What Is Microfinance?

 Microfinance is a banking service provided to low-income individuals or groups who

otherwise would have no other access to financial services.
 Microfinance allows people to take on reasonable small business loans safely, in a
manner that is consistent with ethical lending practices.
 The majority of microfinancing operations occur in developing nations, such as
Bangladesh, Cambodia, India, Afghanistan, Democratic Republic of Congo,
Indonesia, and Ecuador, among others.
 Like conventional lenders, microfinanciers charge interest on loans and institute
specific repayment plans.
 The global microfinance market was valued at an estimated $187 billion in 2022,
and is expected to exceed $488 billion by 2030.

History of Microfinance
Microfinance isn't a new concept. Small operations of this type have existed since the 18th
century. The first occurrence of microlending is attributed to the Irish Loan Fund system,
introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish
citizens.9 In its modern form, microfinancing became popular on a large scale in the 1970s.

The first organization to receive attention was the Grameen Bank, started in 1983
by Muhammad Yunus in Bangladesh. In addition to providing loans to its clients, the
Grameen Bank also suggests that its customers subscribe to its "16 Decisions," a basic list
of ways that the poor can improve their lives.The 16 Decisions touch upon a wide variety of
subjects, ranging from a request to stop the practice of issuing dowries upon a couple's
marriage, to keeping drinking water sanitary. In 2006, the Nobel Peace Prize was awarded
to both Yunus and the Grameen Bank for their efforts in developing the microfinance
system

Benefits of Microfinance
Millions of people have directly or indirectly benefited from microfinance-
related operations. The Consultative Group to Assist the Poor, a Washington-based global
nonprofit organization, estimates that, as of 2021, more than 120 million people had
directly benefited from microfinance-related operations. However, these operations are
only available to some of the world's poor, while an estimated 1.7 billion people lack access
to establishing basic financial accounts.
Concerns About For-Profit Microfinancing

1. Over-Indebtedness

The microfinance sector deals with marginalised sections of Indian society intending to
improve their standard of living, and thus over-indebtedness poses a severe challenge to
its growth. The growing trend of multiple borrowing by clients and inefficient risk
management are the most significant factors that stress the microfinance industry in
India.

2. Higher Interest Rates in Comparison to Mainstream Banks

The financial success of MFIs is limited when compared to commercial banks in India.
The centuries-old banking system has a strong foothold in Indian grounds and is slowly
evolving to meet the needs of the times. Most Microfinance Institutions charge a very
high rate of interest (12-30%) when compared to commercial banks (8-12%). The
regulatory authority RBI issued guidelines to remove the upper limit of 26% interest on
MFI loans.

3. Widespread Dependence on Indian Banking System

One of the significant problems of microfinance in India is the widespread

dependence on the banking system. Because most microfinance institutions function
as registered Non-Governmental Organizations (NGOs), they are dependent on
financial institutions such as commercial banks for stabilised funding to carry out
their own lending activities. Most of these commercial banks are private institutions
charging a higher rate of interest. They also sanction loans for shorter periods. The
massive dependence of Indian MFIs on banks makes them incompetent as a lending
partner.

4. Lack of Enough Awareness of Financial Services in the Economy

A developing country in the making, India has a low literacy rate, which is still more
moderate in its rural areas. A large chunk of the Indian population fails to understand
the basic financial concepts. There is a severe lack of awareness of financial services
provided by the microfinance industry among the masses. This lack of adequate
knowledge is a significant factor that keeps the rural population from accessing MFIs
for easy credit to meet their financial needs.
Conclusion

Although it has come a long way, the microfinance sector in India still faces several
challenges. The problems of microfinance in India can be addressed with the help of
technological aid, enabling the sector to advance loans to the rural populace more
effectively.