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Micro
Finance |
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Poor
people often have just hand to mouth existence and have few reserves for
major expenses such as illness, weddings, house repairs or education. They
are unable to build their savings and are forced to borrow at exorbitant
rates. This further adds to their burden and worsens their economic
situation.
Micro finance is the supply of loans, savings, and other basic
financial services to the poor. The idea of micro finance was
developed as a survival strategy for the poor. In India, Ela Bhatt
established the Self-Employed Women's Association (SEWA) in 1974.
Mohammed Yunus founded the Grameen Bank project in Bangladesh in 1976.
Micro credit provides poor people with access to small loans at more
manageable interest rates, and can lead to self-sufficiency and poverty
alleviation. There are many models of micro credit.
Saving and borrowing are really different ways of turning small amounts
of money into lump sums. Saving involves building a lump sum by first
accumulating smaller amounts. Borrower is taking the lump sum first and
then 'saving' afterwards in the form of loan repayments.
Poor people have been able to reduce debt burdens and break the cycle
of poverty, when the interest in low. Studies of the impact of micro
finance in more than 24 countries have found dramatic improvements in
household income levels.
This paper looks at the various aspects of Micro finance. Like everyone else, people living in poverty need a diverse range of
financial instruments The poor rarely access services through the formal
financial sector. They address their need though village moneylenders who
exploit them by charging high interest rates.
Most poor people need and use financial services all the time. Buying
goods on credit is far more expensive than paying in cash. They need to
save and borrow to take advantage of business opportunities, invest in
home repairs and improvements, and meet seasonal expenses. But
conventional borrowings have serious limitations in terms of cost, risk,
and convenience.
Lending institutions will not lend to people unless they have some kind
of security, or collateral, for the loan, to ensure that if it is not paid
back, the bank or other institution will be able to recover part of the
debt.
Micro finance can be defined as small loans that help poor
people who wish to start or expand their small businesses but are not able
to get banks to lend to them. Micro credit is the extension of small loans
to entrepreneurs too poor to qualify for traditional bank loans. It is
helping millions of poor people, especially poor rural women, with tiny
loans so they can start small, create self-employment and improve their
lives.
Micro finance is the supply of loans, savings, and other basic
financial services to the poor. The idea of micro finance was
developed as a survival strategy for the poor. Ela Bhatt in India and
Professor Muhammad Yunus of Bangladesh are the pioneers in this field. Ela Bhatt founded Self Employed Women's Association (SEWA) in 1972. It was to bring poor women together and give them ways to fight for their rights and earn better livings. Its membership has grown to 7000 members in 1975 and now it must be over 700,000. Professor
Muhammad Yunus founded the Grameen Bank in Bangladesh in 1976. It operates
very differently from mainstream banks. Most of its customers are women.
The bank encourages them to form a small group of five borrowers. The
group members guarantee each other's loan. These loans are used for
self-employment activities like raising cows, seasonal crop trading,
weaving, sewing, operating grocery shops etc.
These groups meet weekly to discuss new loan proposals and to make
their loan repayments, including interest. Bank workers also discuss in
these meetings issues like health, hygiene, family planning, child
immunization etc. Over the years more than one third of these groups have
crossed the poverty line, and another third are close to crossing it.
There are over 7000 micro finance institutions worldwide, serving over
16 million poor people. Micro credit provides poor people with
access to small loans at more manageable interest rates, and can lead to
self-sufficiency and poverty alleviation. There are many models of micro
credit.
Through the 1980s and 1990s, micro credit programs throughout the world
improved showing that poor people, especially women, had excellent
repayment rates. Some of these rates were better than the formal financial
sectors of most developing countries. It also showed that, the poor
were willing and able to pay interest rates that allowed micro finance
institutions (MFIs) to cover their costs. Micro financing has been
revolutionizing the rural economy through the self-help groups.
Poor people save all the time, although mostly in informal ways.
