Micro-finance
Micro-finance assists low-income individuals or those who do not have access to typical banking services. Microfinance is the supply of loans, savings, and other basic financial services. Micro-finance is also the idea that low-income individuals are capable of lifting themselves out of poverty -- if given access to financial services. As these services usually involve small amounts of money, loans, savings, etc., the term "microfinance" helps to differentiate these services from those which formal banks provide. Formal financial institutions were not designed to help those who don't already have financial assets but those who do have means and are a lower risk for default. Credit typically is available to the poor from informal money-lenders, who oftten charge high interest rates. Even some micro-enterprises have high fees to offset the administration and processing costs. |
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Programs serving the very poor clients are somewhat less profitable than those reaching better-off clients, but this may say more about the managers' objectives than an inherent conflict between serving the poor and profitability. Canefire Microfinance is dedicated to serving the very poor.
There are three kinds of costs any financial institution has to cover when it makes loans. The first two are the cost of the money that it lends as well as the cost of defaults. The third is that of loan transaction. The cost of processing a loan transaction is similar, whether the loan is for $100 or $10,000. The staff time to meet with the lender, appraise the loan, track repayments, and follow-up monitoring are similar. Every loan applicant is required to complete a business training course we provide and is accountable to a support group of other participants.
While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that this is not always the appropriate method and never should be seen as the only tool for ending poverty.
There are cases where microfinance cannot be made profitable. An example might be where potential clients are extremely poor and risk-adverse, or live in remote areas with very low population density. In such settings, microfinance may require continuing subsidies. Whether microfinance is the best use of these subsidies will depend on evidence as to whether or not it impacts the lives of clients.
By reducing vulnerability as well as increasing earnings and savings, financial services can allow poor households to make the transformation from every-day survival to planning for the future. Households are able to send more children to school for longer periods and make greater investments in their children's education. Increased earning from financial services leads to better nutrition and improved living conditions, which translates into lower incidence of illness. Increased earnings also mean that clients may seek out and pay for health care services when needed, rather than go without or wait until their health seriously deteriorates.
There are three kinds of costs any financial institution has to cover when it makes loans. The first two are the cost of the money that it lends as well as the cost of defaults. The third is that of loan transaction. The cost of processing a loan transaction is similar, whether the loan is for $100 or $10,000. The staff time to meet with the lender, appraise the loan, track repayments, and follow-up monitoring are similar. Every loan applicant is required to complete a business training course we provide and is accountable to a support group of other participants.
While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that this is not always the appropriate method and never should be seen as the only tool for ending poverty.
There are cases where microfinance cannot be made profitable. An example might be where potential clients are extremely poor and risk-adverse, or live in remote areas with very low population density. In such settings, microfinance may require continuing subsidies. Whether microfinance is the best use of these subsidies will depend on evidence as to whether or not it impacts the lives of clients.
By reducing vulnerability as well as increasing earnings and savings, financial services can allow poor households to make the transformation from every-day survival to planning for the future. Households are able to send more children to school for longer periods and make greater investments in their children's education. Increased earning from financial services leads to better nutrition and improved living conditions, which translates into lower incidence of illness. Increased earnings also mean that clients may seek out and pay for health care services when needed, rather than go without or wait until their health seriously deteriorates.