Microfinance institutions are bankers and lenders who provide microfinance services, such as deposits, loans, payment services, money transfers, and insurance. The prominence of microfinance is that it provides much-desirable financial services to poor and low-income households, entrepreneurs, and nascent businesses, who would otherwise not have access to such services. An estimated 1.7 billion people around the world don't have access to financial services, according to the World Bank. The organization is an international banking group with 189 member countries that work to reduce poverty and "build shared prosperity" in developing countries. To break financial shackles, marginalized groups in rural areas traditionally formed self-help groups, where resources were pooled and distributed to those in need. The government made the decision to link these groups to banks and other financial institutions, a scheme that was developed by the commercial micro financial institutions.
Functions and Benefits of Micro Finance
- It allows people to extend the current opportunities to run their families
- It gives small merchants to access to credit for their business operative purpose
- It creates the possibility of future investments..
- It is one of the financial tool for mobilizing rotation funds for sustainability of business
- It can create the possibility of self-employment
- It encourages people to save for the future
- It offers significant economic gains even if income levels remain the same.
- It leads to better loan repayment rates
Capital and expertise are increasingly flowing into microfinance. Increased competition can be seen among MFIs. As they continue to develop their internal operating capacities, more of the potential 80% of the market will be served. Key players such as ratings agencies and institutional investors are also moving into the marketplace, signaling the fact that a true market is developing. Microfinance has a significant role in bridging the gap between the formal financial institutions and the rural poor. The Micro Finance Institutions (MFIs) accesses financial resources from the Banks and other mainstream Financial Institutions and provide financial and support services to the poor. MFIs are the pivotal overseas organizations in each country that make individual microcredit loans directly to villagers, micro entrepreneurs, impoverished women and poor families. An overseas MFI is like a small bank with the same challenges and capital needs confronting any expanding small venture but with the added responsibility of serving economically-marginalized populations. Many MFIs are creditworthy and well-run with proven records of success, many are operationally self-sufficient. Various types of institutions offer microfinance: credit unions, commercial banks, NGOs (Non-governmental Organizations), cooperatives, and sectors of government banks. The emergence of “for-profit” MFIs is growing.
Dr. Senthil Kumar, is an Associate Professor of Finance and Business Management in Skyline University Nigeria. He has a PhD. in Business Management from Bharathiar University, India.