Microfinance

Introduction:
The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. Microfinance began with microcredit: the provision of small loans (20-50 Euros) to very poor families to help them engage in productive and self-sustaining activities. Since the successful initiation of formalized microcredit in the 1980s a number of other complementary services have popped up around the globe, including micro savings, micro insurance. Microfinance has proven to be a very effective development tool because it provides empowerment instead of charity. Typically, microfinance clients are self-employed household entrepreneurs who lack the resources to invest in their business and their future and thus cannot escape the grips of extreme poverty. Traditionally banks and Lending Institutions do not lend money to low income individuals. The reasons being Lack of Information about Individuals. Collateral. High Transaction cost of processing Microfinance provides a solution for the above problem. Definition: According to International Labor Organization (ILO), Microfinance is an economic development approach that involves providing financial services through institutions to low income clients. In Pakistan, Microfinance has been defined by SBP, as provision of thrift, credit and other financial services and products of very small amounts to

The poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards. Microfinance as a branch of economic development for those who lack access to resources has garnered considerable recognition over the last several years, much of it due to the 2006 awarding of the Nobel Peace Prize to Dr. Mohammed Yunus, a US-trained, Bangladeshi economist who serves as the global figurehead for the microfinance movement. Microfinance is commonly understood to refer to the provision of credit services to those who have traditionally been considered too poor and uneducated to qualify for access to loans. When the first microfinance models were being developed in the 1970s and 1980s, the term microcredit was used interchangeably with microfinance. Today, however, microfinance can refer to the provision of numerous types of financial services, the majority of which are made on what those living in the developed world would consider to be an extremely small scale. These can include loans, savings accounts, insurance and pension products. Microfinance is a relatively new segment of the market economy that is why institutions created in this segment have short experience in their activities, and their personnel is not sufficiently experienced and qualified. Taking this into consideration, staff of these institutes is recommended to follow the internationally recognized principles of microfinance:

thorough examination of potential clients of the microfinance institution; thorough estimation of business viability and also factors which can positively or negatively affect the results of work in specific conditions;

thorough registration of documents and contracts related to loan issuance and microfinance services providing;

keep in touch with client in combination with monitoring of the terms of paying a credit, interests payments and with the aim to find out potential and real problems;

setting of interest rates for microfinance services compatible with market ones; quick reaction to any problems which can complicate the perspectives of getting of issued credit payed back.

Microfinance organizations make it a priority to serve the particular needs of women, since a staggering 70 percent of all those living in extreme poverty are female. Women are often excluded from education, the workplace, owning property and equal participation in politics. They produce one half of the worlds food, but own just one percent of its farmland. Nearly 85 percent of Opportunitys loan clients are women. While Opportunity gladly extends loans to men, the organization believes the greatest opportunity for interrupting cycles of extreme poverty come from microfinance programs that target female entrepreneurs. When women improve their circumstances, they also improve the lives of their children. By investing in nutrition and education, they help to create a better future for their children and their communities. Despite the success of life-transforming microfinance services, the World Bank says that the industry is not close to meeting the demand. Five hundred million people living in poverty could benefit from a small business loan and only one-third of the worlds population has access to any kind of bank account. The lack of access is particularly severe in sub-Saharan Africa where the World Bank estimates that microfinance is reaching only a small percentage of the economically

active population. In sub-Saharan Africas poorest countries, less than 10 percent of the population has an account with a financial institution. In response, Opportunity has committed to building scalable, sustainable and accessible banks throughout the developing world to provide loans, training, savings and insurance products tailored to the specific needs of each region. As the microfinance industry continues to mature, there is a danger that it will drift toward a more secure client base. It is critical that microfinance organizations continue to focus on those with the greatest needsthose who have been displaced, those in rural areas, those who traditional institutions consider unbankablethe most marginalized people. Maintaining that focus, microfinance can help create a world in which the underserved have fair access to economic opportunities and the hope to move beyond poverty.