS works similarly to Grameen Bank, grouping all borrowers into five-member groups who work together to ensure loan repayment. There are other microfinance operations around the world. Some large organizations work closely with the World Bank, while other smaller groups operate in different countries. Some organizations allow lenders to choose exactly who they want to support, categorizing borrowers based on criteria such as poverty level, geographic region and small business type. Others are very specifically targeted: there are some in Uganda, for example, which aim to provide women with the capital needed to undertake projects such as growing eggplants and opening small cafes. Some groups tend to focus their efforts only on businesses created with the goal of improving the community as a whole through initiatives such as education, job training, and clean water. Benefits of Microfinance The World Bank estimates that more than 500 million people have benefited directly or indirectly from microfinance-related operations. The International Finance Corporation (IFC), part of the World Bank Group, estimates that more than 130 million people directly benefited from microfinance-related operations in 2014. However, theseOperations are only accessible to about 20% of the 3 billion inhabitants. people who are among the world's poor. In addition to providing microfinancing options, IFC has helped developing countries create or improve credit bureaus in 30 countries. He also advocated for the addition of relevant laws governing financial activities in 33 countries. The benefits of microfinance go beyond the direct effects of giving individuals a source of capital. Entrepreneurs who create a successful business create jobs, commerce and overall economic improvement within the community. Empowering women in particular, as many MFIs do, leads to more stability and prosperity for families. The controversy over for-profit microfinance Although there are countless heartwarming success stories, from micro-entrepreneurs starting their own water supply business in Tanzania to a $1,500 loan allowing a family to to open a barbecue restaurant in China, for immigrants in the United States to be able to create their own business, microfinance is sometimes criticized. Even though microfinance interest rates are generally lower than those of conventional banks, critics have accused these operations of making money off the poor – especially as the trend toward for-profit MFIs, like BancoSol in Bolivia and SKS mentioned above, (which actually started as a non-profit organization (NPO), but became for-profit in 2003). One of the largest and most controversial is Mexico's Compartamos Banco. The bank was established in 1990 as a non-profit organization. However, ten years later, management decided to transform the company into a traditional for-profit business. In 2007, it went public on the Mexican Stock Exchange and its initial public offering (IPO) raised more than $400 million. Like most other microfinance companies, Compartamos Banco makes relatively small loans, serves a predominantly female clientele, and groups borrowers into groups. The main difference lies in the use of the funds which it records as interest and repayments: like any public company, it distributes them to shareholders. In contrast, nonprofit institutions take a more philanthropic focus with their profits, using them to increase the number of people they help or create more programs. Besides Compartamos Banco, many large financial institutions and other large companies have launched for-profit microfinance projects. CitiGroup (NYSE:C), Barclay's (NYSE:BCS) and General Electric (NYSE:GE) have launched microfinance divisions in many countries. , For example. Other companies have created mutual funds that invest primarily in microfinance companies. Compartamos Banco and its for-profit ilk have been criticized by many, including the grandfather of modern microfinance himself, Muhammad Yunus. The immediate and pragmatic fear is that, out of a desire to make money, these MFIs will charge higher interest rates, which could create a debt trap for low-income borrowers. But Yunus and others also have a more fundamental concern: The incentive for microcredit should be poverty reduction, not profit. By their very nature (and their obligations to their shareholders), these publicly traded companies run counter to the original mission of microfinance: to help the poor above all else. In response, Compartamos and other for-profit MFIs argue that commercialization allows them to operatemore efficiently and attract more capital by attracting profit-seeking investors. By becoming a profitable business, they argue, an MFI is able to expand its reach, providing more money and more loans to low-income applicants. For now, charitable and commercial MFIs coexist. Other Concerns About Microfinance Beyond the divide between non-profit and non-profit microfinance enterprises, other criticisms exist. Some argue that individual microcredits of around $100 are not enough to guarantee independence: they simply allow recipients to continue working in subsistence jobs or simply cover basic needs, such as food and shelter. A better approach, these critics argue, is to create jobs by building new factories and producing new goods. They cite the examples of China and India, where the development of large industries led to stable jobs and higher wages, which helped lift millions out of the lowest levels of poverty. Other critics have said that the presence of interest payments, even if low, remain a burden. Despite high repayment rates, there are still microfinance borrowers who cannot or do not repay their loans, due to business failure, personal disaster, or other reasons. The additional debt can make these people poorer than when they started, even when living hand to mouth. Types of Microfinance Institutions in India: Types of Microfinance Institutions in India By Priya Chetty on July 26, 2017 Microfinance organization is not new in the financial market in India. Due to the crushing poverty in India, the government has paid special attention to rural credit development. Taking into account the All India Rural Credit Survey report (1950), he reconstructed the cooperative structure which included state partnership in cooperatives, establishment of Regional Rural Banks (RRBs) and National Agricultural Bank and rural development (NABARD). In India, Non-Governmental Organizations (NGOs) have played a central role in the development of microfinance services. Furthermore, the microfinance sector in India has grown rapidly over the past two decades. In 2009, the total number of microfinance institutions in India was around 150 (Tripathi, 2014). Definition of Microfinance Institutions in India: The Indian Microfinance Services Regulation Bill defines microfinance services as financial assistance to be provided to an eligible person directly or through a group mechanism for: A maximum aggregate amount of fifty thousand per person for small businesses and small businesses. , agricultural and allied activities (consumption purposes of the person are also included) or A maximum amount of one lakh fifty thousand in total per person for housing purposes or Amounts similar to the above amounts may also be prescribed to a person for other purposes. The bill further defines microfinance institutions as an organization of individuals which includes the following if the establishment of the organization focuses on increasing microfinance services: Registration of the company under the Law on registration of companies (1860). A creation of trust under Indian law. Trust Act (1880) or a public trust registered under a state-imposed governing trust. A society registered under the Multi-State Cooperative Societies Act (2002) which may be a society