Differences Between Microfinance and Micro Credit

When people or business organizations require money, they go to the banking institutions to apply for loan. Based on their application, eligibility and collateral they get the required loan from the Bank.

But this is not the whole story of getting loans. Most of the loan applications get rejection due to the rigorous eligibility criteria. Only successful and resourceful people or business entities get such financial facilities from the banks and not the common ones.

For the common man, getting loan from a bank is next to impossible. As they cannot comply with the rules and regulations of the banks, they do not even apply for that.

This is where enters the Microfinance Concept. In Microfinance everyone is eligible to get financial services no matter what is their social status. Microfinance Companies (MFIs) mainly serve financial duties to the underprivileged and poor sections of the society.

Microfinance companies have started the concept of Micro loans or Micro Credit. It is similar to the bank loans and requires Microfinance Software for the management of loans. Many of us consider Microfinance and Microcredit as the same. There are many visible differences.

What is Microfinance?:

The Microfinance was started by Mr. Muhammad Yunus of Bangladesh in 1976 with the origination of “Grameen Bank.” It has started to provide services to the poor people and businesses in Bangladesh. It mostly granted loans to the women.

The Grameen Bank of Bangladesh is the perfect example of Microfinance system.

What is Micro Credit? :

Micro credit is just a part of Microfinance business process. The loans that MFIs provide to the poor people can be labeled as “Micro Credit.”

What is not Micro Credit?

There are many other types of services that MFIs offer apart from giving loans. They can accept deposits; create savings opportunity by accepting savings accounts, offers Micro Insurance products and many more. These services are not related to Microcredit even if the same is given by any Microfinance Company.

• The Concept

a. Microfinance is the whole services that MFIs provide. There are many similarities between a Bank and Microfinance institution.

b. Microcredit is the small amount of loan that Microfinance Company provides to the poor individuals and/or organizations.

• The Impact

a. MFIs and Microfinance industry contributes to the economy of the nation. Through this service poverty-stricken individuals and underdeveloped farms get loans, open savings accounts, and get insurance etc. This way, people get the chance to accommodate their basic financial requirements and improve their overall livelihood. It helps small and unorganized businesses and companies to get loans to run and manage their business. In this fashion, those farms can generate more employments that ultimately contribute to the nation’s economic development.

b. Micro credits contribute to develop the economy of the needy people, women, and farms. To take Microloan people don’t have to go through rigorous processes, so that everyone can afford it. Microloans come with small amount of debt and easy repayment options. Hence, people get to fulfill their essential monetary necessity and betterment of their livelihoods. Women can become entrepreneurs of businesses. Thus, microcredit helps to eliminate gender inequality scenario from the society.

• Software Usage

a. Microfinance Companies relies heavily on the utilization of Microfinance Software. It is similar to the general core banking system where MFIs can look after the whole Microfinance business related operations like opening and management of accounts, loan origination, maintenance and repayment, micro insurance and many more.

b. Microloan process can be managed with any loan management software. Just need to make sure it complies with the microloan terms.

In broader sense there is no comparison between Microfinance and Microcredit. One is the full system (microfinance) and the other is the subsystem (microcredit). Microcredit is complementing the Microfinance scenario.