What are microfinance institutions?

2023 Author: Henry Conors | [email protected]. Last modified: 2023-11-26 12:05

Microfinance activities and microfinance institutions are key to start-up entrepreneurs. Businessmen entering the market get better access to sources of funds. Let us further consider in detail what microfinance organizations are.

General characteristics

In economic science, microfinance is understood as specific monetary relations between organizations providing relevant services and small businesses within the framework of personal contact and territorial proximity. Such work involves the accumulation of funds, their provision under a simplified scheme. Obtaining the necessary capital is carried out according to the principles of payment, repayment, short-term, trust. The funds must be spent directly on the development of the economic entity.

Microfinance organizations: reviews

These companies are approachedmany start-up entrepreneurs. In modern conditions, starting from scratch is extremely problematic. This necessitates the search for additional sources of funds. As businessmen themselves note, microfinance organizations form an efficient and highly dynamic lending system. The funds received make it possible to further stimulate the production and distribution of services and products. It is also important that novice entrepreneurs get the opportunity not only to gain the necessary market experience in generating income, but also to start accumulating capital.

Tasks

Microfinance organizations offer flexible lending schemes. Such models make it easy to overcome obstacles and start a business from scratch without own funds and credit history. In addition, such companies contribute to the solution of the following tasks:

1. Increase in the number of entrepreneurs in the country.
2. Increase in tax deductions.
3. Building a credit history for subsequent financing through the banking sector.

Benefits

Microfinance institutions provide services to businessmen in addition to the work of commercial banks. Thus, there is a significant strengthening of the monetary system of the state. Often, the conditions offered by banks turn out to be unbearable for business entities. One of the main problems is the need to secure a loan. Microfinance institutions conduct small transactions withlow risk and definite reward. Such services would be unprofitable for commercial banks.

Subjects

Microfinance services provided by:

1. Specialized institutions dealing exclusively with lending. They, in turn, are funded by external sources.
2. Credit unions. They are companies with a collective membership. They are formed to provide financial services to their members. The sources of funds are directly the contributions of members. Usually such structures do not have external income.
3. Credit agricultural cooperatives. These are also collective membership associations. They work mainly with farms and agricultural production enterprises.
4. Small business support funds. They can be municipal or state. Such associations provide services without a bank license.

Historical background

The microfinance industry was the result of the development of microcredit. Professor Mohammed Yunus founded Grameen Bank in 1976. This institution specialized in issuing loans to poor Bangladeshis. It is believed that microfinance was born in this year. Over time, other services for low-income people appeared. For example, micro-insurance, micro-ownership, and so on began to develop. According to statistics provided by the International Bank, by 2005 there were more than 7,000 such companies in the world. In gener althe complexity of their customers is about 16 million people in different countries.

Work in Russia

In the Russian Federation, microfinance companies are represented by a variety of organizational and legal forms. Cooperatives act as the main microcredit enterprises. However, it should be noted that the development of the microfinance institution in Russia is not as intensive as in other countries. There are very few specialized companies in the country that can carry out most of the small lending operations. For the formation and subsequent development of the system, state support and an appropriate legal framework are needed. One of the first steps towards solving these problems was the law "On Microfinance Organizations". It was approved by the State Duma in 2010. Federal Law No. 151 regulates the work of such companies, determines the size, conditions and procedure for providing small loans to the population.