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What Is Micro Finance

  • Date Submitted: 11/30/2011 09:44 AM
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What is Microfinance?
Microfinance is the provision of financial services (loans, savings, insurance) to people on a small scale, such as businesses with low or moderate incomes. Loans of micro value are one of the better known means of helping small business owners in developing countries move out of poverty. It involves a broader range of financial products and services including loans, savings, insurance, transfer services, and other financial instruments targeted at low income clients.
Microfinance Institutions (MFIs) provide loans and savings services through a variety of lending models, while micro entrepreneurs use these services. The theory is that if the poor have access to these services, their financial lives will be more stable, predictable and secure, allowing them to plan and improve their livelihoods through education, healthcare and empowerment.
In other words, microfinance converts poverty into an economic opportunity that evades the idea of exploitation.
What are the Sources of Microfinance?
Microfinance providers come in various forms which can be broadly grouped as follows:
  * Formal Microfinance Institutions – rural/microfinance/village banks, commercial banks, telecom firms, and cooperatives offering loans to lower-income group individuals.
  * Semi-formal Microfinance Institutions – nongovernmental organizations providing micro-sized loans.
  * Informal Microfinance Sources – money lenders and shopkeepers who often loan money on a daily basis and charge exorbitant interest rates.
Problems Faced by Microfinance
Despite good intentions, microfinance still has several hurdles to face:
  * perceived high risk of lending to the poor (the loan may be misused easily)
  * Technology-related hurdles, such as the high costs involved in small loan transactions for microfinance providers.
  * lack of awareness about sources of funds for microfinance providers to pass on to the poor
  * the poor’s inability to offer marketable...


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