Financial cooperation as a low-cost tool for effective microfinancing

Abstract

Microfinance is often associated with provision of such financial services as savings, credit, payment transfers, and insurance, to low income people, so they can level their income, invest in economic opportunities, increase their assets, cope with emergencies, and plan for the future. Microfinance has also proven itself to be an effective tool for reducing the vulnerability marginal social groups.

Although in most European countries there is a well developed and efficient banking sector, many individuals as well as small and micro businesses still has considerable difficulties in obtaining loans for their investments. As seen by traditional financial intermediaries, small scale customers often mean an unfavourable cost/income ratio.

Thus it is necessary to offer micro credits through a type of financial institution that would be able to meet interests of people with small income and possible deposits at the same time covering its own operational costs. There are several operative microfinance models. In Latvia one of the most efficient has proved to be financial cooperation known as Credit unions. A Credit union is a non-profit financial cooperative owned and controlled by its members. It mobilizes savings, provides loans for productive and provident purposes and have membership which is generally based on some common bond. Because credit unions exist to serve their members best rather than to make the biggest profit, the service at a credit union is generally considered superior to that given by banks.