Microfinance is the provision of loans and other financial services to the poor. The microfinance has evolved due to the efforts of committed individuals and financial agencies to promote self-employment and contribute to poverty alleviation and provision of social security. India has been able to develop its own model of microfinance organizations in the form of savings and credit groups known as the Self Help Group (SHGs), which are bank-linked. These SHGs are mainly formed and managed by women and this has become an instrument, which has led to women's empowerment and social change. Most of the microfinance institutions in India attempt to go beyond savings and credit groups to provide microfinance services in the form of savings and insurance.
Microfinance provides financial services to those whose income is small and unstable. These people are in need of credit facilities for several reasons (i) their needs are small and arise suddenly (2) the institutional providers of finance namely the banks demand collateral security which they cannot provide (3) most of the time, they are in needs of funds to meet their consumption demands, for example, to meet expenses related to education, illness, funerals, weddings for which it is difficult to obtain institution finance (4) for purpose of investment in income generating activities.1
Concept of Self Help Group (SHGs) is the most exciting discovery in the context of microfinance. The Indian microfinance scene is dominated by SHGs and their
linkage with Banks. Owing to the importance of microfinance and self help groups in the eradication of poverty and in the empowerment of women.
3.0 The Concept of Microfinance
Microfinance is a concept that is helping the poor to avail of an create opportunities for economic growth. In India, microfinance has fulled the efforts of rural development, women empowerment and wealth generation by providing small scale savings, credit, insurance and other financial services to poor and low income households. Microfinance thus serves as a means to empower the poor and provides a valuable tool to help the economic development process.
The concept of microfinancing and self-employment activities in rural areas has developed considerably over the last two decades. It is working neither on domain/charity nor on subsidy. It is basically rotational investment done to motivate the poor to empower themselves and practice the dictum 'Save for the future and use those resource during the time of need.' Theoretically, microfinance also known as microcredit or microlending means making provision for smaller working capital loans to the self- employed or self-employment seeking poor.
Microcredit has defined as the extension of small loans to be given in multiple doses based on the absorption capacity of the needy beneficiaries, who are too poor to qualify for formal bank loans, as they have no assets to offer as collateral security against loans.
'Microcredit' may be defined as the credit and repeated credit provided in small measures to suit the recipient's requirements, with a comfortable pace of repayment and at an appropriate rate of interest. Microcredit has been defined by the microcredit
summit held in Washington D.C. in February 1997 as "programmes that provide credit for self employment, other financial and business services to very poor persons." Microfinance can be interpreted in a broader context both as microcredit and microsavings, even though microcredit and microfinance have come to used interchangeably. However, when the term 'microfinance' is used it implies some other services accompanying credit viz. facilities for saving and availability of services for insurance of the assets acquired with microcredit. Microfinance has come to be referred to as a small scale financial services and technical assistance provided to rural people who operate small or micro-enterprises, provide services, work for wages or commission and other individuals and group working at local levels.4
NABARD has defined microfinance as "provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi- urban and urban provided to customers to meet their financial needs; with only qualification that (1) transactions value is small and (2) customers are poor."5
In essence, therefore, microfinance could be referred to as an institutional mechanism of providing credit support in small amount and usually linked with small groups along with other complementary support such as training and other related services to the people with poor resources and skills for enabling them to take up economic activities. In the November 1995 Microcredit Summit, U.S. first lady Hillary Clinton wrote; "Microenterprise is the heart of development because microenterprise programmes work - they lift women and families out of poverty. It is called micro but its impact on people is macro, we have seen that it takes just a few dollars, often as little it takes as dollar 10, to help a woman gain self employment, lift her and her family out of poverty. It is not a hand out; it is a helping hand."
Let us begin by understanding some of the distinct characteristics of microfinance. The term 'microfinance' is often confused with the related term 'microcredit', so much so, that the two are often treated as synonymous and used interchangeably. While there are certain similarities between the two terms, there are also certain differences, which require to be classified at the very start to avoid confusion of time.
The term microcredit refers to a small size loan, to be repaid within a short period of time, used mostly low income households and micro entrepreneurs for the purpose of income generation and enterprise development. The mobilization of such credit is restricted to external sources such as banks and moneylenders.
Microfinance on the hand, provides a greater menu of options whereby the small loan can be garnered not just from the external sources but also through self- mobilization, by way of saving and sale of assets. Also, in case of microcredit, due to the definite obligation to repay the loan, a physical collateral may sometimes be needed. However, the biggest flexibility in the case of microfinance is the lack of any physical collateral, even in case of loan from the bank. The options available with microfinance, therefore, are much broader and flexible than the ones available with microcredit.