Processing Knowledge

The dark clouds of tough times have always laid the seeds of innovation. A classical example is the drought of 1974 that laid the foundation of Microfinance. In the past the only source of income for the poor were the pawnbrokers and money lenders. The absence collaterals have forced the poor to borrow from relatives and local money lenders. This type of borrowing coupled with information asymmetry and the greed of the lenders is a source of malice in poor nations. Many economists consider microfinance as one of the most worthy solutions for the above problems. Further, the economic benefits of microfinance has been highlighted by many financial analysts.

How microfinance works:

The wikipedia entry on microfinance is nice read. The following diagram from the wikipedia entry gives a comprehensive summary of the various goals achieved by a family of microfinance products ranging from insurance plans to long term loans.
Why is it attractive?

According to KPOs such as S.G Analytics, currently about 250 million people in India which includes small and marginal farmers need about 52 billion USD worth of microfinance credit.  Further the customer base  covered by microfinance is growing at a Compounded Annual Growth Rate (CAGR) of about 43%. These numbers need to be taken with a pinch of salt due to the absence of regulations and regulatory rules in the microfinance sector. Lately a couple of microfinance firms have plans to raise more than Rs 300 crores.
A wolf in sheeps clothing:

The greed of some microfinance firms is clearly reflected in their huge interest rates, as a result of which microfinance appears to be a camouflage for the pawn brokers.