This essay has been submitted by a student. This is not an example of the work written by professional essay writers.

What is Microfinance

downloadDownload printPrint

What is ‘Microfinance’ Microfinance, also called microcredit, is a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise have no other access to financial services. While institutions participating in the area of microfinance are most often associated with lending (microloans can be anywhere from $100 to $25,000), many offer additional services, including bank accounts and micro-insurance products, and provide financial and business education. Ultimately, the goal of microfinance is to give impoverished people an opportunity to become self-sufficient.

Are you Looking For A Custom Essay about “What is Microfinance” NOW? You Found It!

Professional Writers that Guarantee an On-time Delivery


experts online

‘Microfinance’ Microfinance services are provided to unemployed or low-income individuals because most of those trapped in poverty or with limited resources do not have enough income to do business with traditional financial institutions. Despite being excluded from banking services, however, those who live off of as little as $2 a day do attempt to save, borrow, acquire credit or insurance and make payments on their debts. As a result, many look for help from family, friends and even loan sharks, who often charge exorbitant interest rates. Microfinance allows people to safely take on reasonable small business loans in a manner that is consistent with ethical lending practices. Although they exist all around the world, the majority of microfinancing operations occur in developing nations, such as Uganda, Indonesia, Serbia and Honduras.

Many microfinance institutions (MFIs) focus on helping women in particular. How Microfinance Works Microfinancing organizations support a wide range of activities, ranging from business start-up capital to educational programs that allow people to develop the skills necessary to succeed as an entrepreneur. These programs can focus on such skills as bookkeeping, cash flow management and even technical or professional skills. Unlike typical financing situations, in which the lender is primarily concerned with the borrower having enough collateral to cover the loan, many microfinance organizations focus on helping entrepreneurs succeed. In many instances, people looking to join microfinance organizations are first required to take a basic money management class. Lessons focus on understanding interest rates and the concept of cash flow, how financing agreements and savings accounts work, how to budget, and how to manage debt.

Once educated, customers are then allowed access to loans. Just as one would find at a traditional bank, a loan officer approves and helps borrowers with applications and oversight. The typical loan, sometimes as little as $100, does not seem like much to many in the developed world. But to many impoverished people, this figure is enough to start a business or engage in other profitable activities. Microfinance Loan Terms Like conventional lenders, microfinanciers must charge interest on loans, and they institute specific repayment plans with payments due at regular intervals. Some require loan recipients to set aside parts of their income in a savings account used as insurance in case of default; if the borrower repays the loan successfully, he has use of this account, of course. Because many applicants cannot offer any collateral, microlenders often pool borrowers together, as a buffer. After receiving loans, recipients repay their debts together. Because the success of the program depends on everyone’s contributions, a form of peer pressure helps ensure loan repayment. For example, if an individual is having trouble using his or her money to start a business, that person can seek help from other group members or from the loan officer.

Through repayment, loan recipients start to develop a good credit history, allowing them to obtain larger loans down the line. Interestingly, even though the borrowers often qualify as very poor, repayment rates on microloans are often higher than the average rate on more conventional forms of financing. For example, the microfinancing institution Opportunity International reported repayment rates of approximately 98.9% in 2016. History of Microfinance Microfinance is not a new concept: Small operations have existed since the 18th century. The first occurrence of microlending is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens. But in its modern form, microfinancing became popular on a large scale in the 1970s. The first organization to receive attention was the Grameen Bank, which was started in 1976 by Muhammad Yunus in Bangladesh.

On top of providing loans to its clients, the Grameen Bank also suggests its customers subscribe to its “16 Decisions,” a basic list of ways the poor can improve their lives. The “16 Decisions” touch on a wide variety of subjects ranging from a request to stop the practice of issuing dowries upon a couple’s marriage to ensuring drinking water is kept sanitary. In 2006, the Nobel Peace Prize was awarded to both Yunus and the Grameen Bank for their efforts in developing the microfinance system. India’s SKS Microfinance also serves a large number of poor clients.

