Micro Finance Essay

1072 words - 4 pages

Performance of Microfinance Sector 1CHAPTER 1: INTRODUCTION1.1 Overview of MicrofinanceMicrofinance is a tool to eradicate poverty from the developing countries. It can be stated as the supply of money in the form of loans and other financial services to the poor sector of the country. As the poor people cannot full fill the collateral requirements of the commercial banks so they are left behind in attaining these financial services by the banking sector, microfinance tends to provide them with the financial services exclusive of such conditions. The major purpose of microfinance is to help the poor people to generate the source of income and to create the employment opportunities.Microfinance overall help the economy to grow, expand and to increase the saving rate It also helps to manage the risk. In the past twenty five year microfinance is the most important innovative tool for the development of the underdeveloped nations. By giving the small loans to the poor people micro institutions help them to switch from the poverty line and from unemployment to self employment. Throughout the world the micro credit is provided either on individual basis or by the group based methodology. In the group based methodology the loan is provided individually. These individuals instead of providing the collaterals have to make a group of minimum three individuals. The purpose of making the group is to make all the group members responsible for the repayment of the total amount of loan.In the case of the individuals the creditors demands collateral requirements. For this the microcredit loan officer determines the credit risk after doing the screening efforts. There are three types of microfinance provider informal sources, formal sources and semi formal sources. In Pakistan informal sources accounts the largest proportion. There are further three sources through which informal credit can be acquired. Commercial Creditors with the market intermediaries, friends and relatives and then at last the land base credit arrangements. There are two further kind of semi formal source NGO with microfinance as their core activates and other NGO with mf as one of their services. The informal sector also includes the MNC's. A formal source includes the commercial banks and domestic scheduled banks. Poor households are excluded from the financial services because of their incapability of meeting the collateral requirements. Thus a large population is unable to take the advantage of financial facilities. Therefore the tool of mf was emerged to reduce this inequality and poverty. But still the institutional set up of the developing country is unable to increase the access of poor people because of their in effective reforms and policies and political prudence. Further the major purpose of micro institutions is that it wants to protect the poor people and also to decrease their vulnerability to the natural hazards. In Bangladesh the loans are not only given to start a small...

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