Microfinance means the provision of small financial services to the marginalized section of the Society. Microfinance, lately, has served as a Panacea to poverty in the developing and third world economies. More than half of the working-age adults ( about 2.5 Billion ) still do not have access to financial services of regulated financial institutions. This would sound strange to people who are residing in the developing world, but this is a fact, a fact which has haunted the marginalized section of the society for long.
The poor and the marginalized are considered unbankable by the formal financial institutions primarily because of the fact that they do not have a formal credit record to showcase when they apply for a Loan. It is also because the quantum of loan that they wish to apply for is of a small size, which does not augur well for the profitability of financial institutions. It is here where the Microfinance Institutions step up. Microfinance as a concept has been adopted by many developing and underdeveloped economies to provide financial services to the poor. Instead of Physical Collateral, Microfinance works on the principles of Social Collateral. The major chunk of the lending under this, therefore, happens in Groups which are Liability Groups, wherein individuals are liable for the Loans taken by every other individual in the Group. Borrowers avail the loan from Microfinance institutions and repay it in customized installments. The recovery and collection of the installment is done at the doorstep of the customers which helps avoid any kind of hassles for the customers.
Microfinance has a significant impact on the economic development of the countries in South- East Asia and Africa. A number of studies conducted in countries like Nigeria and Ghana have indicated that a very strong, positive and significant relationship exists between the microfinance bank asset growth and per capita income. In rural parts of India, microfinance institutions have come as a big relief for marginalized customers, who often had to run from pillar to post seeking finance from formal financial institutions.
Microfinance as a concept has its own set of detractors, as well, with critics indicating that the rates of interest under micro financing are exorbitantly high, and the recovery of the loan is stringent. A massive uproar was witnessed in the Telangana and the Andhra Pradesh State of India against the Micro Finance Institutions. However, the positive side of microfinance certainly outweighs the negative side. A lot of Development practitioners term it as a “Panacea for Poverty”