Microfinance

Poverty is one of the few problems and challenges that every country on the planet faces and the statistics speak for themselves. In 2015, 7.3 billion people lived on less than US$1.90 a day, according to the World Bank. Despite the complexities concerned about changing this situation, there are various solutions and microfinance. Microfinance is an essential means for financing the deprived and underprivileged populace of Society. In simple words, it can be termed as “banking for the poor.” The word “microfinance” (M.F.) refers to providing banking services to lower-income groups, especially the poor or meager. Microfinance can be in Microcredit, insurance, loans, savings, money transfer services, and means of payment. It is beneficial to small-business owners as well as low-capital enterprises. The majority of the deal under microfinance involves a small amount of money. Microfinance is an influential device to eliminate poverty and make the poor and backward class of Society stronger in a broader sense. It is very much advantageous for the empowerment of women. To operate their enterprises, stabilise consumption, grow assets, and defend themselves against hazards, everyone, rich or poor, needs a varied collection of financial instruments. Every impoverished person need consumer credit, working capital loans, savings, pensions, insurance, and money transfer services.

Microfinance enables those living in extreme poverty to strive toward being financially self-sufficient, allowing them to better their living situations. Microfinance (Ledgerwood, 1998)¹ refers to small-scale loans, savings, insurance, and other financial products aimed at low-income clientele. Microfinance as a concept has been employed as a development tool with the primary goal of poverty reduction. Microfinance has evolved as a more viable solution for meeting the credit requirements of the poor in order to enhance their quality of life and eliminate poverty.

To provide credit to the deprived population, eliminate poverty, develop the poor’s skills, work for economic growth, social welfare, women empowerment, mobilize savings, and bring mutual help and cooperation between borrower’s microfinance programs. Microfinance services are usually offered to the little groups and their families to support them in launching and developing their tiny businesses and engaging in other productive activities. Microfinance has wedged the attention as a successful tool for reducing poverty and socio-economic development. For providing financial services to the weaker sections, microfinance institution programs achieved wide-reaching popularity and acceptance after 1980.

Definition of Microfinance

Various economists, scholars, and national and international organizations defined microfinance differently:

Joan Parker, 2000, “Microfinance refers to the provision of small-scale financial services including microcredit, savings, payment services, micro-insurance, and other services to the rural and urban poor clients who don’t have access to the banking services on a sustainable basis.”

NABARD^2, a working definition of micro finance, is “provision of thrift, credit and other financial services to the unsaved poor enabling them to raise their income levels and improve living standards”.

According to ILO³, “Microfinance is an economic development approach that involves providing financial services through institutions to low income clients.”

According to ADB⁴ defined, “microfinance as the provision of a broad range of financial services such as deposit, loans, payment services, money transfers and insurance to the poor and low-income households and their micro-enterprises.”

In a nutshell, microfinance refers to all financial services provided in the form of small loans to the poor to help them start or expand small businesses that will help them improve their economic and living standards by increasing their earning capacity, as well as empower women by allowing them to make financial decisions and alleviate poverty.

Without a doubt, microfinance is a means of lifting the poor out of poverty and releasing them from the chains of deprivation, allowing them to achieve selfsufficiency and independence. It gives planners a vision for achieving the combined goals of economic progress, equal employment, social peace, and harmony.

Table 1.1: Summary of Microfinance Definition

Microfinance Characteristics

1. It is an important part of rural financing.
2. It is a lender that specialises in modest loans.
3. Microfinance helps low-income families.
4. It is one of the most valuable and accepted ways for poverty alleviation.
5. It encourages women to participate in electronic activities.
6. It encourages people to take advantage of self-employment options.
7. It is more service-oriented than profit-oriented.
8. It’s designed to help small businesses and entrepreneurs.
9. Because they are simple and God-fearing, borrowers are unlikely to default on their debts.

Microfinance Fundamentals

1. The poor desire a wide range of financial services, not only loans.
2. Microfinance is a popular way to get out of poverty.
3. Microfinance entails establishing an economic and financial structure that benefits the poor.
4. Microfinance entails the establishment of long-term local financial institutions capable of attracting domestic deposits, converting them into loans, and providing other financial services.
5. The high rate of interest on loans harms residents by making loans more difficult to get.

Objectives of Microfinance

Various objectives of microfinance are determined by the organization and bodies working to encourage MFIs in different parts of the world. Some of the main objectives are as follows:

1. By promoting socio-economic growth at the grass-roots level through a community-based strategy.
2. To give employment training to the poor so that they can increase their income.
3. Microfinance lowers costs and maximises the use of locally available resources as inputs for business and livelihood activities.
4. Build-up and make stronger the groups called Self-Help Groups (SHGs) and make possible well-balanced development through these groups.
5. To boost and enhance the level of household income and remuneration days.
6. Encourage public and community participation activities and programs for the disabled.

For citing this article, use:

• Wani, A. A. (2022). Study of working of Micro finance self help groups SHGs linked with commercial banks with reference to Baramulla District of J and K State.

References:

1. Microfinance handbook: an institutional and financial perspective. Washington, DC: The World Bank
2. National Bank for Agriculture and Rural Development
3. International Labor Organization
4. Asian Development Bank