Security of Micro Financing

Security of Micro Financing: Collateral Security, Group Security, Collateral substitute and Documentation

ANTARA ZAREEN

Lecturer, BIBM

Bangladesh micro finance continued growing rapidly towards the main objective of financial inclusion, extending outreach to a growing share of poor households. Micro finance has evolved as an economic development approach intended to benefit low-income group.

What is microfinance?

"Microfinance is the supply of loans, savings, and other basic financial services to the poor.” As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term "microfinance" helps to differentiate these services from those, which formal banks provide. Why are they small? Someone who doesn't have a lot of money isn't likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – "micro". Microfinance activities usually involve:

• Small loan, typically for working capital.

• Informal appraisal of borrowers and investments

• Collateral substitutes, such as group guarantees or compulsory savings

• Access to repeat and larger loans, based on repayment performance

• Streamline loan disbursement and monitoring Secure saving products

What is an MFI?

A microfinance institution (MFI) is an organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks. An MFI can be broadly defined as any organization—credit union, down-scaled commercial bank, financial NGO, or credit cooperative—that provides financial services for the poor."

Why don't poor just go to a bank?

"The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal." Formal financial institutions were not designed to help those who don't already have financial assets –...