Empowering poors through Microfinance
Microfinance seems new word to most of us however it exists from centuries in one form or the other. There are various institutions in the world which provides small credit to poor people so that they (borrower) can use the money to fullfil their various needs. This is called micro credit. Microfinance is a broad term that includes micro credit, microinsurance, savings etc.
Microfinance sector is one of the fastest growing sectors in the world. This sector is complex in the sense that there are large number of transactions of very small amount. So, the transaction costs are high and margins are thin. The loans given to poor are unsecured and this is the reason that commercial banks are not invovled in direct lending to the borrowers. They inturn provide loans to the MFIs (Microfinance Institutions). The effective interest rates charged by microfinance institutions are also very high (on avg 24-40%, in some cases even 50%). The institutions that provide loans to poor are called MFIs (Microfinance institutions) and they are not allowed to accept the savings from the public.
They get the funds from banks, private investors, FIIs for lending to the poor and since the loans are unsecured they charge high interest rates which increase the cost to the poor. Even though the interest rates are high, they provide the much needed capital to the poor which is utmost important for their growth and help them move out of poverty as they can use this money in setting up their business and income generating activities.
Commercial banks are apprehensive while giving loans to the poors because of the insecurity of repayment. However repayment history of the poor is excellent with most of the companies have repayment rate of above 99%. Microfinance is serving social purpose by helping the poor in fulfilling their needs, providing employment opportunities etc.
