Microfinance: Expectations vs. Reality

Microfinance (microcredit) - a short-term loan for a small the amount issued to a borrower without collateral and surety.

Microfinance has been around the world for over 30 years. In 1983, in Bangladesh, Muhammad Yunus founded Grameen Bank, which began to issue

small loans at low-interest rates without collateral and guarantees to the poorest segments of the population for the development of small business. In 2006, Yunus received the Nobel Peace Prize for his contribution to the fight against poverty through the creation of a microcredit system.

Mechanism of microfinance

Microfinance is the provision of financial services such as small loans and savings for the poor.

Microfinance (small-scale finance) is a financial service that provides poor people with services such as small loans and savings, and aims to help them operate small businesses, become independent, and escape from poverty.

In developing countries, more than half of the workers earn a living from self-employed or family business because there are few employment opportunities in companies and they continue to live insecure.

Poor people do not have access to common financial services, such as deposit accounts and insurance services, to respond to future arrangements and plans. Microfinance meets these needs.

Microfinance, unlike traditional philanthropic approaches found in development assistance, helps each and every one of them to take advantage of their own potential, to design an economic future and to work independently.

Main services of microfinance

Microfinance institutions provide low-income and poor people with access to financial services such as loans, deposits, and insurance. We mainly offer the following services (financial products).

Microcredit: You can sell vegetables, make clothes, and start a hair salon in the food market with a small loan to improve the income and livelihoods of the poor. The loan amount can be repaid from the income obtained from self-employed people.

Micro-saving: Savings services help save the poor, save money, prepare for education, health, and hygiene when they run short, and invest in the future.

Microinsurance: There are many people in the world who can escape from poverty due to natural disasters, wars, economic crises, illnesses, and other unforeseen circumstances. Microinsurance protects the poor when such risks occur with a small burden.

Key actors involved in providing microfinance services.

The main actors involved in providing microfinance services include the following:

Microfinance Financial Institutions (MFI): MFI is the implementation period for financial services for the poor in the developing world. There are various forms such as banks, non-banks, credit unions and NGOs. Many MFIs have been established with the support of international organizations and NGOs.

Government-affiliated banks, development financial institutions: These banks are led by the government and provide loans mainly to the MFI. In addition, these banks may provide microfinance services.

Commercial Banks: Commercial banks generally provide assistance in the implementation and operation of investments and loans for MFI. In recent years, there have been cases where commercial banks directly provide microfinance services.

Credit Bureau: A credit bureau is a body that collects and distributes personal credit information to lenders. This information includes information such as payment history, loan repayment unpaid amount, savings amount, employment period and place of work. This information is used for fraud prevention and MFI risk management.

Donors: The costs for providing funds, training, operational support, and support services to the entire microfinance sector towards MFI are: Provided by the UK Department of International Development (DFID), International organizations (United Nations, World Bank, European Commission etc.), NGOs, companies, funds, and individuals.

Difference between microfinance and traditional development support

Conventional development support is often given free of charge as a philanthropic activity, and it is said that the beneficiaries are likely to fall into aid. On the other hand, microfinance gives poor people the opportunity to carry out their own profit activities, and in accordance with their own priorities, carry out self-employment, savings for the future, and investments for the future. As a result, the beneficiaries can take responsibility in their own lives, and the results obtained through their self-help efforts lead to self-esteem and the goal is to finally escape from poverty.

Furthermore, since microfinance will achieve its goal through a market approach, microfinance users will sell products and services in open markets and penetrate the regional economy. As microcredit users are also obligated to pay interest, they are also an incentive for business success.