A Business Encyclopedia


Definition: The Microfinance is the cluster of banking services, relatively of lower monetary amounts, designed specifically to meet the banking requirements of an unemployed or low-income people.

In other words, Microfinance is the arrangement of financial services including loans, savings, insurance, money transfers and remittances offered to the lower income groups or poor entrepreneurs, who otherwise cannot avail the standard banking services. The motive behind Microfinance is to give people in poverty a privilege to become self-sufficient by offering them crucial banking services at a considerable smaller monetary amounts.

Most often the Microloans are given for the development of micro or small enterprises that does not have any collaterals against which the standard loan could be raised. The borrower is required to pay interest on the borrowed amount, but the interest rate is minimal. Also, the Microloans are given to those who live in developing countries and who are working in varied trades such as, carpentry, fishing, and transportation.

People often get confused in terms Microfinance and Microcredit. Although the concept of Microfinance has its roots in Microcredit, but the former is a broader term that includes several banking services such as savings account, loans, money transfers, insurance and other services. While the latter is only concerned with the disbursement of small loans at a low rate of interest to the poverty-hit individuals.

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