Zist of Microfinance

The concept of micro-finance is described in the most simplistic terms; as “banking for the poor”. As the name suggests, the most transactions under “micro-finance” involve small amount of money. But it is a powerful tool which is being used effectively for addressing poverty, empowering the socially marginalized poor and strengthening the social fabric. And when it is being directed towards women, the benefits accruing out of the micro-finance activities are expected to become manifold. That is why it is supposed to be changing the lives of people in every part of the globe. The concept of micro-finance includes micro-credit, remittance, micro insurance and micro-savings in its ambit. So, it is a much broader term. In India, the Task Force on Micro-finance has defined micro-finance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income and improve living standards”.

The history of micro-finance has been traced from the Second World War and the formalized institutions started date back in 1970s. The most successful stories in the filed of micro-finance are Grameen Bank in Bangladesh and Shore bank in USA which is known as the inventory for community development banking and institutions. In India, this step forward in this direction has been taken by NABARD and SIDBI and various SHGs, MFIs and NGOs are also operating in this direction. The benefits of micro-finance are not only limited in giving access to loans but it also helps in extreme poverty and hunger, achieve proper education, promote gender equality and women’s empowerment, reduce child mortality, improve maternal health, and combat disease. For micro-finance to be successful there is a need for formal financial institution and micro-finance institutions to work in tandem. For this, there is a need to properly identify the target group after which the products can be customized according to the needs of the customers. There is a need to learn lessons from the developed economies where the micro-finance is highly commercialized; partnerships are being created, public-private assets are being leveraged and know-how is being shared. Lessons from the best managed micro-finance institutions in the world have shown that use of certain methods like group lending, peer guarantees, step-ladder lending, matching repayment terms with borrowers’ cash flows etc., have contributed largely to their success. Also, they have competently used information technologies and performance-linked incentives for their staff. Most of all, the strong and firm commitment of the top management of the bank to the micro-finance operations is an essential precondition for the sustainability of this business in any commercial bank.