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| (Understanding need of Microfinance ) |
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| The World's Working Poor |
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Nearly one half of the world's population lives on $2 a day or less, often unable to meet even their most basic human needs. The majority of these poorest are women and children. Malnutrition, lack of healthcare, substandard housing, and illiteracy result in desperation, disease, and daily suffering enhances the sufferings of these poor peoples.
Lacking stable job opportunities, the world's poor are largely self-employed. Their unpredictable day-to-day existence forms a vicious cycle of poverty that leaves little room for hope or opportunity. When proper nutrition or healthcare is out of reach, children grow up at greater risk of contracting life-threatening or disabling diseases. If a family can't afford to educate their children, they have few avenues for a better life than that of their parents. And if parents can't afford to buy property or livestock, there are few opportunities for them to build assets that will last over time.
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| What's Holding Them Back ? |
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Beyond obvious employment challenges, the vast majority of the world's poor have no real access to the financial products and services that help those in the developed world bridge the gap when times are tough.
Without life or health insurance, diseases and illness go untreated and the death of an income earner becomes a dramatic hardship for a family. Without access to loans or credit, shop owners can't buy products in bulk and farmers can't buy machinery-or even seeds-after a natural disaster or a poor yield the season before. Without access to savings accounts, money is hidden in walls or floorboards where it can be stolen or lost in a flood or fire.
In many cases, local moneylenders are the only available source of capital. They provide loans to smooth incomes during rough times or to help individuals improve their small businesses, but they do so at exorbitant annual interest rates, often from 300 to 3,000 percent. Under this system, virtually all of a borrower's financial gains are passed directly to the moneylender. Individuals are unable to reap the rewards of their own hard work.
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Microfinance could be defined as the supply of basic financial services (such as micro loans, saving, money remittance, pension and insurance schemes) to the less favoured sectors of the society.
People living in poverty, especially those who are self-employed in small-scale economic activities (micro-entrepreneurs) need simple financial instruments to run their businesses, build their assets, and shield themselves against major risks. However, they very rarely can access the formal financial sector, and they are forced to address their needs through informal relationships, e.g. by borrowing credit from moneylenders at usurious costs.
Over the last twenty-five years, Microfinance Institutions (MFIs) have led the way in developing workable credit methodologies and reaching out to large numbers of poor people.
Throughout the 1980s and 1990s, these programs improved upon the original methodologies and changed conventional wisdom about financing the poor. Successful MFIs have shown that the poor repay their loans and are willing and able to pay commercial interest rates. This allowed many institutions to reach financial sustainability and to expand - quite a rare characteristic among development initiatives.
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| Social Impact |
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Financial services for the poor have proven to be a powerful instrument for poverty reduction that enables the poor to build assets, increase incomes, and reduce their vulnerability to economic stress. Rigorous studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs.
By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from every-day survival to planning for the future. Households are able to send more children to school for longer periods.
Increased earnings from financial services lead to better nutrition and better living conditions, which translates into a lower incidence of illness. Increased earnings also mean that clients may pay for health care services when needed.
Providing access of all or any one of these financial services to poor people is known as microfinance. Since poor people require these services in very small quantity, formal sector do not find these services viable. The microfinance sector does it by increasing the number thus increases the volume. Here is the secretes of this sector. |
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