What is "microfinance" Microfinance, also called microcredit, is a type of banking service provided to unemployed or low-income individuals or groups who would otherwise have no other access to financial services . While institutions participating in the microfinance area are often associated with lending (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 a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay "Microfinance" Microfinance services are provided to unemployed or low-income people because most of those who are trapped in poverty or with limited resources do not have sufficient income to do business with traditional financial institutions. Despite being excluded from banking services, however, those living on as little as $2 a day attempt to save, borrow, acquire credit or insurance, and make payments on their debts. As a result, many turn to family, friends and even loan sharks for help, who often charge exorbitant interest rates. Microfinance allows people to safely accept reasonable small business loans in a manner consistent with ethical lending practices. Although they exist all over the world, most microfinance operations take place in developing countries, such as Uganda, Indonesia, Serbia and Honduras. Many microfinance institutions (MFIs) focus on helping women in particular. How microfinance works Microfinance organizations support a wide range of activities, ranging from start-up capital for businesses to educational programs that enable people to develop the skills needed to succeed as entrepreneurs. These programs can focus on skills such as accounting, cash flow management, and even technical or professional skills. Unlike typical financing situations, where the lender is primarily concerned with whether the borrower has enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs succeed. In many cases, people who want to join microfinance organizations are first required to take a basic money management course. Lessons focus on understanding interest rates and the concept of cash flow, how financing agreements and savings accounts work, how to budget and how to manage debt. Once educated, customers are given access to loans. Just like at a traditional bank, a loan officer approves and helps borrowers with applications and supervision. The typical loan, sometimes as little as $100, doesn't seem like much to many in the developed world. But for many poor people this amount is enough to start a business or engage in other profitable activities. Microfinance Loan Terms Like conventional lenders, microfinancers must charge interest on loans and set up specific repayment plans with payments due at regular intervals. Some require borrowers to set aside part of their income in a savings account used as insurance in case of default; if the borrower repays the loan successfully, he can obviously use this account. Since many applicants cannot offer any collateral, microlenders often put together theborrowers, as buffers. After receiving the loans, the beneficiaries repay their debts together. Since the success of the program depends on everyone's contributions, a form of peer pressure helps ensure loan repayment. For example, if an individual is having trouble using their own money to start a business, that person can ask other members of the group or the loan officer for help. Through repayment, loan recipients begin to develop a good credit history, allowing them to obtain larger loans in the future. Interestingly, even though borrowers often qualify as very poor, repayment rates are high and microloans are often higher than the average rate of more conventional forms of financing. In 2016, for example, the microfinance institution Opportunity International reported repayment rates of approximately 98.9%. History of Microfinance Microfinance is not a new concept: small operations have been around since the 18th century. The first case of microlending 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, microfinancing became popular on a large scale in the 1970s. The first organization to receive attention was the Grameen Bank, founded 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 poor people can improve their lives. The "16 decisions" touch on a wide variety of topics, from calling for a halt to the practice of issuing dowries at a couple's wedding to ensuring that drinking water is kept hygienic. In 2006, the Nobel Peace Prize was awarded to both Yunus and Grameen Bank for their efforts in developing the microfinance system. India's SKS Microfinance also serves a large number of poor customers. Founded in 1998, it has grown to become one of the largest microfinance operations in the world. SKS works similarly to Grameen Bank, grouping all borrowers into groups of five members who work together to ensure loan repayment. There are other microfinance operations around the world. Some larger 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, classifying borrowers based on criteria such as poverty level, geographic region and type of small business. Others are targeted very specifically: in Uganda, for example, there are those who focus on providing women with the capital needed to undertake projects such as growing aubergines and opening small cafes. Some groups tend to focus their efforts only on businesses created with the intention 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 larger World Bank Group, estimates that more than 130 million people directly benefited from microfinance-related operations in 2014. However, these operations are only available to around 20% of the world's population. billions of people. people who are among the world's poor. In addition to providing microfinance options, the IFC has assisted developing countries in establishing or improving credit reporting offices in 30 nations. It also hassupported the addition of relevant laws