April 27th, 2010Micro Finance – A Good Financial Service for the Poor
Banks are by nature risk-adverse and like to give loans to those who knock on their door and already have money. So, micro finance appears.
Usually, micro finance is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as micro finance institutions. These institutions commonly tend to use new Business Models developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly.
Micro finance takes its name from the ridiculously low amounts lent by western standards. US $50 to $100 can allow someone to buy a goat and have an ongoing supply of milk and cheese to feed their family and sell the surplus on the market. Those loans are usually repaid within 6 months. Another reason why traditional banks stay well clear of that market is because whether the loan is for $100 or $10,000 their processing costs are the same.
Traditional lending without collateral is the realm of credit cards. We can guess how many divorces have been caused by encouraging wild spending and so the social responsibility of the established banking sector is something shareholders do not care about. Fortunately, with the appearance of micro finance, people can manage their expenses easily and avoid the wild spending.