Microfinance is a term revolves around the people who have difficulty in accessing typical conventional banking services. It is basically rooted on the ideology of uplifting the people’s lives by supplying basic finance services such as loans, savings, credit, etc, to the low income individuals and makes it easier for the young entrepreneurs and small businesses to sources banking services not conventionally available at small scale.
It dates back to the early human civilizations in one form to another that includes group-based community finance models still exist in Pakistan and many other nations as pool committees or individual relationship based financing which lead to pawnshops founded by Franciscan monks in 15th century and later European Credit unions in the 19th century. The concept of modern microfinancing often credited to Bangladeshi Nobel Laureate, Dr Muhammad Yunus who started economic reforms for Bangladeshi rural areas by lending money to poor money in 1970s. The main purpose behind it was to encourage poor people to produce sellable commodities without toiling the burden of high interest due to predatory lending. Along the same lines, Dr Yunus set up Grameen Bank in 1983, first ever financial institute with a vision to grant microcredit, mainly serving poor women. Now it has a client base of over 7 million and microfinance itself has reached to 130 million clients in the past 15 years. Dr Akhtar Hameed Khan of Pakistan was another pioneer in the sector of microfinance who actively advocated microcredit in Pakistan and initiated poverty alleviating projects like Orangi Pilot Project and Comilla Cooperative Pilot Project.
People save all the time to meet their future needs and/or to handle disasters. It is very common in South Asia to save up in non-cash forms such as gold, livestock, grains, and precious metals to meet the needs. Sometimes people get together to form small saving groups where each participant contributes a fixed amount of money on periodic terms and successfully awarded the pool on rotationally basis. These committee pools are prevalent in Asia and Africa. Nevertheless, such mechanisms and schemes help people to a certain extent only due to their limitations. For example, livestock keepers or precious metal holders are always under the constant fear of theft, fluctuating prices of metals, natural disasters and illness of livestock. Moreover, usually committee pools are consists of small groups and can provide a limited amount of money. These groups stick to the fixed periodic terms and savings, hence not flexible enough to accommodate the changes in a member’s ability to save. Fraud and mistrust is another risk to indulge this kind of practice, however people still use these informal ways to fulfill their financial needs as their access to formal financial sector ranges from zero to very low.
Microfinance was introduced to address the financial needs of the low income people who often turn to informal way due to lack of services for them in mainstream banking. It is a movement to ensure the accessibility of high quality financial services to poor people so they can also enjoy savings, fund transfers, credit and insurance services. Microfinance mainly works on individual relationship banking to small business and entrepreneurs and group-based models, where several entrepreneurs come together to apply for loans and other services as a group. Many of its proponents believe; microfinance helps in eliminating poverty, economic development, growth and employment through the support of small businesses and entrepreneurs.
Unlike traditional banking services, microfinance providers are not only the banks but it ranges from charities to non-profit organizations and from community welfare groups to large commercial banks. Conventional banks offer loans to those who has assets as collateral and would not extend their services to individual with little to no assets, and generally don’t engage in small size loans typically associated with microfinancing. Through microfinancing small loans are produced and accessible. Microfinancing is based on the philosophy that even small amounts of credit can help end the cycle of poverty. Another benefit produced from the microfinancing initiative is that it presents opportunities, such as extending education and jobs. Families receiving microfinancing are less likely to pull their children out of school for economic reasons. As well, in relation to employment, people are more likely to open small businesses that will aid the creation of new jobs. Overall, the benefits outline that the microfinancing initiative is set out to improve the standard of living amongst impoverished communities (Rutherford, 2009).
There are also many challenges within microfinance initiatives which may be social or financial. Here, more articulate and better-off community members may cheat poorer or less-educated neighbours. This may occur intentionally or inadvertently through loosely run organizations. As a result, many microfinance initiatives require a large amount of social capital or trust in order to work effectively. The ability of poorer people to save may also fluctuate over time as unexpected costs may take priority which could result in them being able to save little or nothing some weeks. Rates of inflation may cause funds to lose their value, thus financially harming the saver and not benefiting collector.
