Microfinance and its Benefits - Angel One (2024)

Microfinance can be defined as a banking service dispensed to low-income individuals or groups as well as unemployed people who generally do not have access to financial services. It also refers to the credit or loans that are provided to the small and micro enterprises for the growth and expansion of their business by scaling up their operations at the same time.

Many microfinance institutions also provide additional services such as savings accounts, chequing accounts, and even micro-insurance services., and business and financial education. This promotes financial inclusion in the economy and also helps in economic and social growth in the country.

Microfinance for the Poor

Microfinance mostly targets the informal sector. There has been precedent that shows that microfinance has helped the financially poor to reduce their susceptibility to external shocks, improved income, and build feasible businesses. It also has been a potent instrument in enabling the economically weaker sections, especially women, to be self-sufficient, and become economic agents of change.

This income generated from businesses help expand business activities, contribute to household income expansion, and also aid in food security, education of the children, healthcare, etc.

Women have always been concealed from the public spaces, and interactions with such formal institutions may aid in building self-confidence among them and also a sense of empowerment.

Principles of Microfinance Institutions

1. To eradicate poverty by providing diverse financial services, and not just loans, needed by the poor.

2. Its focus is to build a financial system for the economically weaker sections.

3. Building of permanent local financial institutions that focuses on creating more domestic deposits, recycling them as loans, and also providing various other financial services.

4. The government’s duty is to enable financial services, not providing them.

Benefits of Microfinance

There are several benefits of microfinance.

Providing immediate funds

The microfinance setup helps to provide an additional level of resilient behaviour in the economy at large. It helps the households to work efficiently and effectively at large. It also helps these households to alleviate poverty. It allows the businessmen to run their companies and upscale their businesses at the same time. It provides the opportunity for the firm to get immediate resources for keeping their business on. It also helps in capital accumulation that leads to more access to funds when needed.

Access to credit

Since the credit amount is smaller when the economically weaker sections take up loans, the large banks do not partake in providing them. In addition, large banks do not provide loans to people with little or no assets. Microfinancing comes to the rescue here, as they are based on the ideology that small credit amounts can be a step towards ending the cycle of poverty. Women usually do not have proper documents for identification or certificates of land or house ownership, thereby hindering their access to formal financial institutions.

Better rates for Loan Repayment

Statistically, women are less likely to default on repayment of loans, and hence microfinance institutions tend to target women borrowers. They are the safer investment options for lenders and also help empower women. 55% percentile of women show traits of honesty and integrity while the numbers are at 48% in the case of men. Microfinance institutions recognise this and hence target women as credit borrowers, thus having a total repayment rate of more than 98% even though there are many overdue accounts at a microfinance institute at any given time period.

Provides for those who go unnoticed

Primarily women, people with disabilities, unemployed persons, and people who need to meet the basic necessities are the ones who receive microfinance products from the microfinance institutions.

It has been observed that companies with female board of directors perform better in obtaining up to 66% returns on invested capital and 42% better returns on sales than companies with only a male board of directors.

Women hold significant business leadership roles and also develop others in entrepreneurial roles, even in developed countries.

An opportunity to receive education

Children of economically weaker families either are not enrolled in school or miss their school days, as these families are mostly of agricultural background and require their children to work in order to earn and help the family financially. Microfinance products can come to the rescue of these children by providing funds to meet the financial needs of the family, thereby allowing the children to complete their education.

Suppose a girl child receives eight years of formal education. In that case, the chances of her getting married young reduce by four times, the chances of teen pregnancy decrease, and their chances of finishing school increase, and hence, they are more likely to obtain a fair-paying job or higher education.

Possibility of future investments increases

Poverty is a perpetual cycle. Scarcity of money results in a lack of food and water, leading to a lack of sanitary living conditions and malnutrition and illness, leading to people not working and, hence, a lack of money.

Microfinance aims to break this cycle by making more money available. Availability of funds means the basic needs are met. Hence, investments can improve sanitation, build better wells, and better health care, making people productive and not perpetually ill. Children can complete their education, and also, since the chances of survival increase, the average family size reduces. All of these add up to the possibility of future investments as the people can now meet their basic needs.

Creation of Real Jobs

Entrepreneurs, when they borrow credit from microfinance institutions to start their businesses, they create employment opportunities for others. An increase in employment benefits the local economy as more money circulates through local businesses and services.

Significant Economic Gains

The gains from partaking in microfinance programs entail access to better nutrition, higher consumption, and also consumption smoothing. Here the economic gains are not monetary but are from stability.

The happiness gained from microcredits is reflected in the fact that the repayment rates are high. Hence, at the core level, microfinance almost always leaves a positive effect.

