Today, we are going to explore
a broad topic briefly. I am sure a lot people have heard about microfinance or
microcredit. What is it actually? How many of us are familiar and use this term?
What kinds of people make use of microfinance or similar methodology? When it
first came into existence? How long it has been in use?
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.