Microfinance - lending to the poor Essay Example | Topics and Well Written Essays - 1750 words

Microfinance - lending to the poor - Essay Example Due to these stringent measures, small scale businesses and private entrepreneurs are locked from assessing bank finances to support their businesses. The service of lending finances to small scale businesses and private entrepreneurs who cannot access such services from banking and other financial institutions is referred to as microfinance. Banking institutions consider such borrowers as lacking ability to repay loans and the interest (Collins et al. 135). However, microfinance institutions have successfully advanced finances to such borrowers for a long time and have managed to get them out of poverty. Conventionally, banks have ignored small scale clients by failing to grant them loans or accept deposits from them. Providing financial services to small scale customers is an expensive activity because it takes a lot of time to processes numerous but small value loans involving many clients (Collins et al. 155). This is because the same processes undertaken when processing small amount transaction is similar to that which is taken to process a large amount belonging to one large client. Since the same interest rate is charged for both large and small scale clients, banks prefer dealing with large clients in order to save costs involved when dealing with many small scale clients (Yunus 135). The operation cost of processing transactions in the bank remains unchanged regardless of the amount of funds the bank is handling. This is the reason why banks prefer large scale clients who are making large transactions so that they can maximize their revenues. According to Collins et al. (165 ), handling many accounts is costly in terms of data base management. This has discouraged banks from inviting membership from small scale clients so that they can maintain the cost of data base management as small as possible. According to Yunus (137), banks consider lending their finances to small scale