Hence, microfinance has multiple advantages and is an essential tool in trying to break the cycle of poverty.

Microfinance and its Benefits - Angel One (2024)


Microfinance and its Benefits - Angel One? ›

It helps the households to work efficiently and effectively at large. It also helps these households to alleviate poverty. It allows the businessmen to run their companies and upscale their businesses at the same time. It provides the opportunity for the firm to get immediate resources for keeping their business on.

What is microfinance and its benefits? ›

Microfinance is a banking service provided to low-income individuals or groups who otherwise would have no other access to financial services. Microfinance allows people to take on reasonable small business loans safely, in a manner that is consistent with ethical lending practices.

What is the difference between a microfinance and a regular stream bank? ›

The main goal of microfinance is to alleviate poverty in the population through credit provision and carrying out financial training while banks focus more on profitability and growth. Microfinance loans are of lower interest rates and better repayment terms while bank loans are of comparatively higher interest rates.

Is microfinance good or bad? ›

Microfinance isn't perfect, and many of the concerns voiced about the industry are legitimate. It is, however, one of the more effective tools the world has for improving financial inclusion, which in turn can help to bring people out of poverty and assist in reaching the UN's Sustainable Development Goals.

What are the advantages of individual lending in microfinance? ›

Individual loans also offer the potential to take out larger loans and have faster application and repayment procedures. In addition, because of the reduced risk associated with more rigorous client assessment procedures, individual loans are often less costly for the client than their group loan counterparts.

Who benefits the most from microfinance? ›

Benefits of microfinance

Individuals with little or zero assets often fail to get loans from major banks. Microfinance loans are easily available for small businesses that have less income. Many entrepreneurs find it difficult to provide identification or certification to the traditional banks for loans.

Why invest in microfinance? ›

Positive impacts of the loan

A microloan can help an entrepreneur start a new company or expand an existing company. This way they have an opportunity to generate or increase their income, which they can use to improve their personal circ*mstances.

How does a microfinance loan work? ›

Microcredit is a common form of microfinance that involves an extremely small loan given to an individual to help them become self-employed or grow a small business. These borrowers tend to be low-income individuals, especially from less developed countries (LDCs).

What is an example of a microfinance? ›

Microfinance includes microcredit, the provision of small loans to poor clients; savings and checking accounts; microinsurance; and payment systems, among other services.

Which microfinance bank is the best? ›

The top five Microfinance Banks are LAPO MFB, AB, Baobab, Lovonus, Addosser MFB. These banks have distinguished themselves through the adoption of technology in their products and services.

What are the downsides of microfinance? ›

Microfinance can cause low-income people to become excessively indebted. Borrowers might take out several loans from several microfinance organizations, which could put them in a debt cycle and make it impossible for them to repay the debt.

What are the risks of microfinance? ›

Credit risk is one of the most significant risks faced by microfinance banks. Effective credit risk management involves assessing the creditworthiness of borrowers, setting appropriate interest rates, and implementing collection strategies to minimize defaults.

What are the negative effects of microfinance? ›

Others allude to negative impacts (i.e., that microfinance does harm), such as the exploitation of women, increased or at best unchanged poverty levels, increased income inequality, increased workloads and child labor, the creation of dependencies and barriers to sustainable local economic and social development (e.g., ...

Who provides microfinance? ›

The different types of institutions that offer microfinance are: Credit unions. Non-governmental organisations. Commercial banks.

Are microfinance loans effective? ›

The studies found fairly consistent results: None found evidence that income went up on average among those offered credit. A few saw modest positive effects, such as people choosing to spend more time on their small businesses and some changes in spending habits.

What are the objectives of microfinance? ›

Microfinance institutions have a specific focus: they aim to offer banking services to low-income individuals and groups, and they receive funding from established financial institutions to support the underprivileged. Consequently, these institutions have become powerful tools in the fight against poverty in India.

What are the most important benefits of micro lending? ›

One of the main benefits of micro loans is that they can be easier to obtain than traditional bank loans. This is because micro lenders typically have a more relaxed approach to lending, and they are often more willing to work with small businesses and entrepreneurs.

What is the difference between a bank and a microfinance? ›

Like a bank, a microfinance institution is a provider of credit. However, the size of the loans are smaller than those granted by traditional banks. These small loans are known as microcredit. The clients of an MFI are often microentrepreneurs in need of economic support to launch their business.

Is microfinance a powerful tool? ›

Microfinance has proven to be a powerful tool in the fight against poverty. Microfinance services have been predominantly oriented towards women. This is in part because the majority of the world's most poor people are women. It is also because lending to women has proven particularly effective and successful.

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