WHAT IS MICROFINANCE AND HOW DOES IT WORK?

Microfinance is a way to provide banking services to small entrepreneurs and those in need of financial support. Microfinance is intended for low-income groups, entrepreneurs, and people who need cash to grow businesses. It helps people access a range of financial services, such as loans, insurance, money transfers, and savings. The loan can be provided by a micro finance company, banks, non-government organizations, cooperative, non-bank financial institutions, or other legal-regulated entities. Microfinance loan programs come with small loan amounts, low collateral requirements, and short repayment periods.

Here is everything you should know about micro finance.

Why Is It Important?

Most small business owners, especially village-level entrepreneurs, do not have credit scores or history, so they cannot attain loans and other financial services from banks and major financial institutions. Often, low-income people have no collateral, so they cannot apply for a loan from regular banks to invest or save money for their future. The provision to apply for a microfinance loan is vital as it helps financially underserved people to access resources and capital.

History of Microfinance

The concept of microfinance was originated in the 70s in Bangladesh by Muhammad Yunus. A professor of economics, Muhammad Yunus, started giving out small loans to low-income people to boost self-employment and decrease poverty. In 1983, he founded the Grameen Bank, which is now active in more than 70,000 villages in Bangladesh. At present, the concept of microfinance is being used in several banks and private organizations to promote economic activity in developing countries.

How Does It Work?

Microfinance plays a key role in the battle against poverty by helping low-income families to work towards achieving their financial goals and ending their poverty. It helps them with the required capital to start a business and be financially independent. Many regular banks and financial institutions see low-income people as high risk and high cost for two main reasons – first, the client is from remote and hard-to-reach areas, and secondly, their transactions are small.

Micro finance is intended to break these hurdles as it allows low-income families to start businesses, stabilize their earnings and save for the future. While microfinance helps business owners to grow and succeed in good times, it helps them survive and rebuild in times of crisis. So, microfinance is being praised as a great way to end the poverty cycle, help the financially marginalized, boost earning power, and reduce unemployment in India. Overall, it can serve as an essential tool for the poor and weak segment when used properly.

Benefits of Microfinance

Access to Instant Funds

Microfinance allows low-income or unemployed individuals to get immediate funds to start a new business or find resources to grow their business. Micro finance personal loan provides financial solutions on reasonable terms and conditions to those who are ignored or considered ineligible for mainstream banking. The goal is to help the unbanked people establish or sustain a small business, tackle emergencies, and save money for the future.

Create Employment Opportunities

When small entrepreneurs take the help of microfinance to start their businesses, they create job opportunities for others in the community. The creation of real jobs is beneficial for both the poor and the local financial system, as more income is generated through local businesses and services.

Access to Loan for Neglected People

Microfinance provides funds for those who go unnoticed by regular banking services. Also, many big financial institutions and banks do not give loans to people with no income or who have little or no assets. A micro finance company or institution primarily focuses on unemployed persons, women, poor or low-income people, and those with disabilities. For small entrepreneurs, it is easier to apply for a microloan online as they are not asked to show their credit history.

Possibilities of Future Investments

Poverty can be a regular cycle for underserved people. Lack of money can lead to difficult situations like water and food scarcity, malnutrition, and illness. As a result, people cannot work and hence, shortage of money and the cycle continues. A microfinance loan is intended to break this cycle by providing funds to underserved people. Access to funds means the basic needs of life are met for poor people. Therefore, people can focus on improving sanitation, health care, child education, and productivity.

Microfinance, with its diverse aspects, including microcredit, micro-savings, and micro-insurance, can help in economic growth and poverty mitigation across the world.

Muthoot Finance is the most trusted financial services company that provides a variety of loans for entrepreneurs and small businesses. Muthoot Finance offers financial services to the masses, including underprivileged people and those living in rural regions of India. We focus on providing financial support through Muthoot microfinance loans to women engaged in small businesses.