Vision & History of Microfinance

Prof. Dr. H. D. Seibel (2001), one of the persons give clearest frameworks of microfinance has been defined microfinance as follows: ?A sector of formal and non-formal financial institutions providing micro saving, microcredit and micro insurance services to the micro economy, thereby allocating scarce resources to micro investments with the highest rates of return. In a narrow sense, microfinance institutions are small local financial institutions. In a wider sense, they may also comprise national or regional banks with microfinance services for small savers and borrowers.

Thus, Microfinance is the provision of financial services such as credit, savings, cash transfers, and insurance to poor and low-income people. Microfinance became a powerful tool of poverty alleviation. The provision of finan?cial services to the poor helps to increase household income and economic security, build assets and reduce vulnerability, create demand for other goods and services (especially nutrition, education, and health care), and stimulate lo?cal economies. When possibilities for asset management are limited, the role of microfinance in risk management or protective strategies may be as or more im?portant than income generation in preserving a household?s standard of living.

Models of Microfinance

The main difference between microfinance and mainstream finance is its alternative approach to collateral that comes from the concept of joint liability. In this concept individuals from the same economic status come together to form small groups and apply for financing. All the members of the group are trained regarding the basic functioning of financing and the requirements they will have to fulfill. The loans are disbursed to individuals within the group after they are approved by other members. Repayment is a shared responsibility of entire group members. That means they share risk. If one defaults the entire group face problem. This is the basic and effective form of credit mechanism practiced by most of the microfinance institutions.

John D. Corney (2003), explains four major models of micro finance institutions. But when we go through the entire institutions working for the promotion of micro finance in the organized and unorganized sector we have found more than ten models in microfinance practice. Some models are not common in international level. Here listed twelve important models of microfinance institutions. Few models are complimentary. NGOs and self help groups are example. Most of the self help groups have a promoter NGO. At the same time many NGOs have direct microfinance chains. And some models are seeing in the informal sector only. Here trying to explain briefly important models of microfinance.

MICROFINANCE AND POVERTY ALLEVIATION

Poverty is a socio-economic phenomenon in which a section of the people is unable to meet even their basic necessities of life. In general, those who are unable to fulfill their minimum needs due to lack of income or wealth are considered to be poor. Poverty is the sum total of a multiplicity of factors that include not just income and calorie intake but also access to land and credit, nutrition, health and longevity, literacy and education and safe drinking water, sanitation and other infrastructural facilities.

The discussion on poverty largely revolves around the notion of a poverty line: a critical threshold of income, consumption, or more generally, access to goods and services below which the individuals are declared to be poor (Ray, 2002). To determine poverty line based on nutritional requirements, the minimum physical quantities of cereals, pulses, milk, butter, etc. are determined for a subsistence level and then using price quotations, the physical quantities are converted into monetary terms. Aggregating these monetary terms for various physical quantities of commodities, the poverty line is thereby drawn. People whose income is below poverty line are said to be poor. The most common measure of poverty is the Head-Count ratio, defined as the percentage of population living below the poverty line.