
Microfinance, also known as microcredit or microloan, is a financial service that offers loans to low-income individuals, groups or entrepreneurs and small business owners who don’t have access to traditional sources of capital, like banks or investors.
The main objective of micro-finance is to providing start ups with money to support their businesses, especially those with poor credit. The average microloan is anywhere $35,000 to $50,000, as stated by SBA.
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Benefits of Microfinance
According to an estimation by the World Bank, more than 500 millionย people have benefited from microfinance directly or indirectly. Inย addition, the IFC has assisted developing nations in the improving creditย reporting bureaus in 30 nations, and advocated in adding relevant lawsย with regards to financial activities in 33 countries.
Furthermore, the benefits of microfinance extend beyond providing aย source of finance for businesses to grow. It also creates jobs and actsย as a source of over all economic improvement and market growth.ย Empowering women in particular, as many MFIs do, leads to moreย stability and prosperity for families.
Self-Sufficiency
Entrepreneurs might have a successful business plan but lack adequateย funds to start a business or run the start up in the beginning.ย Microfinance, in such cases, provides enough funding for the businessย to take off and generate revenue. The loan can be eventually paid offย with the business profits.
Access to Funding
The underprivileged entrepreneurs obtain financial assistance by takingย credits from acquaintances which might turn out to be expensive. Sinceย financial bodies, such as banks, do not approve underprivilegedย customerโs loans considering their business history or bad credit history,ย micro-finance foundations make it simpler and easier to take a smallย loan.
Risk Management
Microfinance can give a small business enough capital stability, whichย gives them financial security from sudden monetary problems. Howย much risk is there with a $1000 loan? This small level of working capitalย is sustainable because itโs essentially a forgettable amount. If there is aย default on that money, the interest and high repayment rates of otherย microloans will make up for it. Then repayments are reinvested intoย communities so that the benefits of microfinance can be continuallyย enhanced. Each repayment becomes the foundation of anotherย potential loan.
Creating Employment
Microfinance helps businesses to create new employment opportunitiesย that can benefit the overall economy. The more people work the moreย revenue is generated. More than 21,000 people are employed byย Grameen Bank, using financial products related to microfinance, inย Bangladesh. The company has created thousands of jobs to helpย unfortunate individuals come out of poverty.
Empowers Women
Microcredit empowers women since they are the major beneficiaries. Inย the past, women were not able to participate in economic activities.ย Microfinance institutions now provide women with the capital theyย require to start business projects. This gives them more confidence andย allows them to participate in decision making, thereby encouragingย gender equality.
Encourages Savings
When the basic needs of individuals or businesses are met, the left overย amount naturally goes to savings for emergencies. These savingsย creates the possibility of future investments and help in generating moreย income. There has been an unprecedented amount of savings noted byย some microfinance institutions as a result of business extension.ย According the Unit Desai of Bank Rakyat Indonesia, 28 million saversย have been counted to just 3 million microloan borrowers.
According to Investopedia, many microlenders allow borrowers to workย together to repay their loans, helping each other when needed. Thisย holds borrowers more accountable for their repayments, which in turnย leads to better credit and sets them off on the right foot.
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