Formed in 1998, it has grown to become one of the biggest microfinance operations in the world. SKS works in a similar fashion to the Grameen Bank, pooling all borrowers into groups of five members who work together to ensure loan repayment. There are other microfinance operations around the world. Some larger organizations work closely with the World Bank, while other smaller groups operate in different nations. Some organizations enable lenders to choose exactly who they want to support, categorizing borrowers on criteria like level of poverty, geographical region and type of small business. Others are very specifically targeted: There are those in Uganda, for example, that focus on providing women with capital required to undertake projects such as growing eggplants and opening small cafés. Some groups tend to focus their efforts only on businesses which are created with the intent of improving the overall community through initiatives like education, job training and clean water. Benefits of Microfinance The World Bank estimates that more than 500 million people have directly or indirectly benefited from microfinance-related operations. The International Finance Corporation (IFC), part of the larger World Bank Group, estimates that more than 130 million people have directly benefited from microfinance-related operations as of 2014.

However, these operations are only available to approximately 20% of the 3 billion people who qualify as part of the world’s poor. In addition to providing microfinancing options, the IFC has assisted developing nations in the creation or improvement of credit reporting bureaus in 30 nations. It has also advocated for the addition of relevant laws governing financial activities in 33 countries. The benefits of microfinance extend beyond the direct effects of giving people a source for capital. Entrepreneurs who create a successful business create jobs, trade and overall economic improvement within the community. Empowering women in particular, as many MFIs do, leads to more stability and prosperity for families.

The For-Profit Microfinance Controversy While there are countless heartwarming success stories ranging from micro-entrepreneurs starting their own water supply business in Tanzania to a $1,500 loan allowing a family to open a barbecue restaurant in China, to immigrants in the U.S. being able to build their own business, microfinance has sometimes falls under criticism. While microfinance interest rates are generally lower than conventional banks’, critics have charged that these operations are making money off of the poor – especially since the trend in for-profit MFIs, such as BancoSol in Bolivia and the above-mentioned SKS (which actually began as a nonprofit organization (NPO), but became for-profit in 2003). One of the largest, and most controversial, is Mexico’s Compartamos Banco. The bank was started in 1990 as a nonprofit.

However, 10 years later, management decided to transform the enterprise into a traditional, for-profit company. In 2007, it went public on the Mexican Stock Exchange, and its initial public offering (IPO) raised more than $400 million. Like most other microfinance companies, Compartamos Banco makes relatively small loans, serves a largely female clientele, and pools borrowers into groups. The main difference comes with its use of the funds it nets in interest and repayments: Like any public company, it distributes them to shareholders. In contrast, nonprofit institutions take a more philanthropic bent with any profits, using them to expand the number of people it helps or create more programs. In addition to Compartamos Banco, many major financial institutions and other large corporations have launched for-profit microfinance projects.

CitiGroup (NYSE:C), Barclay’s (NYSE:BCS) and General Electric (NYSE:GE) have started microfinance divisions in many countries, for example. Other companies have created mutual funds that invest primarily in microfinance firms. Compartamos Banco and its for-profit ilk have been criticized by many, including the grandfather of modern microfinance himself, Muhammad Yunus. The immediate, pragmatic fear is that, out of desire to make money, these MFIs will charge higher interest rates that may create a debt trap for low-income borrowers. But Yunus and others also have a more fundamental concern: that the incentive for microcredit should be poverty alleviation, not profit. By their very nature (and their obligation to stockholders), these publicly traded firms work against the original mission of microfinance – helping the poor above all else. In response, Compartamos and other for-profit MFIs counter that commercialization allows them to operate more efficiently, and to attract more capital by appealing to profit-seeking investors. By becoming a profitable business, their argument goes, an MFI is able to extend its reach, providing more money and more loans to low-income applicants. For now, charitable and commercialized MFIs co-exist. Other Concerns Regarding Microfinance On top of the divide between non- and for-profit microfinance enterprises, other criticisms exist. Some say that individual microloans of $100 or so really are not enough money to provide independence – they just keep recipients working in subsistence-level trades, or just cover basic needs, like food and shelter. A better approach, these critics maintain, is to create jobs by constructing new factories and producing new goods. They cite the examples of China and India, where the development of large industries has led to stable employment and higher wages, which in turn has helped millions to emerge from the lowest levels of poverty.

