Workings of microfinance

Poverty is the major problem faced by all the developing countries. All these countries face the problems of the gender and economic inequality, rich and poor divide, higher crime rate, illiteracy, etc. The key to finding a solution to eradicate these issues lies in offering equal opportunity to everyone. Involve all the segment of people to be a part of losses and gains of the country. Microfinance is the initial steps towards that. It is an organization which offers different types of financial services to low-level income people and also the poorest of the people in rural areas.

Procedure of microfinance

Evaluation of village– Before you choose a village, a thorough investigation has to be carried out regarding the demographics, population, etc.

Conduct seminars– After finalizing the village, an introductory seminar has to be organized wherein the information related to microfinance is communicated such as its operation mechanism, services it offers, details about the institutions and so on.

Group formation– Once the seminar is over, all the people who interested to avail the services are formed into different groups. Whenever a loan is offered to a person, the remaining people in that will group will be his guarantor. Hence, people are very much careful while they form the group. If at all one person makes any default in making the payment, the whole group will be penalized. Hence the peer pressure helps out in bringing the loyalty which makes sure the whole amount is repaid within the stipulated time.

Training programs are conducted and village center is formed– A group training programs will be conducted. Field of officers is appointed who presides over all the village meetings. On these meetings, discussion on loans is conducted. Repayment of money is also collected in these meetings. However, lending of loan is carried out only by the branch office.

Distribution of loan-Since there is a high risk of payment of default, lending of loans are conducted only after detailed checks are done. There are specific rules which need to be followed by the institutions before a loan is sanctioned. Required documentation and evaluation have to be conducted. Most importantly, the viability of individual and business group’s repayment capacity is evaluated. The unique characteristic of the microfinance is the beating the risk of default which is quite high. With the introduction of microfinance, developing countries are able to uplift the lower income segment of people.