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Overview: Microfinancing: A Global Purview

Published on : 12 Jul 2020

Microfinancing: A Global Purview

Microfinancing can be categorized as financial services that target small businesses and individuals by providing them loans, savings or checking accounts amongst other things in order to provide them access to unconventional methods of banking and associated services. This aids in rendering self-sufficiency for particularly marginalized groups and geographically isolated segments of society that otherwise are not able to access the conventional methods of banking. Microfinancing has proven to be a boon globally to everyone who is not able to access the high range of financial services or products, including fund transfers or payment services. It provides a two-fold objective of promoting employment amongst entrepreneurs with start-up businesses that have fewer funds or other small businesses and at the same time aids the poor to administer their finances while taking full benefit of economic opportunities. Microfinancing helps in the economic development and growth of a country through its support by providing affordable financial services and access to capital. This includes delivering loans, saving accounts, credit or any other policies related to insurance or money policies and presenting small entrepreneurs and small businesses with the financial independence that one would require. 

Microfinancing has its origin dates back to the 1800s in Europe and the 1900s in the United States. One of the first institutions of microfinancing to receive attention was pioneered by ‘Muhammad Yunus’ who founded the first micro-credit establishment known as the ‘Grameen Bank’ in Bangladesh in the year of 1976. The objective is to promote sustainability, and the features of microfinancing are outlined below:

  1. The objective of microfinancing is to aid and assist individuals with loans or any other financial services to people who are living below the poverty line and cannot afford the banking services or financial services conveniently. Such loans will also be provided to self-help groups, start-up businesses or other small companies that cannot afford the conventional methods of banking institutions and other financial services. 
  2. Microfinancing includes within its ambit apart from small loans, also any financial services including insurance or savings accounts and other insurance funds.
  3. The category of borrowers that will be qualified for obtaining loans under microfinancing can be small business groups/individuals that belong to low-income backgrounds or are faced with difficulties in gaining capital access due to low-income funds.
  4. The tenure of a loan in microfinancing is short, and the loans do not entail the need for collateral. This aids the individuals who already face a crunch financially and are at ease of obtaining loans easily without having to provide collateral security for the loans.
  5. Loans are provided without additional security and offer a better rate of repayment on loan than traditional banking and other financial institutions available in society; however, the interest rates can be high due to high risk of default.
  6. It provides sustainability in developing and emerging countries by improving the situation of the economy and providing equal opportunities for financing to the ones who cannot afford it. It aims at increasing incomes and employment in developing countries, thereby empowering the economy against poverty and aiding in economic development.
  7. Different types of institutions offer different types of options such as credit unions, cooperatives, non-banking financial companies and other non-governmental organizations.
  8. Creation of opportunities to the underprivileged for employment and moving them out of poverty. 
  9. Developing a sustainable community by providing access to support services and resources for the input of income following which self-sufficiency and financial independence is created.
  10. Microfinancing promotes ethical lending practices and promotes specific repayment plans.

The microfinancing institutions help in linking the gap between the modern financial institutions and the poor and enables the poor to gain access to these resources comfortably. Impoverished individuals, underprivileged individuals, farmers, villagers, micro-entrepreneurs and poor families with no access to banking services benefit by microfinancing. There are certain challenges that also need to be combated with the emergence of microfinancing activities that include access to reliable market information, risk management, social impact transparency to stakeholders/investors and valuation of investments. The lack of security and high levels of costs required for operation impose limitations in the field of microfinancing

Microfinancing organizations run in the United States, where marginalized sections are provided with small loans and other financing activities. These organizations focus on promoting healthy lending opportunities and the creation of jobs via employment. Self-employment is largely promoted, and micro-lending activities are carried out. In Canada, the microfinancing activities are carried out via credit unions that provide financial services to the financially marginalized sections of the society. Many microfinancing institutions have been developed for providing financial alternatives and affordable small loans. In the Indian territory, microfinancing activities have also been carried out in full swing by providing individuals with finances in the form of self-help groups and non-governmental organizations. Such self-help groups are formed whereby a group of individuals come together to self-govern and self-manage links with banks and operate independently with the help of financial services. Such groups obtain security by non-governmental organizations and receive funds and credit. Many micro-credit associations are also effective in Egypt, Lebanon and Morocco that carry out microfinancing operations. Microfinancing activities have been initiated globally in Asia, Middle East, America and Europe. Hence, microfinancing has emerged beneficial for the poor and the sidelined sections of the society by creating equal opportunities for such underprivileged sections financially. Through this, the financial needs of the underprivileged are integrated with the overall financial needs of the country. 


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