Microfinance and commercial banks are two major forms of financial services that are provided to the public. They play an important role in economic development by giving people access to capital that they can use to improve their lives.
One of the main differences between microfinance and commercial banks is their target market. Microfinance targets low-income people who often do not have access to credit from commercial banks. These people may include small traders, farmers, the unemployed and housewives. Commercial banks, on the other hand, cater to a wide range of customers including high-income people, businesses and organizations.
Type of loans
Microfinance organizations usually provide small loans for a short period of time that are used to finance small businesses or personal needs. These loans can be used to purchase goods and services, expand a business, or cover current expenses. Commercial banks offer a wide range of loans, from large home or car loans to small loans for consumer goods.
Microfinance organizations usually charge higher interest rates than commercial banks. This is because they carry a higher risk when lending to low-income people. Low-income people often have unstable incomes and may be more prone to default on loans.
Microfinance organizations are regulated by various authorities, including the Central Bank and financial services supervisors. Commercial banks are also regulated by various authorities, but they are usually subject to stricter regulation than microfinance organizations. This is because commercial banks have a higher risk and can have a greater impact on the economy in the event of bankruptcy.
Microfinance organizations usually offer a limited set of financial services such as lending and savings. Commercial banks, on the other hand, offer a wide range of financial services including lending, savings, insurance and investment banking.
In addition to the main differences listed above, there are other differences between microfinance and commercial banks. For example, microfinance organizations often use group lending techniques in which group members act as guarantors for each other. This helps reduce risk for microfinance organizations and makes loans more accessible to low-income people. Commercial banks do not usually use group lending techniques.
Microfinance and commercial banks play an important role in providing financial services to the public. They have different target markets, offer different types of services and are regulated by different authorities. However, they both play an important role in developing the economy and improving people's standard of living.