Financial Services  

What is microfinance?

Microfinance is banking the unbankables, bringing credit, savings and other financial services within reach of millions

Microfinance began in the year 1970s when the social entrepreneurs started lending their money on a large scale to the working poor. The term microfinance means providing financial services to micro-entrepreneurs and small businesses that lack access to banking and related services due to high transaction costs linked with serving these client categories.The industry started by providing small loans to the talented entrepreneurs to expand and start their business.The microfinance sector has expanded its financial service offerings to meet the needs of the clients. 

History of microfinance

The history of micro finance can be traced back as long to the middle of the 1800s when theorist Lysander Spooner was writing on the benefits from small credits to entrepreneurs and farmers as a way of getting the people out of poverty. The modern use of the expression of micro financing has its roots in the year 1970s when the companies like Grameen Bank of Bangladesh with microfinance pioneer Muhammad Yunus started and shaped the modern industry of micro financing.

Microfinance products, services

Microfinance institutions offer different types of products and services.  Some of which are as follows:

Microsavings:  Microsavings accounts allow the individuals to store small amounts of money for the future use within the minimum balance requirements. Like the traditional savings accounts in developed nations, micro-savings accounts are tapped by the saver for life needs like the weddings, funerals, and old-age supplementary income.

Microloans: Microcredit or microloans are loans that have small value and most loans are less than $100 in size. These loans are generally issued to the finance entrepreneurs who run micro-enterprises in the developing countries. The example of micro-enterprises includes basket making, sewing, street vending and raising poultry.  The average global interest rate charged on micro loans is about 35%.

Micro-insurance:  Micro-insurance pools risks and helps provide risk management.  It also allows for insurance policies that have very small premiums and policy amounts. The examples of micro-insurance policies include crop insurance and policies that cover outstanding balances of micro-loans in the event a borrower dies.  Due to the high administrative expense ratios, micro-insurance is the most efficient for MFIs when premiums are collected together with microloan repayments.

Career in microfinance

The scope of the microfinance sector is very large particularly in India. The microfinance professional is involved in various stages including providing blueprint to setting benchmarks for the repayment of loans. The fresh graduates having a social science background can work as field officers in MFIs and the fresh MBAs can find middle management level jobs as branch or regional managers.  The pay packages offered by large microfinance institutions like Share, SKS, Spandana, and Basix are competitive. At the middle and junior levels, the salaries match those of manufacturing companies. Fresh MBA can earn anywhere between Rs 15,000 and Rs 20,000 per month.  While, those with some experience in MFI are picked up by the microfinance division of banks at 6 figure salaries.  The microfinance professional having an experience of working in good Indian MFIs are in high demand for the international microfinance post in developing countries and international companies with high salary packages.

Clients of microfinance

The clients of microfinance are poor and low-income people who do not have way in to other formal financial institutions. The clients are generally self-employed and house-hold based entrepreneurs. Their diverse microenterprises include the small retail shops, street vending, artisanal manufacture, and service provision. Some MFIs have started developing products to meet the needs of other clients such as pensioners and salaried workers.

Role of government in supporting microfinance

The government plays a role in establishing a sound macroeconomic policy that provides stability and low inflation. It also plays a role in adjusting bank regulation to facilitate deposit taking by solid microfinance institutions after the country has experience with sustainable microfinance delivery. The government plays a role in creating government wholesale funds to support retail MFIs if the fund can be insulated from politics and they can hire and protect strong technical management and avoid disbursement pressure that forces funds to support uncompromising MFIs.

Institutions delivering microfinance

A large number of micro-finance institutions started as not-for-profit companies like non-governmental organizations, credit unions and other financial cooperatives and state-owned development and postal savings banks. The increasing number of MFIs is now organized as for-profit entities.

Microfinance is a very broad category of services. Though it has been in existence since 1970s, it is now much more relevant to the investors, individuals and professionals in the field of finance.

Join Businessfriend today. Where social networking leads to productivity

Featured Articles + MORE Featured Articles >>