Microfinance, also known as “microcredit”, is a method of providing small business owners with capital. These small businesses and individuals often don’t have the traditional financial resources of major institutions. This makes it difficult for them to get loans, investments, and insurance.
Microfinance is a way to provide small business owners and entrepreneurs with loans, credit and access accounts, as well as insurance policies and money transfers.
Microfinance: How it Works
The loans are important because the borrowers do not have to provide collateral. These microloans have high interest rates due to the possibility of default. 1
Microfinance includes microloans and microinsurance. Microfinance Institutions provide small loans to entrepreneurs and business owners to get their businesses started. The majority of the borrowers live in developing countries, and would not be able to obtain a conventional loan. 3
They allow entrepreneurs to have savings accounts with no minimum balance. These accounts allow entrepreneurs to save money without a minimum balance.
Financial Literacy
Some microloans require that the borrower attend training. These courses cover bookkeeping, cash management and other relevant skills. 6
Microfinance has become more prevalent around the globe due to the widespread use of cell phones and wireless Internet. Potential borrowers are able to use their phones as a banking channel.
Why is it important?
Microfinance has a vital role to play in the financial underserved. It provides resources and capital for those who cannot get a checking account, unsecured credit lines, or loans through traditional banks.
These groups would be forced to borrow money or take out payday loans with high interest rates if they did not have access to microfinance. They could also borrow from their family members and friends. Microfinance allows them to invest in their business and in turn, in themselves.
Who benefits from microfinance?
Microfinance is not only beneficial to those living in developed countries, but it can be a valuable resource for those who live in developing nations. Cell phones, for example, are used to provide financial services like microlending in Kenya. 7
8
Women can break the cycle poverty with microfinance. These loans are often as little as $60. A young single mother in Paraguay invested $60 to open an empanada stand. She built her business by repaying the loan, and then taking out bigger loans to purchase a building with attached home and refrigerator for her family.
According to the 2019 Microfinance Barometer, women accounted for 80% of microfinance loans in 2018. According to the 2019 Microfinance Barometer, 65% of all borrowers reside in rural areas. This means that many female microfinance clients live in areas where resources are limited.
Microfinance is growing at a rapid pace. In 2018, there was 139.9 millions microfinance loan borrowers. This amounted to $124 billion. India was the largest borrower, followed by Bangladesh and Vietnam.
Does it Actually Work?
Some experts believe that microfinance may not be working as well as they would like. They even go so far as saying it has lost its purpose.
Some people argue that microfinance makes poverty worse because borrowers are using microloans for basic needs or to fail their businesses, and then they get further in debt.
In South Africa, for example, 94% all microfinance loan funds are spent on consumption. This means that the money is used to buy basic necessities. The borrower isn’t creating new income from the loan. This means that they need to take out a second loan to pay it off. This can lead to a large amount of debt. 11
Other experts, however, say that when microfinance is used correctly, it can be a valuable tool to help those who are financially disadvantaged. The high repayment rate of the industry is also cited as proof.
Microfinance, if used correctly, can be a powerful financial tool.
FAQs (Frequently Asked Questions)
Who are the microfinance lenders?
Microlending institutions are usually nonprofits such as Pacific Community Ventures, based in California, or Grameen Bank, a Bangladeshi institution that won the Nobel Prize for its work. Other government agencies are involved, like the Small Business Administration. Some work in specific countries or communities, while others offer loans to people from all over the world.
How can I obtain a microfinance loan?
The lender that you choose will determine how to obtain a Microloan. You will have to complete a series of steps that include an application, a business plan, and some form of identification. On the websites of lenders, you can find out more about applying for microloans.