They invest in assets such as gold, jewelry, domestic animals, building
materials, and things that can be easily exchanged for cash.
Providers of financial services to the poor include Saving and borrowing are really different ways of turning
small amounts of money in to lump sums. Saving involves building a lump
sum by first accumulating smaller amounts. Borrower is taking the lump sum
first and then 'saving' afterwards in the form of loan repayments.
Access to credit allows poor people to take advantage of economic
opportunities. Though it does not always result in increased earnings, it
has been demonstrated that reliable sources of credit provide a
fundamental basis for planning and expanding business activities. It
reduces vulnerability and increase earnings and savings.
Financial services thus transforms the poor households from
"every-day survival" to "planning for the future". It
has proved to be a powerful instrument for poverty reduction that enables
the poor
* To build assets, Micro finance smoothens consumption levels and
significantly reduces the need to sell assets to meet basic needs. Micro
finance programs have generally targeted poor women. This sends a strong
message to households as well as to communities by providing access to
financial services only through women like Access to finance enables poor women to become economic
agents of change by increasing their income and productivity, access to
markets and information, and decision-making power. It has improved the
status of women within the family and the community.
Poor people have been able to reduce debt burdens and break the cycle
of poverty, when the interest in low. Access to financial services enables
the poor to increase income and smooth consumption flows, and thus expand
their asset base and reduce their vulnerability. . Access to financial
services enables the poor to fight the various dimensions of poverty and
make improvements to their lives. It provides the poor with the means to
make improvements in their lives
Increased earning and savings provide poor people with some cushion
from the day-to-day struggle of earning a living. Increased earnings from
financial services lead to better nutrition and better living conditions,
which translates into a lower incidence of illness. This opens up the
possibility of investing in their children's future, and in education in
particular. With increased earnings the poor do invest in improved
housing, water, and sanitation.
Studies of the impact of micro finance in more than 24 countries have
found dramatic improvements in household income levels. Micro
finance programs may enable poor people to improve their situation, but
they do not eliminate the need for other basic social and infrastructure
services. The United Nations has declared the year 2005 to be the
Year of Micro credit.
Micro financing has been revolutionizing the rural economy through the
self-help groups. The success of the concept of micro credit through
self-help groups has encouraged the government to use as an instrument to
address the issues of poverty and unemployment.
The Grameen Bank of Bangladesh has loans currently in the
hands of borrowers totaling over US$300 million, with deposits of a
similar amount. Over 95% of the Grameen Bank's 3.8 million members are
women. It has reversed conventional banking practice by removing the need
for collateral and created a banking system based on mutual trust,
accountability, participation and creativity.
GB provides credit to the poorest of the poor in rural Bangladesh,
without any collateral. At GB, credit is a cost effective weapon to fight
poverty and it serves as a catalyst in the over all development of
socio-economic conditions of the poor who have been kept outside the
banking orbit on the ground that they are poor and hence not bankable. Today the SEWA Cooperative Bank has $1.5 million in working capital and more than 30,000 depositors with a loan return rate of 94 percent. SEWA's efforts to increase the bargaining power, economic opportunities, health security, legal representation, and organizational abilities of Indian women have brought dramatic improvements to hundreds of thousands of lives and influenced similar initiatives around the globe. Financial
services for the poor have proved to be a powerful instrument for poverty
reduction that enables the poor to build assets, increase incomes, and
reduce their vulnerability to economic stress. However, with nearly
one billion people still lacking access to basic financial services,
especially the very poor, the challenge of providing financial services to
them remains. Convenient, safe, and secure deposit services are a
particularly crucial need.
Select Bibliography
Marguerite S. Robinson, The Microfinance Revolution:
Sustainable Finance for the Poor (Washington, D.C.: The World Bank, 2001).
Robert Peck Christen and Deborah Drake, Commercialization: The New
Reality of Microfinance? (West Hartford, Conn.: Kumarian Press,
Inc., 2002).
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