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Introduction: Microfinance is a service for poor people that are unemployed, entrepreneurs or framers who cannot have banking

services due to lack of collateral, steady employment, income and a verifiable credit history. They cannot even meet the minimal qualifications for an ordinary credit. Microfinance provides credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks since they are unable to offer sufficient collateral. It is an innovation for developing countries. By helping people with micro credits it gives them more available choices and opportunities with a reduced risk. It has successfully enabled poor people to start their own business generating or sustain an income and often begin to build up wealth and exit poverty. The amount of money that is lended out seldom exceeds 100USD. Microfinance is the best program for the poor people with entrepreneurial capability and possibility who work in growing economies, and who can undertake activities that generate weekly stable incomes. Microfinance institution have special safety programs for extreme poor like destitute and homeless that offer basic subsistence and later endeavors to graduate this members in their microfinance program making ordinary micro credits available. Microfinance plays an important role in fighting the multi-dimensional aspects of poverty. Microfinance increases household income, which leads to attendant benefits such as increased food security, the building of assets, and an increased likelihood of educating ones children. Microfinance is also a means for self-empowerment. It enables the poor to make changes when they increase income, become business owners and reduce their vulnerability to external shocks like illness, weather and more. Microfinance holds a big promise to generate income and employment and alleviate poverty in developing countries. This can have positive social effects at different levels of society, from the personal to the community & regional level. Microfinance is not the solution to all the problems in developing countries, but should be focused on economically active poor, who can afford to borrow and repay money as part of their normal budget and who are not living in an emergency situation. Nowadays the mainstream finance industry is counting the microfinance projects as a source of growth. The success of microfinance was almost neglected by everyone in the beginning of the 1970s when pilot projects such as ACCION where released until the United Nations declared 2005 the International Year of Microcredit. When Muhammad Yunus, an economics professor at a Bangladesh university, started making small loans to local villagers in the 1970s, it

was unclear where the idea would go. Today, Muhammad Yunus is recognized as a visionary in a movement that has spread globally, claiming over 65 million customers at the end of 2002. They are served by microfinance institutions that are providing small loans without collateral, collecting deposits, and, increasingly, selling insurance, all to customers who had been written off by commercial banks as being unprofitable. Advocates see the changes as a revolution in thinking about poverty reduction and social change, and not just a banking movement. Microfinance successes force economists to rethink assumptions about how poor households save and build assets, and how institutions can overcome market failures. Social Impact of Microfinance on poverty reduction: Social impact can be categorized according to three levels: the personal, the community and the regional level. Different types of social impact at different levels have been observed in past social impact studies: 1) Personal/Household level At this level the following effects can take place: Empowerment of women, who are often, preferred clients of MFIs. This can lead to a higher social status, better education and more independence of women, all factors that have been shown to contribute positively to a more sustainable development of whole regions. Better education and further development of MFI clients, as MFIs often support them in acquiring basic skills and financial knowledge. Ability to cope with economic shocks (e.g. loss of an important family member, natural catastrophes etc.), by means of savings, credit, micro insurance products. Higher income in general leads to better access to education, healthcare, sanitary infrastructure, food supply etc. 2) Local community level Creation of jobs. Higher quality of jobs (i.e. labour conditions, productivity, skills base, empowerment). Higher and more stable income of the community as a whole, making it more resilient to external shocks. In the context of savings/credit groups, members start educating and helping each other. This can support the cohesiveness of a community. At the same time, access to financial services can trigger

entrepreneurship members.

and a healthy competition

among community

Entrepreneurship usually leads to increased trade with neighbouring communities and regions, in turn improving the economic base and resilience of the community. 3) Regional level Creation of jobs at the regional level. Strengthening of the microentreprise sector which in many developing countries represents the back-bone of the economy, providing up to three quarters of jobs. The provision of financial services to rural areas supports income and employment generation in those areas. This in turn mitigates the pressure on the environment and natural resources, and can help to reduce migration flows to urban areas. Strengthening of the financial sector as a whole, widening its scope and outreach. Microfinance in South Asia: In South Asia the concept of cooperative movement was first initiated through Cooperative Credit Societies Act of 1904 to reach out those poor people who were otherwise excluded by the formal financial system. Later in 1970 the first attempt was made to launch Microfinance. For the first time, a substantial proportion of the lowincome families of a major developing country were served by the activity. In South Asia modern microfinance effectively started during a time in which poverty was extensively examined, it was perhaps inevitable that the growth of microfinance would be rooted in the poverty discourse. Most South Asian countries have a reasonable banking system in urban areas though majority of these populations live in rural areas, the access of rural populations to formal financial services remains limited. By 2005, microfinance covered at least 35 million of some 270 million families in the region and met around 15 percent of the overall credit requirements of low-income families. The six countries can be classified into high (Bangladesh and Sri Lanka), medium (Nepal and increasingly India), and low (Pakistan and Afghanistan) coverage levels.

Country Afghanista n Banglades h India Nepal Pakistan Sri Lanka

Microfinan ce Gross loan Number Institution portfolio borrowers s 15 28 88 18 23 13 109,432,729 2,347,258,316 4,612,955,370 97,493,518 210,054,683 269,764,092 295,044 20,571,831 26,629,123 586,952 1,449,452 911,029