Introduction
“If you are uplifting the poor, you are uplifting the nation”- M.K.Gandhi
This statement clearly explains the essence of microfinance and its importance in the modern economy. Microfinance is a source of financial services and resources to the small entrepreneurs, villagers and less privileged section of the society. In December 2007, Forbes has brought out a special magazine on microfinance and has described microfinance as the next buzzword.
Global Context and History
The concept of microfinance is not something new. In fact, the history of the microfinance goes back as early as the 15th century. It was in Europe where the concept of pawn shops – an institution by the Catholic Church against the people who were charging exorbitant
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Criticism of microfinance
The disadvantages of microfinance are enlisted below:-
• It is one of the few ways to reach out to the poorer sections of the society.
• Another disadvantage is that the deal may be too small for the lender to devote adequate amount of time.
• The profits are low because the capital involved is less.
• Borrowers seldom give the lenders the full story on their situation and with a small amount at risk, it does not make sense for lenders to give a lot of money to check out the story.
• Micro lending depends on an ever increasing number of lenders in order to be successful.
• As mentioned by the Gresham’s Law, if the poor and the non poor are combined in a single system, then the non poor will drive out the poor from the society.
• Microfinance programs generally affect the moderately poor more than the moderately stronger section.
• Vicious cycles of debt, microcredit, increased roads and micro load associate with microfinance institutions.
• Low repayment rates in comparison with traditional financial institutions.
• Use of harsh and coercive methods to push for repayment and excessive interest
revolving loan (such as a large line-of-credit or a car loan), which would make it harder for them
Likewise, individuals may not need to borrow as much as a usual business loan minimum and to do so would put them in unnecessary debt. Thankfully, some credit unions can offer microloans as little as $200. Such loans could be the key factor for a local family to start a small town business, which promotes economic growth in a community. Without a credit union’s aid, these small businesses would be unable to even begin, thus taking away an opportunity for both the community and its
A good deal of borrowers is those on fixed income or in the lower income bracket. Their credit worthiness is not go, and they may not have any savings accounts. In fact some may have no financial assets whatsoever. The borrowers are apart of a segment of society that the Center for Responsible Lending have dubbed “unbanked,” According to Payday Lending:Serving the Unbanked by Mike Foley. This segment is primary comprise of the poor. So, when many of these loans are taken out the borrowers can not afford them in the first place. The borrowers only see the small fee for the loan and the fact the company just holds the check, so they see not risk in taking the loan.
people's need for extra funding has led to the extension of credit to large segments of the population who were previously deemed unqualified. However, some lenders have tried
Another major characteristic of microfinance is that they have numerous loans to informally-organised businesses which are often in small amounts over a short-term period with turnover of the aggregate loan portfolio maturing several times during the year. These are unsecure loans with simple repayment structure and documentation, but interest rates are generally higher than those in the formal sector (Anderson, 2002).
Poverty has stricken many developing nations. However, there are many ways to limit things like this from occurring, micro-loans being one of those things. It is apparent that women in developing countries are empowered by micro-loans. Micro-loans are a small amount of money given to small businesses. Micro-loans help make women more independent and help them not rely on their husbands for money. It helps these women in poverty get their kids and themselves an education with the money they receive. Additionally, micro-loans make it possible for women starting a business, in order to make more money. There are many benefits for women receiving micro-loans.
For Victoria’s case, she needs the money to buy more potatoes and quinoa to make sure her shop has all the proper vegetables (Kiva.org). If Victoria can keep her shop well stocked, she may attract more customers and make more money. By earning more money, Victoria can improve her quality of life. According to Plan Canada “microfinancing can lead to improved access to clean water and better sanitation while also providing better access to health care” (plancanada.ca). Research shows that microfinance loans are better suited for women because they are less likely to miss payments on their loan and it helps them feel empowered (plancanada.ca). By lending to Victoria, she will feel empowered and will be able to support herself and her family. Also, because she is a woman, she is less likely to miss
Unlike the big banks, the funding that goes into the micro credit programs all comes from locality. They don’t have shortages of money or any finical hardships due vast amount of braches in participation. Each branch
Microfinancing produces many benefits for poverty stricken, or low- income households. One of the benefits is that it is very accessible. Banks today simply won’t extend loans to those 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,
With this concept it is virtually impossible to lend money for a long- term period without a risk of losing money off the loan. Adjustments can be argued to be made once the loan is made to adjust for inflation, however, in business it will typically be difficult to dispute a 2% increase if there is no binding contract. Although it is very rare that some of the bigger firms lose on a loan, there are still risks involved in the loan.
However, in the past not all was rosy with these loans. There were many who criticized them for their high rates, and fees. Many felt that these types of loans took advantage of those who were desperate, without other options to obtain the money they needed.
As the lender is taking much more risk on such an arrangement the amounts you can borrow are much lower and the rates of interest much higher.
In this documentary, Tom Heinemann (the director) provides a sharp critique of microfinance in the world. The documentary pertains critically to the work of Muhammad Yunus and the Grameen Bank in Bangladesh. Tom Heinemann tells an unpopular and confronting story about how microfinance, although innovative, leaves few to prosper and the many poor being financially “strapped”. This documentary has caused a flood of criticism about microfinance, while diminishing the reputation of Grameen Bank’s founder, Muhammad Yunus. I feel that The Micro Debt does not shed the full light onto microfinance, yet it is becoming increasingly hard to ignore its effects.
Microcredit undoubtedly is easily sustainable to the public. For example suppose you had poor credit or no credit at all, you can still receive a lone (The Pros and Cons of Microloans). Because of this anyone can get a small lone. This show that no matter their position, microfinance can help. In addition the program targets under privileged citizens (What are the pros and cons of microfinance?). This shows that microcredit can help people in the toughest situations. As a result people can provide better for themselves and their family. However some claim borrowers can’t make a living because people can’t afford to pay back lones. Lastly microcredit is used all over the
What is microlending? In simplest terms microlending is the lending of very small amounts of money at low interest, to low income people in urban and rural areas. It started forty years ago, when a person named Muhammad Yunus was visiting his family and his country Bangladesh which had recently become an independent country. Muhammad Yunus had left his home country then –East Bengal- when he was a child with his parents in search of a better future. He graduated from Vanderbilt University in Nashville, Tennessee, with a PhD in economics. Muhammad Yunus is the founder of Grameen Bank, the first non-profit organization to offer microfinance services in Bangladesh and in the world (New York Times). This bank showed the world on how little