As the name suggests, microfinance is providing finance or monetary credit in small amounts. Microfinance refers to various financial services that issue small amount of money as loans, savings and insurance to lower income group. Financial institutions providing microfinance to poor people are referred to as Microfinance Institutions (MFIs). MFIs cater to poor people who have difficulty in obtaining finance from other sources. Microfinance exists in more than 100 countries worldiwde to serve people in poverty and meet their financial needs.


It is one of the services provided by the MFIs. It refers to issuing loans of small amount to microenterprises or for small self-help women’s group. Self-employed people who are running businesses in small scale can also avail the microloans provided by the MFIs. Certain special cases of unemployed people are also assisted through microloans to start small scale business on their own. Generally, these microloans are extended against none or little collateral.

Group Lending

In order to promote private sector businesses, group lending strategy is used by the MFIs. Under this scheme, a group of poor people are provided loans instead of individuals in order to help them in setting up a small scale business as a group. At times, orientation and training are provided to the group members to succeed in their entrepreneurial activity. The liability of the repayment of the loan is distributed equally among the members of the group which availed the microfinance.

Goals of Microfinance

Most of the microfinance institutions are non-governmental organizations which are working for the down-trodden people. Hence, these microfinance institutions work with the sole aim of assisting unemployed or poor people to start something in a productive manner. Thus, through its finances for productive activities, MFIs assist poor people to have a way for daily earning. Through its various programs like group lending and pre-loan savings MFIs also inculcate the importance of savings in the minds of the poor people. They are also given an assurance for availing future loans. It helps them to encourage the entrepreneurial skills in low income people.

Effects of Microfinance

Poor families get the confidence to start some business in small scale on their own even without having any collateral. Thus, it leads to the development or improvement of the economic conditions of the poor people. Government is keen to support the microfinance institutions as a step towards helping poor to come up and to reduce the number of people below poverty line. Especially as microcredits are provided to poor unemployed people without taking any collateral, it helps to eradicate poverty by giving a sustainable financial assistance.

Final Word

Though MFIs work for uplifting poor people, it is not appropriate at all times. You should opt for microfinance only when you have certain amount of cash in your hand and opportunities to earn money as you have to repay the loan through the agreed repayment schedule. Similarly do not go in for microfinance when you have access to other financial sources as the interest rates for microfinance are too high when compared to bank rates.


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