regulating financial activities in 33 countries. The benefits of microfinance go beyond the direct effects of providing people with 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 microfinance institutions do, leads to greater stability and prosperity for families. The controversy over for-profit microfinance While there are countless heartwarming success stories ranging from microentrepreneurs starting their own water supply business in Tanzania to a $1,500 loan enabling a family to open a barbecue restaurant in China, to immigrants in the United States who can build their own business, microfinance has sometimes been criticized. Although microfinance interest rates are generally lower than those of conventional banks, critics argue that these operations will make money for the poor, especially after the trend of for-profit MFIs, such as BancoSol in Bolivia and the aforementioned SKS (which in actually started as a non-profit organization (NPO), but became for-profit in 2003). One of the largest and most controversial is Mexico's Banco Compartamos. The bank was founded in 1990 as a non-profit organization. However, 10 years later, management decided to transform the company into a traditional for-profit company. In 2007, it was listed 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 it collects in interest and reimbursements: like any public company, it distributes them to shareholders. In contrast, nonprofit institutions take a more philanthropic stance with profits, using them to expand the number of people they help or create more programs. In addition to Compartamos Banco, many major 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 started 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 institutions have been criticized by many, including the grandfather of modern microfinance himself, Muhammad Yunus. The immediate and pragmatic fear is that, driven by the desire to make money, these MFIs will charge higher interest rates that could create a debt trap for low-income borrowers. But Yunus and others also have a more fundamental concern: that the incentive for microcredit should be poverty alleviation, not profit. By their very nature (and their obligations to 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 counter that commercialization allows them to operate more efficiently and attract more capital by appealing to profit-seeking investors. By becoming a profitable business, they argue, an MFI is able to extend its reach, providing more money and more loans to low-income applicants. For now, charitable and commercialized institutions coexist. Other concerns regarding microfinance In addition to the gap between non-profit microfinance enterprises and microfinance enterprises, other criticisms exist. Someargue that individual microloans of around $100 are actually not enough money to ensure independence: they merely keep recipients working in subsistence activities, or simply covering 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 has led to stable employment and higher wages, which in turn have helped millions of people out of the lowest levels of poverty. Other critics have argued that the presence of interest payments, however low, still represents a burden. Despite high repayment rates, there are still microfinance borrowers who cannot, or fail, to repay their loans, due to the failure of their businesses, a personal catastrophe, or other reasons. The additional debt can make these people poorer than when they started, even living hand-to-mouth. Types of Microfinance Institutions in India: Types of Microfinance Institutions in India By Priya Chetty July 26, 2017 Microfinance organization is not new in the Indian financial market. Due to the crushing poverty in India, the government has paid special attention to the development of rural credit. Taking into consideration 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 Bank for Agriculture and Rural Development (NABARD). Non-governmental organizations (NGOs) have played an importantkey role in the development of microfinancial services. Furthermore, the microfinance industry in India has witnessed rapid growth over the last 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 Bill defines microfinance services as financial assistance to be provided to an eligible individual directly or through a group mechanism for: a maximum amount of fifty thousand in aggregate per person for small businesses and cottage industries, agricultural and allied activities (the person's consumption purposes are also included) o A maximum amount of one lakh fifty thousand in aggregate per person for the purpose of accommodation o Similar amounts as above may be prescribed to a person for other purposes as well. The bill further explains microfinance institutions as an organization of individuals which includes the following if the establishment of the organization focuses on the purpose of increasing microfinance services: Registration of the company under the Societies Registration Act (1860 ). A creation of trust under the India Trust Act (1880) or public trust registered under the government trust imposed by the state. A society registered under the Multi State Cooperative Societies Act (2002) which may be a co-operative society or a mutual benefit society, etc. (Singh, 2016). Different Types of Microfinance Institutions in India Microfinance models are developed to address financial challenges in financially backward areas. There are various types of microfinance companies operating in India. Joint Liability Group (JLG) Joint Liability Group can be explained as an informal group of 4-10 persons seeking to obtain loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category is generally made up of tenant farmers, farmers and other rural workers. They work primarily for lending purposes, although they also offer lending services