The Idea of Microfinance

The Idea of Microfinance

Microfinance is often confused with micro lending business. In today's era, the banking industry is taking microfinance as a business, but as time goes by, this business is failing miserably. If we examine the write-off and non-performing loans of different microfinance banks and looking at their huge numbers, we get a good idea that there must be some mistake at the policy level in the execution of microfinance. A growing number of microfinance banks still fail to understand this flawed strategy. This is the reason that while the investors of the microfinance industry are losing money, this industry has also put the careers of many good professionals at stake.

To understand microfinance, first we have to understand its main idea. Microfinance is actually not a loan program but it is a social support for poverty alleviation at the household level. Social support means that such households are identified as being below the poverty line. The resources of these households should be estimated. How many people are earners and how many dependents are there in each of these households. To looking their resources and willingness, then the planning process begins as to how the social and economic improvement of the household can be done. This planning includes many factors such as putting them in a habit of saving, making them aware of the methods of avoiding unnecessary expenses. To build the capacity of any house hold member through any technical or vocational Trainings. In these factors also include financing at the micro level so that the income of this household can increase to some extent. Although this financing is not in the form of a grant but in the form of a loan, it is important to remember that microfinancing is non-traditional financing that is very low-level and does not involve any collateral. This specific process just to support the poor household for a time being. so this Micro level financing has a unique mechanism:

1- There should be no change at all in the economic system of the particular household which is already running.

2- Generally, the economic system of household is run by men, and women are only limited to cooking and cleaning the house, so to reduce poverty, the women of these families have to be included in this micro-level credit. As already mentioned, the purpose of microfinance is not to change the existing economic system of the family, but to increase the income of the family to some extent.

3- In fact, microfinance does not only aim to give loans, but it also includes setting production targets for this loan, necessary trainings and even ensuring the marketing too. That's Why?it is said that?microfinance is a tool for poverty alleviation at the household level and its primary objective is to make the women of poor households a part of the economic support of the household so that the household income can increase somewhat. The goal is not to put the entire economic system of a household on microfinance loans. So the idea of microfinance is an economic support that is not for business expansion but for increasing household income preferably by involving females in economic activity. This support cannot be given at the level of individual household, but it has to work in likeminded groups consist on different households Microfinance banks take this as a commercial lending and this is where the decline begins that almost all microfinance banks are suffering from today. I think the name of small lending banks should be Micro Small and Medium Enterprise Bank (MSME Banks) instead of Microfinance Bank.

Microfinance lending is not a business but only an economic support in which it is necessary to take into account the collective role of the community.

If we look at it as a business in the context of Microfinance (MSME) banks, then it should be on a purely technical basis. their target should be poor and lower middle families. Collateral should be either hypothetical or in mortgage shape. The loan should be individualized in every case. Technical requirements should be fulfilled in every case, for example income statement, household balance sheet and cash flow chart etc.

Written by: ?Muhammad Amir