Understanding Microfinance [What, Why And Behind The Scenes]

Posted on February 21, 2011 in Biz and Eco

By Akshay Subramaniam:

What it is:

Microfinance is the new buzz in the entrepreneurship world these days. The term Microfinance refers to a banking service that is provided to the unemployed or low income individuals or groups who would otherwise have no means of getting financial services. The goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance.

Simply put, it is ‘money lending‘. Money lending aimed at the up liftment of the economically weaker sections of the society, who lack the security that banks demand in order to acquire loans.

Why:

Traditionally, banks did not provide financial services, such as loans, to clients with little or no cash income. Banks incur substantial costs to manage a client account, regardless of how small the sums of money involved. For example, although the total gross revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000, it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one.

Banks did not see a potential gain in lending money to people who struggle for a livelihood and do not gurantee total repayment of the sum they borrowed.Thus the concept of microfinance was born and is existent till now. Currently vegetable vendors, rickshaw drivers, shopkeepers, street hawkers and other people involved in such business rely on microfinance.

Behind the scenes:

Well, microfinance does give the poor a ray of hope to continue in whatever they are doing and gives them a chance to rise up in life. It gives these people a second shot in their lives at a little risk. People who face losses in business and have no other source of income are compelled to terminate their existence. Now, they have an option to take some risk and move on,instead of turning to the streets penniless.

However there are traditional money lenders who turn greedy when look at the prospect of the lending money to uneducated and helpless individuals. They demand a very high interest rate that puts a psychological burden on people. They have to work hard to pay back the interest. There are traditional money lenders who give loans on a daily basis but demand an interest of nearly!

It is very sad and shocking to find people who have committed suicide when they are unable to repay the loan borrowed. They are cornered by the money lenders to pay the interest and as days pass by with not much financial progress they resort to suicidal schemes. These people have no clue that they are being cheated by the money lenders and feel they are very incompetent to survive in the world. They stagger under the burden the money lenders place upon them and quit.

Social entrepreneurship:

Recently, social entrepreneurship is being offered by associations like ‘Rang de‘ that provide loans (microfinance) at a lower interest rate. Associations like these earn a much lesser profit than the traditional money lenders. With their main aim being social up liftment of the backward sections in of the society they work relentlessly, despite all the odds they face, to provide a better living for the poor. Organisations like these give a new defintion to the term ‘microfinance’ and are motivated by the will to help rather than the greed for money.

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