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Understanding Microfinance
Bibi Hanifa is a successful micro entrepreneur from Hubli who has set up an incense-stick unit along with a group of women in her neighbourhood. Earlier they worked as daily wage labor at a nearby factory and earned a meagre income. Today, thanks to the simple system of taking loans and repaying them, these women manage a successful enterprise and dream of a better and more prosperous tomorrow.

Microcredit or Microfinance is the process of granting small loans to poor people, primarily to women, who have no collateral and are marginalised. These women tend to use their income to benefit their households and children. The process is accomplished through a microfinance institution that:

  • recruits and trains responsible, appropriate borrowers, each of whom establishes her small business
  • helps them form groups that are accountable for each other's loans
  • distributes funds for loans
  • meets with groups of borrowers to collect loan repayments and to guide their endeavours

Examples of enterprises established include, buying a buffalo to sell its milk; starting a kirana store; manufacturing sweets; selling soft drinks; grinding spices; sewing; candle making; collecting fallen hair for wigs and extensions; repairing watches; tea or petty shops; vegetable stands; bicycle repair; carpentry and welding shop or an auto rickshaw.

In groups of five to ten, the women support each other emotionally and financially by guaranteeing the repayment of each of their loans. With as little as INR 4,000 (USD 85), a borrower can start a kirana store. With INR 10,000 (USD 212), a borrower can purchase a milking cow / buffalo, sewing machine, or set up an embroidery unit. Many of the women become leaders in their communities and undertake projects that benefit all the residents.

The repayment of loans plus interest generates funds that can be reinvested as a second and third loan or used to start other women on their journey toward sustainable prosperity. The entire community benefits from improvement projects taken on by these newly confident and capable leaders.

Microfinance institutions broadly operate under a wide range of legal structures. They could be registered as NGO, Trusts, Sec 25 Companies, Cooperative Societies, Cooperative Banks, Regional Rural Banks, Local Area Banks, Public and Private Sector banks, Business Correspondents and Non-Banking Finance Companies.

SKS Microfinance is registered with the RBI as a non-deposit taking NBFC-MFI and is regulated by the RBI.

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  • Out of the 6.7 billion in the world, 3 billion people live on less than USD 2 per day (ILO).
  • 80% of the world’s population has no access to financial services(GDRC).
  • The world’s 10,000 microfinance institutions provide funding to 150 million active clients, 3/4 of who are women. An estimated 500 million potential microfinance clients are yet to be reached (Planet Finance).
  • Fewer than 2 % of poor people have access to financial services (credit or savings) from sources other than money lenders. (Data Snapshots on Microfinance - The Virtual Library on Microcredit).
  • The Microcredit Summit estimates that INR 1015 billion (USD 21.6 billion) is needed to provide microfinance to 100 million of the world's poorest families. The Summit planners say it should be possible to raise USD 2 billion from borrowers' savings alone. The final figure may be even higher. (Data Snapshots on Microfinance - The Virtual Library on Microcredit).
  • There is a potential demand for microsaving services from 19 million savers. (Data Snapshots on Microfinance - The Virtual Library on Microcredit).
  • Studies of the impact of microcredit in more than 24 countries found dramatic improvements in household income levels. These improvements took place primarily through growth in the borrower's business, which translated into increased household income. The studies found that access to microcredit allowed the borrower to increase the number of goods or services sold and reduce the costs of supplies and raw materials. As a result, sales increased and profits grew from 25% to 40% (Unitus).
Financial Inclusion
Financial Inclusion