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An insight of Microfinance

ArticleID 135  
Writer Isaac Thuku
Category Personal Article

People tend to visit banks whenever they have a financial need. This ranges from starting a new business, paying for medical bills, paying children school fees and other emergencies. Banks have a principle behavior of offering loans to people with assets which act as security or guarantee that the loan will be repaid. Also they are more than willing to lend money to people with a good financial record.

This disqualifies poor and low-income earners from accessing bank loans and other financial services. Microfinance acts as a source of financial services to entrepreneurs, small businesses and low-income individuals mainly those without access to banking or related services. A Microfinance institution (MFI) is an organization that provides microfinance services. These services range from small non-profit organizations to large commercial banks.

Microfinance Institutions provide a mechanism for delivery of financial services. They can either be relationship based banking or group based models. Relationship based banking service offers funding to individuals and to small businesses. Group based models service is where several entrepreneurs come together for the purpose of applying for a loan and other financial services as a group. Microfinance institutions target poor and low-income people hence helping them access a range of financial services giving them financial stability. This helps un-salaried or low-income earners start small businesses which will make them some profit. Those who had closed down their small businesses or were in danger of closing down due to the lack of capital will re-open and be sustainable again.

Microfinance institutions provide economic development and growth through supporting small businesses. For the growth of any economy, the gap between the poor and the rich needs to be small. Empowering low-income earners will have a positive impact on the economy. Poverty will reduce drastically when the poor are empowered to sustain themselves financially through doing small businesses.

Upcoming entrepreneurs and other low-income earners find micro financing institutions suitable because they give out loans and take little or no collateral. Back in the days it was difficult for financially unstable people to start and run their businesses because banks asked them for assets and assurance when applying for loans. They turned away and sank in poverty without an alternative means of finance. When the micro finance institutions came in, they never asked for assets but gave out loans to the poor even those in rural areas.

Microfinance institutions had to take the risk of giving loans to poor people without the assurance that the money will be repaid. This made many people follow the lead and applied for loans through microfinance institutions. Recent statistics show that many people prefer microfinance loans as compared to bank loans. 98% of low-income people who applied for microfinance loans are said to have paid back. Of late, many microfinance institutions have been charging high interest rates to poor people. They argue that the cost of making small loans is much higher in percentage than the cost of making large ones. These organizations also say that a lot of staff time is taken to make a small loan. All in all, microfinance institutions will continue to offer financial services to low-income earners who want to do business.

An insight of Microfinance
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