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As the name suggests, microfinance is the provision of financial services (loans, savings, insurance) to people on a small scale, such

as businesses with low or moderate incomes, but you can read more meticulous definitions here and here. Loans of micro value are one of the better known means of helping small business owners in developing countries move out of poverty.The definition for according to The Asian Development Bank (ADB) is any financial service targeted toward the poor, such as:

deposits finance schemes or loans up to $3,000 payment services money transfers insurance to poor and low-income households and their micro-enterprises

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 (see examples) Semi-formal Microfinance Institutions nongovernmental organizations providing micro-sized loans (see examples) Informal Microfinance Sources money lenders and shopkeepers who often loan money on a daily basis and charge exorbitant interest rates.

This list was taken from ADBs website.

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 (Read about technology-related solutions) lack of awareness about sources of funds for microfinance providers to pass on to the poor the poors inability to offer marketable collateral for loans to MFIs difficulty in measuring the social performance of MFIs (Read about tools to help measure the social impact of microfinance) mixing of charity with business by microfinance providers (this is an issue of poor governance)

high interest rates of loans made to the poor (to cover various costs and risks) lack of customized solutions/ microfinance models for the poor inappropriate targeting of poor households by microfinance programs lack of microfinance training for MFIs poor distribution system of MFIs, i.e. a need to spread out loan facilities into rural areas lack of information about microfinance investment opportunities (Possible solution through AppLab) poor institutional viability of microfinance ventures dual mission of MFIs to be financially sustainable as well as development oriented

These problems can be grouped according to whether theyre caused by MFIs or caused by micro entrepreneurs. You can read about them in greater detail at these links. Just like any other new venture, microfinance too faces obstacles that will eventually be ironed out as governments alter their priorities, and as the commercial sector understands the economic viability of the development sector, considering the relative immunity of the microfinance sector to the global financial meltdown. Already, a few encouraging trends have emerged in the microfinance sector. As Kofi Annan once put it, microfinance not only recognizes the needs of the poor, it also empowers them and taps into their remarkable reservoir of energy and knowledge. In short, microfinance has tremendous potential, its time is now and is here to stay.

MEANING efined as financial services for poor and low-income clients. he term is often used more narrowly to refer to loans and other services from providers that identify themselves as microfinance institutions (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers. use the like below too watch the video on microfinance Geoff Davis, founder and CEO of Unitus, explains the meaning of microfinance and the huge potential and impact the field has. He goes on to discuss the difference between microfinance and micro credit.

NOTES ON MICROFINANCE
A. Definition of Microfinance
Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance

products to the poor and low-income households, for their microenterprises and small businesses, to enable them to raise their income levels and improve their living standards.

B. Core Principles for Microfinance


The poor needs access to appropriate financial services The poor has the capability to repay loans, pay the real cost of loans and generate savings Microfinance is an effective tool for poverty alleviation Microfinance institutions must aim to provide financial services to an increasing number of disavantaged people Microfinance can and should be undertaken on a sustainable basis Microfinance NGOs and programs must develop performance standards that will help define and govern the microfinance industry toward greater reach and sustainability

Characteristics and Features of Microfinance Characteristics Distinguishing Features


Type of client __Low Income
__Employment in informal sector; low wage bracket __Lack of physical collateral __Closely interlinked household/business activities Lending Technology __Prompt approval and disbursement of micro loans __Lack of extensive loan records __Collateral substitutes; group-based guarantees __Conditional access to further micro-credits __Information-intensive character-based lending linked to cash flow analysis and group-based borrower selection Loan Portfolio __Highly volatile __Risk heavily dependent on portfolio management skills

Organizational Ideology
__Remote from/non-dependent on government __Cost recovery objective vs. profit maximizing

Institutional Structure
__Decentralized __Insufficient external control and regulation __Capital base is quasi-equity (grants, soft loans)