Microfinance Concept - What is Microfinance Loans?

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Post on 27-Mar-2016




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What is Microfinance Loans? Can Microfinance Loans Help The Poor? For More Useful Information about Microfinance and Social Business Please Visit ==> http://themicrofinance.blogspot.com/


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    For More Useful Information about Microfinance Industry ! Please Visit our Microfinance Blog:http://themicrofinance.blogspot.com/

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    What is microfinance?

    Microfinance refers to financial services for poor and low-income clients. Although most attentionhas been on the provision of small loans, microfinance in fact also includes the provision of otherbasic financial services such savings, money transfer and insurance for poor people. Improvingaccess to such services allows poor and low-income people to finance income-generatingactivities, build assets, stabilise consumption and protect against risks. Microfinance is now widelyrecognised as a powerful solution to alleviating poverty among the working poor.Who is microfinance aimed at?

    Microfinance is usually aimed at economically active poor and low-income people who havelimited or no access to the services provided by formal financial intermediaries such as banks.Since there are so few salaried work opportunities, they are usually self-employedmicroentrepreneurs often working from home. Typically, they operate small businesses such asgrocery shops, market stalls, car repair, carpentry or other workshops, and in rural areas they tendto focus on food processing, agriculture and raising livestock and poultry. Around two-thirds ofmicrofinance clients worldwide are women.

    Why has microfinance become so popular?

    Primarily because it has been proven that microfinance is a long-term and sustainable solution toalleviating poverty. After nearly four decades of experience it has been shown that when poorpeople have access financial services - loans, savings, insurance and money transfer facilities -they can lift themselves out of poverty. Poor people in general and poor women in particular, are agood credit risk. They invest their loans wisely, not only in income generating activities, but also inthe welfare of their families. Microfinance is not charity and builds on the principal that teachingsomeone to fish is infinitely better than simply giving them fish. It focuses directly on helping poorpeople to work and become more self-sufficient. Although the relationship between access tomicrofinance and poverty is complicated, microfinance has become popular because it can createa virtuous cycle of investment and increased income and thereby break the cycle of poverty inwhich many poor people are trapped. With access to successive loans over a longer period of timeand through the cycle of further investment and increased income, poor entrepreneurs canthrough their own efforts gradually climb out of poverty.

    How important are money transfers?

    Remittances are a significant source of income for many poor people who often have relativesworking in a different part of the country or even abroad. Enabling cheaper, faster money transferservices is of great benefit for many poor families who currently spend significant proportions of

  • their earnings to move money between different places - for example, it might cost $30 to sendjust $200, that is 15%. This is an amount that poor people can ill afford to pay.

    How does micro-insurance work?

    As with normal insurance, micro-insurance is a service that protects poor people against certainrisks in return for a fee or premium. The service is offered to low-income individuals andbusinesses and is characterised by low insurance premiums, often a small fixed proportion of theloan amount, and low coverage limits - for example if a famer's crop suffers a loss of $100 as aresult of flooding, the insurance policy may just compensate him or her for half this amount.

    What kinds of institutions provide microfinance services?

    Most microfinance initiatives were started by non-governmental organisations (NGOs), like CARE.These often developed into formal microfinance institutions or MFIs whose activities are regulatedby the relevant national banking or microfinance authorities. An increasing number of MFIs arenow organised as for-profit entities, often because it is a requirement to obtaining a license frombanking authorities to offer savings services. For-profit MFIs may be organised as non-bankfinancial institutions, specialist commercial microfinance banks, or microfinance departments oflarger commercial banks. In addition to insurance and money transfer facilities in recent yearssome MFIs have also begun providing social services, such as basic healthcare and education fortheir clients and their families.

    When is microfinance NOT an appropriate tool?

    Microfinance can be a very powerful tool in helping poor people; however it may not always beappropriate. For example, when small loans are to be used for business purposes, microcredit ismost useful for those entrepreneurs who have already identified a productive and profitableeconomic opportunity, can capitalise on it if they have access to credit and are capable of makingthe regular repayments in order to have continued access. The very poorest people may beunable to repay even a small loan and providing them with a grant to help them build assets orstart an enterprise may be more appropriate. In fact, they are generally more in need of help inmeeting their basic needs such as food and shelter. Providing credit to those who cannot use itproductively could push already vulnerable poor people into debt and in fact worsen their situation.

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    Article Source:http://EzineArticles.com/?expert=Jon_Lucas

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    For More Useful Information about Microfinance Industry ! Please Visit our Microfinance Blog:http://themicrofinance.blogspot.com/

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