Banks and financial institutions provide loans or finance to many people like self-employed people such as doctors, chartered accountants, lawyers or to salaried individuals or to small and big business but when it comes to providing finance to low-income group and farmers than not many banks or finance institutions are willing to provide finance and that is where microfinance come into play. Microfinance in simple words refers to providing financial services like loans, accepting deposits and giving other financial services to unemployed people, farmers, small businessmen, and low-income group people. In order to understand more about microfinance one should look at various features of microfinance –
Features of Microfinance
No Collateral
The first and foremost characteristic of microfinance is that in case of lending by financial institution or banks there is no collateral or security required on the part of the borrower as typically people taking microfinance facility does not have assets like land or building which they can keep as collateral with banks or financial institutions for taking loan from the bank or financial institutions.
Small Quantum of Loan
The loan amount is very small and hence the loan amount can vary between $50 to $1000. In simple words, the ticket size of each loan given by banks to people is very small as compared to loans given by commercial banks to mid-sized and big companies where ticket size of loan can be in millions or billions of dollars.
Rural and Semi-Urban Areas
Majority of microfinance institutions operate in the rural or semi-urban area because these institutions mainly cater to people living in rural and semi-urban are who are dependent on agriculture and small sector enterprises for their livelihood.
Provides Basic Services
Another feature of microfinance is that unlike commercial banks where they offer many complex products and services like mutual funds, insurance, mobile banking, internet banking these institutions only provide basic services like providing loans to people who need money and accepting deposits from the public.
Financial Inclusion
In case of developing nations one of the problem which government faces is that people are not educated enough to deal with banks and financial institutions which leads to exploitation of such people by money lenders and it is through microfinance government can reach to such people and help in achieving the task of financial inclusion of the people of the country.
As one can see from the characteristics of microfinance that as far as banks or financial institutions are concerned the size of business from undertaking this activity is not substantial but still as far as financial inclusion is concerned this activity plays a major part in country achieving financial inclusion goal set by the government.