Business Finance · Chapter 6

Microfinance and Cooperatives

Study notes aligned to the official NEB syllabus.

Microfinance and Cooperatives

Concept of microfinance

Microfinance is a financial service aimed at low income individuals or those who do not have direct access to formal banking services. A microfinance institution provides financial services to communities who cannot offer collateral against the loans they take but who have the skills and desire to undertake economic activities for generating income and self employment. In the context of Nepal, microfinance is a class "D" financial institution as described by Nepal Rastra Bank. Interest rates charged by microfinance on micro loans are often very high due to the risk of default.

Importance of microfinance

No collateral required: The key feature of a loan under microfinance is that the borrower does not need to provide any collateral.
The borrowers are generally poor: The purpose of microfinance is to lend a helping hand to needy people, so the borrowers are generally people from the underdeveloped parts of Nepal and small businessmen or entrepreneurs.
Micro loan: The money available under microfinance is usually a small amount. Such loans are given to the poor section of society and to small businessmen.
Short loan maturity: The maturity of the loan is very short, as the amount given is small. The borrower has to repay the loan within the prescribed time period.
To generate income: Microfinance loans are given only to low income groups and small businesses, so the main aim is to generate income for the poor people of the underdeveloped parts of Nepal so that they can work smoothly.

Functions of microfinance

Provide micro loans: Microfinance provides unsecured loans to unemployed or low income individuals or groups who otherwise would have no access to financial services. It plays an important role in raising the living standard of poor people by providing loans.
Contribution to the social sector: Microfinance institutions provide services not only financially but also socially by mobilizing capital into rural areas. This contributes to the improvement of the poverty rate of Nepal and helps rural and poor people by creating entrepreneurs and uplifting women.
Reduce poverty: Microfinance helps poor people increase their income, saving, and standard of living, and is thus able to reduce the poverty of individuals.
Encourage saving: Microfinance develops the habit of saving among citizens and also encourages the saved money to be invested in productive sectors.
Micro insurance: Financial management to protect low income people against specific perils in exchange for regular premium payments, in proportion to the likelihood and cost of the risk involved.
Improvement of economic condition: Microfinance plays an important role in the economic development of the people, society, and the nation as a whole, helping people in various professions and businesses improve their economic condition.

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Microfinance and Cooperatives

Study notes aligned to the official NEB syllabus.

Microfinance and Cooperatives

Concept of microfinance

Importance of microfinance

No collateral required: The key feature of a loan under microfinance is that the borrower does not need to provide any collateral.
The borrowers are generally poor: The purpose of microfinance is to lend a helping hand to needy people, so the borrowers are generally people from the underdeveloped parts of Nepal and small businessmen or entrepreneurs.
Micro loan: The money available under microfinance is usually a small amount. Such loans are given to the poor section of society and to small businessmen.
Short loan maturity: The maturity of the loan is very short, as the amount given is small. The borrower has to repay the loan within the prescribed time period.
To generate income: Microfinance loans are given only to low income groups and small businesses, so the main aim is to generate income for the poor people of the underdeveloped parts of Nepal so that they can work smoothly.

Functions of microfinance

Provide micro loans: Microfinance provides unsecured loans to unemployed or low income individuals or groups who otherwise would have no access to financial services. It plays an important role in raising the living standard of poor people by providing loans.
Contribution to the social sector: Microfinance institutions provide services not only financially but also socially by mobilizing capital into rural areas. This contributes to the improvement of the poverty rate of Nepal and helps rural and poor people by creating entrepreneurs and uplifting women.
Reduce poverty: Microfinance helps poor people increase their income, saving, and standard of living, and is thus able to reduce the poverty of individuals.
Encourage saving: Microfinance develops the habit of saving among citizens and also encourages the saved money to be invested in productive sectors.
Micro insurance: Financial management to protect low income people against specific perils in exchange for regular premium payments, in proportion to the likelihood and cost of the risk involved.
Improvement of economic condition: Microfinance plays an important role in the economic development of the people, society, and the nation as a whole, helping people in various professions and businesses improve their economic condition.