Other critics have said that the presence of interest payments, however low, are still a burden. Despite the high repayment rates, there still are microfinance borrowers who cannot, or do not, repay loans, due to the failure of their ventures, personal catastrophe, or other reasons. The added debt can make these people poorer than when they started, even living hand-to-mouth. Types of microfinance institutions in India: Types of microfinance institutions in India By Priya Chetty on July 26, 2017 Microfinance organisation is not new to the financial market in India. Due to the overwhelming poverty in India, government gave special attention to the development of rural credit. Taking All India Rural Credit Survey report (1950) into account, it reconstructed the cooperative structure which included the partnership of state in cooperatives, establishment of Regional Rural Banks (RRB) and National Bank for Agriculture and Rural Development (NABARD).

In India, Non Government Organisations (NGOs) played a pivotal role in the development of micro financial service. Furthermore, microfinance industry in India has witnessed a fast-paced growth in last two decades. In 2009, the total number of microfinance institutions in India was around 150 (Tripathi, 2014). Definition of microfinance institutions in India: Microfinance Services Regulation Bill of India, defines microfinance services as financial assistance to be provided to an eligible individual directly or by a group mechanism for: An amount of maximum fifty thousand in aggregate per person for small and cottage enterprises, agricultural and allied activities (consumption purposes of the person is also included) or A maximum amount of one lakh fifty thousand in aggregate per person for the purpose of housing or Such like the above amounts may be prescribed to a person for other purposes also. The bill, in addition, explains microfinance institutions as the organization of individuals which includes the following if the establishment of the organization concentrates on the purpose of increasing microfinance services: Registration of society under Societies Registration Act (1860).

A creation of trust under Indian Trust Act (1880) or registered public trust under state enforced governing trust. A society registered under the Multi State Cooperative Societies Act (2002) which can be a cooperative society or a mutual benefit corporative etc (Singh, 2016). Different types of microfinance institutions in India The microfinance models are developed in order to cope with the financial challenges in financially backward areas. There are various types of microfinance companies operating in India. Joint Liability Group (JLG) Joint Liability Group can be explained as the informal group consists of 4-10 individuals who try to avail loans against mutual guarantee from banks for the purpose of agricultural and allied activities. This category generally consists of tenants, farmers and other rural workers. They work primarily for lending purposes, although they also offer the savings facility.

In this type of institution every individual of a borrowing group is equally liable for the credit (Singh, 2010). This kind of institution is simple in nature and requires little or no financial administration (UBI, no date). However, one of the serious problems of this structure is personal preferences in lending credit which resulted in a partial failure of the system. Of late due to various promotional initiatives taken by banks such as Indian bank, Karur Vysya Bank and Indian Overseas Bank, the credibility of Joint Liability Group model has received a boost (The Hindu, 2016). It still remains a landmark movement in the area of protection of farmer’s land ownership rights. Self Help Group (SHG) Self Help Group is a type of formal or informal group consisting of small entrepreneurs with similar kind of socio-economic backgrounds. Such individuals temporarily come together and generate a common fund to meet the emergency needs of their business. These groups are generally non-profit organizations. The group assumes the responsibility of debt recovery.

The advantage of this micro-lending system is that there is no need for collateral. Interest rates are also generally low and fixed especially for women (Chowdhury, 2013; Business Standard, 2017). In addition various tie-ups of banks with SHGs have been implemented for the hope of better financial inclusion in rural areas (Jayadev and Rao, 2012). One of the most important ones is NABARD SHG linkage program where many self-help groups can borrow credit from bank once they successfully present a track record of regular repayments of their borrowers. It has been very successful especially in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka and during the year of 2005-06. These states received approximately 60% of SGH linkage credit (Taruna and Yadav, 2016). The Grameen Bank Model Grameen Model was introduced by the Nobel laureate Prof. Muhammad Yunus in Bangladesh during 1970s. It has been widely adopted in India in the form of Regional Rural Banks (RRB). The goal of this system has been the overall development of the rural economy which generally consists of financially backward classes. But this model has not been fully successful in India as rural credit and system of recovery are a real problem. Huge amount of non-performing assets also led to failure of these regional banks (Shastri, 2009).

