The income levels in poor households are not only low but also irregular. They lack clearly defined property titles and other assets acceptable as collateral, making it difficult for them to prove their creditworthiness.
In addition to filling out a stack of paperwork, lenders generally require a background check to make sure they are loaning money to qualified applicants. It makes it nearly impossible for people with ‘low credit scores’ and ‘no collateral’ to avail loans leaving them with no alternative except to borrow from the money lenders who, in turn, charge exorbitantly high rates.
This is where Microfinance comes into the picture.
Also known as Microcredit, it is a type of financial service provided to low-income individuals and small business owners to help them in generating income and fulfil personal needs.
The term ‘Microfinance’ was pioneered by Noble prize winner, Muhammad Yunus, the founder of The Grameen bank (1976), an organization which lent small amounts of money to villagers organized in voluntary groups.
The idea of joint liability of these groups helped them overcome the issues of their income. Since then, this idea of help groups has spread all over the world and has been expanded to providing more financial services for the poor.
Microfinance includes microloans, micro-insurance, micro-savings, and all other instruments that provide the financially weak with the capital to start or support their ventures and work towards financial independence. Micro savings allow entrepreneurs to open a savings account with no minimum balance, while micro-insurance provides the borrowers’ insurance, at a lower rate and minimal premiums.
Microcredit is extremely important especially in developing countries due to its resourcefulness in helping the ‘underserved’ who cannot avail services like the line of credit or loans from traditional banks. These people, under normal circumstances, would have to resort to informal lending institutions or borrow from friends and family, where they are provided with the loan amount, even without collateral. However, the interest rates for these informal loans are usually very high due to the high risk of default.
Microfinance is becoming a powerful instrument for poverty alleviation within the new economy. Around two-thirds of the world’s working population; still doesn’t have access to the services provided by financial institutions and around 1.7 billion people don’t even have a basic transaction account (World Bank report). Globally, there are more than 3100 microfinance institutions (MFIs) providing loans and financial services to these individuals. Improved access and efficient provisions for savings, credit, and insurance can enable the poor to smooth their consumption, assist them in risks, build their assets gradually, and develop these microenterprises and simultaneously create jobs for others.
Beyond the direct link with poverty reduction, it also addresses the issues of health, education, and gender. Microfinance has helped various women-centric self-help groups (SHGs) to realize their potential that significantly made an impact on their empowerment both in terms of social and economic aspects. Microfinance Institutions usually offer some training to their clients, more specifically entrepreneurial skills, to enable them to utilize the loans efficiently and be able to pay back without delay.
One such story is of Laxmi, who runs a small yet successful tiffin centre in Gharkul near Sholapur in Maharashtra. She decided to expand her business by adding a sweets stall within their existing premises. That is when they heard about ‘Inditrade’ (a financial services company with a strong presence in South India) from their relatives and approached them for a loan of Rs 30,000. She has doubled her income in a few months and is planning to expand further. (Yourstory)
Microcredit and Micro Financing have become fairly substantial substitutes of these informal institutions and have helped many to achieve economic empowerment. However, the goals of microfinance as established in the 1997 Microcredit Summit are still not met. Many credit institutions are serving the poor, but there is less evidence to indicate that the poor and the disabled are being well served. It has certainly contributed to Asian countries like Nepal, Bangladesh, and Malaysia but it is not yet fruitful in the most undeveloped countries of Africa.
Sakti Balaji: A paper-cup revolution
Started about a decade ago, The Sakti Balaji self-help group has made it big.
The SHG provides training to all the members in tailoring, chemical products, food products manufacturing, etc. They started production with plastic cups, plates, and related items, but eventually switched to paper cups due to the environmental effects of plastic.
With the objective of manufacturing paper cups and plates, the group purchased a machine for Rs.40,000 through a bank loan. After a few years, the Mahalir Thittam officials inspected their work station at Milaharanai, near Alanganallur. Impressed, the officials recommended expansion, and the SHG got three machines.
They have received a lot of recognition and appreciation in the local community for their work. Their President, Ms V. Sita was called “Best Women” for her efforts. The Industries minister recognized her as “Vetri Penmani” (victorious woman). The group was awarded the Manimegalai Award in 2006 by the Tamil Nadu Government. The District collector also provided them subsidies on rent and allotted them a shop in a commercial centre.
Today, the SHGs monthly turnover is anywhere around Rs 10 lakh. With plastic use being discouraged, and more people becoming aware of its consequences, the practice of using paper cups and plates has become the new normal. Some of the women workers at the SHG unit claimed that they worked from 9.30 a.m. to 6.30 p.m. Now, they get more wages then what they would form labour, while the members in the SHG draw profits every month. (The Hindu)
- Dilruba Khanam; Muhammad Mohiuddin; Asadul Hoque; Financing micro-entrepreneurs for poverty alleviation: A performance analysis of microfinance services offered by BRAC, ASA, and Proshika from Bangladesh;
- Rachel M Cautero; Why Micro financing Is Important to Small Business
- Chairman Ben S. Bernanke; Microfinance in the United States;