A micro finance bank is an institution that extends small loans, or micro finance, to poor applicants.
A micro finance bank (also written as microfinance) is an institution that extends small loans, or micro finance, to applicants who typically belong to the lowest strata of society. Loans are extended to borrowers to allow them to initiate a business, repair their homes and improve the general living conditions of their families and the community.
History
According to Victoria White and Joanna Ledgerwood in the book "Transforming Microfinance Institutions," PRODEM (Promotion and Development of Microenterprises) conceptualized the first regulated financial institution, dedicated solely to the purpose of microfinance. This institution was called BancoSol (Bolivia). Garmeen bank, brainchild of Muhammad Yunus, introduced the concept of modern micro finance banking systems. The bank, established in the 1970s in Bangladesh, offered loans with zero collateral requirements and marginal interest rates-regulations atypical of commercial banks. Muhammad Yunus was awarded the Nobel Peace Prize (2006) for his efforts to promote social and economic development through micro finance.
Concept
The concept behind micro finance is a social one: providing the marginalized groups of society easy accessibility to financing options. Micro finance banks derive their justification based on the concept of social equality in endeavoring to streamline lending processes and offer basic financial services to individuals at poor income levels.
Functions and Objectives
Micro finance is based on providing credit and training to the most marginal groups in society so as to broaden employment opportunities and deliver services that can improve their living conditions. Objectives of micro finance banks include providing financial products that facilitate small-scale businesses and cottage industries; training lenders in managerial effectiveness; extending low-cost lending to responsible citizens who seek funding; and operating on a reasonably profitable level while ensuring that the general living standards of poor people improve.
Differences Between Micro Finance Banks and Regular Financial Banks
Micro finance banks differ from regular financial banks in various respects, including use of small loan denominations; absence of collateral; simplicity of operation; institutional role to connect the marginalized strata of society with larger national systems in developing countries; direct involvement in rural transformation; facilitation and promotion of banking culture and savings management between low-income individuals and groups; and formation of linkages with development banks, specialized lending institutions and other micro finance banks.
Criticisms
It is not uncommon for some micro finance banks, given their their primary focus on providing small loans to the poor, to have below-par professional management systems and information systems in place. Their financial assets and funds are dependent on donors and financial constraints can limit outreach activities. Micro finance banks can be weakly supervised and governed. The quality of these institutions varies according to financial regulations in place in various countries and the specific micro finance bank in question.
