What is microfinance?
Microfinance is a form of financial development that has primarily focused on alleviating poverty through providing financial services to the poor people in the country (Sinha, 2008). Most people view microfinance as being about micro-credit i.e.it is involved in lending small amounts of money to the poor in order to uplift their living standard. Microfinance is not only this, but it also has a broader perspective which also includes insurance, transactional services, and importantly, savings (Brenna, 2008).
According to Schreiner (2010), microfinance is a bit of a catch all-term. In the broad perspective, it refers to the provision of financial products which are usually targeted at low-income groups. These financial services include credit, savings and insurance products. A series of neologisms has emerged from the provision of these services, name micro-credit, micro-savings and micro-insurance. The Canadian International Development Agency (CIDA) defines microfinance as, the provision of a broad range of financial services to poor, low income households and micro-enterprises usually lacking access to formal financial institutions (Graheen, 2000).
Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. In general, banks are for people with money, not for people without.” (Oikocredit, 2004)
Characteristics of microfinance
Microfinance gives access to financial and non-financial services to low-income people, who wish to access money for starting or developing an income generation activity. The individual loans and savings of the poor clients are small (Kodheka, 2003). Microfinance came into being from the appreciation that micro-entrepreneurs and some poorer clients can be ‘bankable’, that is, they can repay, both the principal and interest, on time and also make savings, provided financial services are tailored to suit their needs. Microfinance as a discipline has created financial products and services that together have enabled low-income people to become clients of a banking intermediary.
The characteristics of microfinance products include:
- Little amounts of loans and savings and short- terms loan (usually up to the term of one year).
- Payment schedules attribute frequent installments (or frequent deposits) and Installments made up from both principal and interest, which amortized in course of time.
- Higher interest rates on credit (higher than commercial bank rates but lower than loan-shark rates), which reflect the labor-intensive work associated with making small loans and allowing the microfinance intermediary to become sustainable overtime.
- Easy entrance to the microfinance intermediary saves the time and money of the client and permits the intermediary to have a better idea about the clients’ financial and social status.
- Application procedures are simple and short processing periods (between the completion of the application and the disbursement of the loan).
- The clients who pay on time become eligible for repeat loans with higher amounts and the use of tapered interest rates (decreasing interest rates over several loan cycles) as a n incentive to repay on time. Large size loans are less costly to the MFI, so some lenders provide large size loans on relatively lower rates.
- No collateral is required contrary to formal banking practices. Instead of collateral, microfinance intermediaries use alternative methods, like, the assessments of clients’ repayment potential by running cash flow analyses, which is based on the stream of cash flows, generated by the activities for which loans are taken.
Impacts of microfinance
To assess satisfaction with loan lending terms of microfinance institutions, respondents were presented with statements on 5 point likert scale and asked to rank the statements by indicating how much they agreed with the statements. The statements were ranked with ranks ranging from “5- strongly agree” to “1-strongly disagree”. Averages for every statement were calculated and the general average score evaluated. Scores were also converted to percentages for easy interpretation. It is observed that the scores were also distributed across gender of the respondents and level of income to provide comparative results.
From the results, the respondents were observed to rank the statements on MFI impact quite lowly with the average score of 50%. Respondents unanimously agreed that MFI had helped them develop their business with a score of 63%. Respondents strongly disagreed with the statements on “Am happy with loan repayment conditions given-35%”, “Interest rate offered was fair-37%” and “It was easy to be given loan-40%”.
To assess impact of microfinance institutions, respondents were presented with statements on 5 point likert scale and asked to rank the statements by indicating how much they agreed with the statements. The statements were ranked with ranks ranging from “5- strongly agree” to “1-strongly disagree”. Averages for every statement were calculated and the general average score evaluated. Scores were also converted to percentages for easy interpretation. It is observed that the scores were also distributed across gender of the respondents and level of income to provide comparative results.
Respondents were observed to rank averagely most of the statements with an average score of 55%. Respondents agreed with the statements; “Reasonable total time taken to complete a transaction-73%” and “Staff knowledge of products and services-65%” on the other hand the respondents disagreed with the statements; “Before any loan is given this organization conducts
analysis of the viability of the business-40%” and “Trainings are provided to customers geared towards increasing their knowledge on available products and services-47%”.
Across the gender, female respondents were observed to rank most of the statements higher than their male counterparts. Great discrepancies were not observed across income level.
Conclusion
There is significant impact of microfinance activities on improvement of the living standard of the family not only in economic term but also in social term. Amazingly, the relation between different factors of society and family became evident and clear, which were being neglected and not thought about during the period of existence of only conventional banking system. From our study and research, we have come to the conclusions that there is a noticeable and positive impact of microfinance activities on the living standards, empowerment and poverty alleviation among the poor people in the society.
Source: Impact of Microfinance awareness in Kenya Essay Example | GraduateWay
