Microfinance institution

Microfinance institution
See also
Public funds Equalization payment Savings plan Angel network Emerging market economy Government expenditure Fully funded Finance company International Monetary Fund

In general understanding, microfinance institution is an institution that helps the poorer citizens and very small enterprises by giving them small and very small loans. Microfinance institutions are the most popularized in Central and Eastern Europe and Asia - countries that used to be under the rule of socialists and USSR. The microfinance institutions largely fill the gap of banking institutions for remote areas (rural areas in Asia, Africa, Middle East, etc.)

History of microfinance institutions

When looking at the history of microfinance from 20 years ago, it was funding from big industrialised companies that fueled the small microfinance organisations. They were given large sums of money in loans and supported all they way through by the bigger, nationally working companies. However, as the companies that were given the money were much too small to cover the costs of the loans, their development was not possible to meet the expectations even at the small percentage. In effect, they were also not able to achieve any results in terms of helping the poorer art of the society. It took some time, but now, the microfinancing has become a large part of finance world and it is constantly supporting finance systems in numerous countries from all around the globe.

Approaches to microfinancing

In literature, there are two different approaches to the mission of microfinancing and the way they should work:

• The welfare approach

The welfarists see the microfinance as a way of improving one's welfare through effective outreach and offering interest at subsidized rates.

• The institutionalist approach

The institutionalists focuse much more on creating and developing many financial organiations that will assist the poorer part of society with effective way of attaining their important financial needs. However, the mission of both approaches is simple and similar to each other: the microfinancing institutions are meant to improve and enhance the welfare of the low-income citizens by giving them a chance at better living by giving loans and grants of money

References

• Burki, A. K., Sadiq, A., & Burki, H. U. (2018) Financial sustainability and microfinance institutions from an emerging market. "Risk Governance and Control: Financial Markets & Institutions", vol. 8;
• Purohit B., Saravanan S. (2018) Sustainability and efficiency of microfinance institutions in South Asia, "Theoretical and Applied Economics", vol. 25;
• Schmidt R.H. (2008) Microfinance, Commercialisation and Ethics, "Fachbereich Wirtschaftswissendchaften", vol.194

Author: Olga Muryn