People need finance to meet the day to day expenses. Finance is quite essential for both productive and also nonproductive purposes. The requirement for business commencement, fixed capital, etc are the productive purposes whereas the funds required for meeting expenses incurred for marriages, education, litigation, etc are considered for nonproductive purposes. For meeting all these needs people need money. Microfinance helps the poor people to meet all the demands.
Now a day’s many countries around the world are promoting microfinance as a rural development initiative. Microfinance primarily gives credit and supports saving among the poor who do not have any access to any of the formal financial institutions. The purpose of microfinance is to promote the society’s welfare. It is a tool which has the power to empower the poor and address poverty thereby strengthening the society. It helps in creating social value which finally focuses on eradicating poverty, promotion of saving the money among poor so that they can minimize both the future and current risks and improving their livelihood opportunities.
Components of Microfinance
Microfinance consists of four components.
Microsavings- Microsavings are small savings accounts which help those people who wish to keep aside small amounts for future use. There is no need to maintain minimum balance requirements. It helps the people from lower households to save some money so that they could meet unexpected expenses in future.
Microcredit- Microcredit is a small amount of loan that the bank or other financial institutions lent to the clients. It does not require any collateral. It can be offered either through group lending or to an individual. The main aim of this loan is to offer credit to all the people who need it. These clients are street vendors, retail shops, artisanal manufacturer and so on.
Remittances- Remittances are transferring money from people who live in one place to people residing in some other place, normally across borders.
Key strategies of microfinance
It focuses exclusively on the poor people. A clear eligibility criterion has been established to select the target clients. All those who do not meet the requirements are ruled out. Also, priority has been given to women while delivering credit.
Loan conditions are listed below:
- Loans have to be repaid in installments weekly which is spread over one year
- Loans are given without accepting any collateral
- Focus on voluntary savings to minimize the future risks.
- Credit will be closely supervised