Microfinance is process through which small loans, savings and other necessary financial services are offered to the individuals who do not have access to other sources of capital. The major aim of microfinance is to assist people living under extreme poverty to be financial strong and autonomous. By being financial autonomous, people can meet basic needs of their families.
There is a need to support and promote microfinance. Microfinance helps the poor get access to finances that they would not have received from banks. The major reason for this is the fact that banks do not offer loans to individuals with few or no collaterals. Banks do not offer small loans like microfinances (Nasrin, Baskaran & Rasiah, 2016). Microfinancing is built on the assumption that small credit can play a significant role in eradicating poverty.
As compared to banks, microfinance offer friendly interest rates. The major target of microfinance is mostly women with low probability of defaulting the loan as compared to men. Based on this, microfinance play a significant role in empowering women and more so offers a friendly environment for the loan lenders (Nasrin, Baskaran & Rasiah, 2016). Additionally, the availability of microfinance has played an essential role in promoting education since families receiving small loans their children do not drop out of school due to lack of school fees.
Even though microfinance plays a major role in eradicating poverty and promoting the wellbeing of the people, it has its dark part. It’s good that microfinance assist women, however, it is not enough to change the society. A society is made up of men and women and have a powerful attraction between each other (Nasrin, Baskaran & Rasiah, 2016). A program that only focuses on women leaving out men has limitation. There cannot be a transformation in the society without changing both men and women.
Next, microfinance is small scale type of business. Often, small businesses grow into big businesses. The small loans received from the microfinance helps families meet their basic needs and rarely grow into bigger businesses. Microfinance loans are often expensive. High number of microfinance business offer their loans at an interest rate of 20% and above (Sanyal, 2010). For, this reason, the borrowers rarely grow due to high repayment costs. The borrowers also face huge problems because of coercive collection techniques by the microfinance employees.
Group model is one of the microfinance technique whereby a group of people join to offer microfinance services to each other (Sanyal, 2010). This technique has its strengths and drawbacks. First advantage is that members of the group can evaluate each other and chose individuals who cannot default the loan. Additionally, the social group can act as collateral. Next is that group model enable monitoring of the peers. This will ensure that the member do not default the loan. The group exerts pressure to a member to repay the loan to avoid the consequences of non-compliance (Sanyal, 2010). Finally, the use of group model enable the microfinance to reach clients easily since they target groups. The use of group model helps cut costs of collecting repayment and more so enables less default cases.
One of the disadvantage of group model is that hostility of group members can cause dropouts leading to communal cost in that the group borrowing can have limited access to loans due to loss of trust and faith (Panda, 2016). The result is that the poor will excluded and discriminated. Because of group liability, bad clients can take advantage of good clients leading to increased default rates. Lastly, since loan demand change from time to time, group members may refuse to act as a collateral for their counterparts applying for big loans.
Community microfinance model view the society as one unit. This microfinance model has its advantages and disadvantages. First, it enables people to help themselves. Loans to initiate business assist the poor advance their living standards. Next, members bank on each other since people deposit funds to cover deficit to enable people get access to loans. It also breaks the cycle of poverty in the society (Panda, 2016). On the other hand, it has its drawbacks. The bad people can take advantage of the good people. The use of this model has challenges of accessing mainstream finance due to bad image.