Articles

Formal Banks & Micro Finance Institutes (MFIs)

Bank -

An establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.

Read more: http://www.businessdictionary.com/definition/bank.html#ixzz309ZHfcRQ

Micro-finance Institutions:

 A financial institution that provides micro-finance products and services to low-income clients. Commercial banks can be considered MFIs, but MFIs can also be nonprofit organizations and are often not licensed in the same way as banks, so in some cases they cannot legally take deposits or handle many financial transactions.

Read more:  http://www.csa.com/discoveryguides/microfinance/gloss.php

Main differences of Loan services between Formal banks & MFIs

	BANK	MFI
Clients will be	Saving account holders only	Person who has capacity to repay loan / needy communities
Interest rates	Comparatively LOW	Comparatively High
Loan size	High	Low
Guarantors	Formal / Gov guarantors need	Join liability
Securities	Need Mortgage	Not essential
Service Providing	Client has to come to Banks	Door to door services (maximum)
Processing period	Comparatively high	Comparatively Low
Documentation	High	Low
Services	Savings & Loans (max)	Credit Plus services
Alternative cost	High (Generally )	Low (generally)
Main tool for recovery	Formal Delinquency management procedures	Highly keen about Peer pressure & Peer monitoring
Repayment period	High	Low
Eligibility of Poor / below main stream	Low	High

Micro-finance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are: (1) relationship-based banking for individual entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.

In some regions, for example Southern Africa, micro-finance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking.

For some, micro-finance is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."^[1] Many of those who promote microfinance generally believe that such access will help poor people out of poverty, including participants in the Micro-credit Summit Campaign. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

Microfinance is a broad category of services, which includes micro-credit. Microcredit is provision of credit services to poor clients. Micro-credit is one of the aspects of micro-finance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.^[2] Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion.

Link - http://en.wikipedia.org/wiki/Microfinance