Compared to this model Self Help Groups have been more successful as they are more suited to the population density of India and far more sustainable (Dash, 2013). Rural Cooperatives Rural Cooperatives in India were set up during the time of independence by the government. They used the mechanism to pool the resources of people with relatively small means and provide financial services. Due to their complex monitoring structure, their success has been limited. In addition, this system only catered to the credit-worthy individuals of rural areas, not covering a large part of the country’s financially backward section (Rajendran, 2012).

Joint Liability Group Self Help Group Grameen Bank Model Rural Cooperatives Size 5-10 members per group 10-20 members per group Starts with only 2 members per group in a village, eventually increased after loan is successfully repaid 70-80 members per group Services Generally lending only, irrespective of savings amount Regular savings in deposit accounts with the financial institutions. Savings and deposits to extremely poor sections of the society for business, health and housing Primarily lending services for agricultural purposes Model Members invest loan amount for different purposes, but are guarantors of each other All individuals of group work together on the same activity Field Manager visits villages to form groups of 5 and lends to 2.

Amount recovered is reinvested in further lending and infrastructure development in villages Cooperative society consisting of members are formed for a singular purpose; such as real estate, agriculture, infrastructure, etc. Structure All members interact with the financial institution individually More formal with defined positions in each group like treasurer and secretary Formal structure consisting of Unit Manager, Field Manager, etc. Who interact with every family in a village All members interact with the financial institution jointly Main goal of financial inclusion Each type of microfinance institution is different from the other in many ways but they work towards the same goal- financial inclusion.

Get a Personal "What is Microfinance" Tailored Essay For You in 3 Hours!

100% Customized to Your Need with Expert Writers


Due to their operational frameworks, some models have been less successful than the others in attaining this objective. In addition to the above, microfinance institutions can also be categorised into large, medium and small scale. These institutions differ in terms of geographical reach, infrastructure, manpower skills availability, funding and lending processes, revenues and success in operations. These differences are explored further in the proceeding article

Remember! This is just a sample.

You can get your custom paper by one of our expert writers.

Get custom essay

121 writers online

What is Microfinance Essay

Remember: This is just a sample from a fellow student.

Your time is important. Let us write you an essay from scratch

experts 450+ experts on 30 subjects ready to help you just now

delivery Starting from 3 hours delivery

Find Free Essays

We provide you with original essay samples, perfect formatting and styling

Cite this Essay

To export a reference to this article please select a referencing style below:

What is Microfinance. (2018, September 04). GradesFixer. Retrieved May 27, 2023, from
“What is Microfinance.” GradesFixer, 04 Sept. 2018,
What is Microfinance. [online]. Available at: <> [Accessed 27 May 2023].
What is Microfinance [Internet]. GradesFixer. 2018 Sept 04 [cited 2023 May 27]. Available from:
copy to clipboard

Where do you want us to send this sample?

    By clicking “Continue”, you agree to our terms of service and privacy policy.


    Be careful. This essay is not unique

    This essay was donated by a student and is likely to have been used and submitted before

    Download this Sample

    Free samples may contain mistakes and not unique parts


    Sorry, we could not paraphrase this essay. Our professional writers can rewrite it and get you a unique paper.



    Please check your inbox.

    We can write you a custom essay that will follow your exact instructions and meet the deadlines. Let's fix your grades together!


    Get Your Personalized Essay in 3 Hours or Less!


    We can help you get a better grade and deliver your task on time!

    • Instructions Followed To The Letter
    • Deadlines Met At Every Stage
    • Unique And Plagiarism Free
    Order your paper now