Micro financing is the delivery of financial services to poor and low income households with limited access to formal financial institutions. It can also be described as banking for the underprivileged. Microfinance institutions (MFIs) came into being in the 90s as banks’ reluctance to lend to those without credit history provided an opportunity to those willing to take risk and organise rural communities.  According to Mohammed Yunus (founder of Grameen Bank in Bangladesh) access to credit was a human right, essential for the poor to create self-employment and income.

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Role played by MFIs:

• The two key systems for the release of financial services to such customers include ‘relationship-based banking’ for individual entrepreneurs and small businesses along with ‘group-based models’ where several entrepreneurs come together to apply for loans and other services as a group
• Be a viable financial institution developing sustainable communities.
• Mobilize resources to provide financial and support services to the poor, particularly women, for viable productive income generation enterprises enabling them to reduce their poverty.
• Learn and evaluate what helps people to move out of poverty faster.
• Create opportunities for self-employment for the underprivileged.
• Train rural poor in simple skills and enable them to utilize the available resources and contribute to employment and income generation in rural areas.

Benefits from MFIs:

• It allows people to provide for their families. Through microfinance, more households are able to expand their current opportunities so that more income accumulation may occur.
• It gives people access to credit. “By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace,”
• It serves those who are often overlooked in society. About 95 percent of some loan products extended by microfinance institutions are given to women, as well as those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs.
• It creates the possibility of future investments. Microfinance disrupts the cycle of poverty by making more money available.
• It can create jobs. Microfinance is also able to let entrepreneurs in impoverished communities and developing countries create new employment opportunities for others.
• It encourages people to save. “When people have their basic needs met, the natural inclination is for them to save the leftover earnings for a future emergency,”

However, off-late the main goals of MFIs are deviated:

• MFIs have strayed away from their original purpose of poverty alleviation and social empowerment to short-term profit-making.
• Many have begun to replicate the behaviour of mainstream financial institutions, setting financial targets which loan officers are under tremendous pressure to deliver.
• MFIs are harassing their clients who are usually too desperate to turn away from the credit being offered. This is true even when credit comes with the catch of high repayment rates.
• Several large MFIs that transformed into small finance banks (SFBs) are looking to diversify into inclusion adjacencies such as micro, small and medium enterprise loans and affordable housing loans.
• The demand potential in these segments also remains buoyant over the medium term given the untapped potential.

Way forward:

• There is a need for MFIs to consider adopting more flexible operating models, providing skills training and offering services such as portability of accounts to provide greater access for a longer duration of time.
• A diversified menu of micro loan products linked to sustainable income generation activities via micro enterprises or a creation of community-based pooled enterprise could possibly make it more attractive and compatible with the requirements of women.
• In addition, linking such developmental initiatives to an institution to nurture, monitor and handhold those activities in the formative stages is crucial for sustainability.

Conclusion:

As per the World Bank estimates, more than 500 million people have improved their economic conditions via microfinance-related entities. Strengthening the credit check and debt collection processes and educating the villagers about products and consequences is important. A model to retain and recycle within the target population could possibly lead to a sustained route for poverty alleviation.