Microfinance basics

Microfinance has been considered as an effective poverty alleviation tool because it is based on the fundamental principle that human beings are motivated to do whatever it takes to make themselves as well off as possible. It’s a way to provide fund to those sections of the society which are not been catered by the traditional banking systems. Over time, the definition of microfinance has become broader to include services like credit, savings, insurance, etc. We have realized that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products. The potential clients for a microfinance institution would be poor or low-income clients, including consumers and the self-employed. The term also refers to the practice of sustainably delivering those services.

As was said by Robert Peck Christen, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation, Microfinance broadly refers to a movement that envisions “a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers.”

How it differs from Traditional loans?

Traditional loans are given against some or the other kind of collateral which could be any of your material possessions. On the other hand in microfinance the clients are not required to keep any collateral, the only security for a lending firm is either the JLG (Joint liability groups) or the SHGs(Self help groups). These are also now being called as moral or social collaterals.