Pros and Cons of Microfinance

Microfinance provides a lot of opportunities to the non-profit sectors; it also comes with some great qualities that make it a unique form of philanthropy. Though the intent of microfinance is to help those in need, the actual paying back of a loan and qualifications for a borrower makes it hard to assess if all markets are suited for microfinance.

In the past two decades, great progress has been made in developing techniques that are required to deliver financial services to the people in need on a sustainable basis. Most donor interventions have focused on micro credit, one of these services. For micro credit to be appropriate, however, the clients should have the ability of repaying the loan as per the terms based on which it is approved. If not, clients may not be able to benefit from the credit and risk that is being pushed into debt problems. This sounds pretty obvious; however, microcredit is seen by some as the ‘one size fits all’ kind of thing. Micro finance has to be carefully evaluated against the alternatives while choosing the most appropriate intervention tool for a certain situation. Microcredit can be inappropriate in those situations where the conditions pose challenges to the common microcredit methodologies.

The population that is geographically dispersed or nomadic might not be best suited for microfinance candidates. Microfinance will not be appropriate for populations with high incidence of debilitating illnesses like the HIV for example. A heavy dependence on one source of economic activity or reliance on barter instead of cash transactions can pose issues. The presence of high inflation or otherwise the absence of law and order can stress the ability of microfinance to operate. Microcredit is also really difficult when the laws and regulations create a huge barrier to the sustainability of microfinance facilitators.

Although Microfinance is a promising way of helping global education and poverty, there are some aspects of microfinance that can make it hard for some groups that are in need of help badly. Similarly, one more aspect that was not highlighted is the necessity for people that are easily accessible by a group that is on the ground in the area being helped. If some of the countries have restrictions on who can enter and do what, it may be hard for the micro finance team to help the people there. While microfinance cannot reach out to all economic segments of society, it has reached out to so many segments that were previously not catered by the other financial markets.

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