Advantages and Disadvantages of Microfinance

Advantages and Disadvantages of Microfinance

What is Microfinance?

Microfinance is a type of banking service that is supplied to those with low incomes who do not have collateral, and as a result, they have limited access to financial services. People with low incomes, both individuals and groups, often end up taking out loans for relatively modest amounts, and Microfinance is the primary means through which they obtain access to such loans. Its primary focus is on rural and semi-urban areas, which are characterised by a scarcity of banking facilities and a dearth of people with access to credit programmes that offer fair interest rates.

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How Microfinance is different from regular finance?

The conventional method of financing involves extending credit in exchange for an asset that acts as security in the event that the debt is not repaid. Microfinance does not base lending decisions on the borrower’s assets; rather, it focuses on the community and gives only modest sums of money with limited support.

Regular finance is more concerned with the big picture and offers a diverse selection of solutions that appeal to a broad range of clients. It is more geared towards small-scale, self-employed, and Micro-entrepreneurs who have limited opportunities to seek large sums of credit, and it is more focused on low-income earners and populations left behind by traditional finance. Microfinance is geared more towards small-scale, self-employed businesses and is more focused on low-income earners, populations that are left behind by traditional finance.

Because it strives to provide people with a feeling of financial inclusion, Microfinance can play a role in the fight against poverty. It does this by providing members of the underserved community with access to credit and by assisting those individuals in obtaining loans at interest rates that are more manageable. If this does not happen, the impoverished will seek credit at a much higher interest rate, which will just further their downward spiral into poverty. They do this by extending much-needed loans to the poor, which enables the poor to better deal with unanticipated costs. resulting in an increase in both income and consumption over the long term.

There is a community-driven lending model in Microfinance in which individuals borrow in groups and have to repay in a structured setting, which motivates everyone to repay on time. This model makes Microfinance viable to some extent because the lending is not hazardous and there is community-driven lending. Many people with modest incomes have benefited from it, and it has assisted them in climbing out of poverty. But lending without limits is a problem to a certain degree, and because Microfinance is a short-term solution, heavy borrowing does make the situation riskier.

Microfinance enables the development of low-scale projects that have a focus on rural areas and provide services to more limited populations. For example, starting a modest retail store, selling milk with the help of a herd of cows, selling handcrafted items, and so on are all viable business options.

Advantages and Disadvantages of Microfinance

Advantages of Microfinance

Following are some of the benefits of Microfinance:
1. Microfinance induces the possibility of future investments.

2. Microfinance can help entrepreneurs to start business which can create jobs to others as well.

3. Microfinance is a sustainable process of financing.

4.  It motivates people towards saving for future.

5. It brings substantial economic benefits even if income levels stay the same.

6. Microfinance helps families to educate their children.

7.  It provides  overall better  loan repayment rate compared to traditional banking products.

8. It gives people access to credit.

9.  it supports quick and easy documentation process for loans.

Disadvantages of Microfinance

  1. Microfinance provides only small amount of loan compared to other financial institutions such as banks.
  2. It charges high amount of interest for certain amount of loans and is calculated based on duration not per annum if less than 12 months.
  3. It provides only short term loan facility.
  4. Microfinance does not offer moratorium to the borrower
  5. Microfinance banks implement harsh repayment procedures since there are no criteria for providing credit and the loans are not collateralized.

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