Understanding the purpose of microfinance
Posted by Kamlesh Soni on March 3rd, 2019
Economic independence is a necessity for every individual, and every government in the world strives to ensure each citizen is self-sufficient. The main concern remains the poor, socially marginalized and poor who either do not get the financial support required or those who are unable to utilize the schemes to grow financially. In this endeavor to help all people achieve financial success, most governments turn to NGOs and microfinance companies. The working poor is offered microloans, microcredit, micro-savings, micro-insurance, and other micro financial products to help them come out of poverty.
The Poor Man’s Financial Support
In simple words, the purpose of microfinance is to offer financial services and products to help the targeted group of people generate a sustainable income and self-sufficiency. The top microfinance company in India will offer products that are cost-effective and easily accessible. But, why not depend on traditional banking institutions like banks and NBFCs? It is because the small amounts required as loans are not feasible and as a part of their processes, they require collateral against each loan, which the poor cannot provide. In fact, though Professor Yunus and his Grameen Bank popularized the concept of microfinance, the concept was started to offer small traders and businessmen the loan needed to sustain a livelihood.
Higher Rate of Interest Is Not A Deterrent
The rate of interest charged on loans charged by topic microfinance is higher as compared to banks. But, it is lower than loan sharks and the flexible repayment makes them more effective. For example, if a borrower is given Rs. 1000 for one week, at an interest rate of 25%, it means they have to return 1250 at the end of the week, which is feasible and affordable for a woman using the money to offer laundry services. She can repay the loan and interest without the hassle and may even earn enough to start saving. However, if this is compounded into three months, it means they have to repay Rs. 3000 in interest alone - which will seem like a huge sum to a person without savings. Hence, the low loan amount, short-term facility and easy access to loans are what makes the loans popular across the world, and there are several non-profits as well as for-profit companies offering microfinance.
Governments Depend On Microfinance
One purpose of microfinance is the support it provides to Governments, especially in developing nations to help the poor get credit and break the cycle of poverty. For borrowers living in remote areas and low-density population, it is the microfinance companies that come to their aid. Another major advantage to the Government is communities creating a group or groups to take the credit. It has been found that when loans are extended to a group, as a collective they rally together to make the repayment.
To sum up, the main purpose of microfinance is to provide financial support to the people who need it the most, allowing them to come of poverty with hopes for a better future.
