Microfinance institutions (MFIs) were developed to provide smaller credit facilities than larger financial institutions like banks. This is because, most times, individuals with lesser economic means cannot meet the criteria of these other institutions. These people sometimes have no access to banking institutions due to their location.
As the name implies, microfinance institutions’ funding is generally smaller than big banks and other high-interest lending platforms. Depending on the institution, one may get a loan of as little as $100 from a microfinance establishment. However, the scope of micro financing goes beyond giving out loans.
Sometimes, these institutions provide other micro services to their customers. They could give micro-savings services allowing low-income earners to save smaller amounts of money without restrictions like minimum account balances or banking charges. They may also provide micro-investment and micro-insurance options.
Importance of Micro financing
Micro financing helps to place small business owners and entrepreneurs with less-than-fortunate financial backgrounds on the map. Instead of turning to mediums that charge high-interest rates that they most likely cannot afford to pay back, people can easily gain access to funds to grow their businesses.
One of the best things about this style of funding is that it offers entrepreneurs a chance to scale their small businesses without worrying about collateral. This peace of mind can lead to newer and better innovations.
No small-scale business is unworthy of these loans; from food vendors to software developers, everyone is deserving of this. Through this funding, the free market becomes more diverse and fairer. Hence, no one is left out or unnoticed.
Global Economic Growth
From a global viewpoint, relevant data and research show that microfinancing lends itself to economic growth. With the development of smartphones, individuals across the globe can gain access to all sorts of resources. One of these resources is a mobile money account (MMA), which helps to grow financial literacy.
Over 1.2 billion people have access to mobile money accounts. In 2020, the number of MMAs worldwide grew by 12.7%. These accounts allow people to be beneficiaries of microloans. Using these same accounts, they can purchase and sell goods to increase incomes in their homes, families, and regions. Furthermore, there is no longer a need to save money at home, which leads to less theft and more wealth.
In Africa, three times as many people use mobile money accounts instead of traditional bank accounts. About 11% of Ugandans use a typical bank account. On the other hand, about 42% use MMAs. During the 2010s, these accounts lifted over 200,000 homes out of poverty through small businesses and strategic funding.
Beneficial to Women and Rural Dwellers
Entrepreneurs make up the majority of the workforce in developing countries. However, these people are not grossly impoverished and do not have the means to access capital for their businesses to grow.
Microloans are especially beneficial to women living in rural areas who need upliftment through monetary assistance. Without this system, these people would not be able to access the financing required to enact their business ideas. In 2018 alone, there were over 139 million beneficiaries of microfinancing. Of this multitude, 65% are rural dwellers, and 80% are women.
Most microfinance lenders focus their services primarily on women because they are predisposed to poverty and gender inequality. This financing encourages economic growth and gender equality.
It’s About More Than Money
Many MFIs offer services that go beyond giving out funding. For example, an institution may give a loan, and in return, the recipients must take training courses to improve their business skills and financial literacy.
The beneficiaries can use these skills and knowledge to grow their businesses and increase their income. In addition, institutions offer constant technical support to these clients. So, these individuals can seek help at any time.
Long Term Benefits
The benefits of microfinancing are not only short-term, but they are long-term as well. For instance, a borrower does not necessarily have to start a business with a loan from a microfinance institution. Instead, they can use it as an investment in their future.
With the rise in the adoption of MFIs in developing countries, a large number of people now have access to these loans. Using these loans, they can afford to finance their tuition fee or that of their children. After completing said education, these people can start businesses or even become working professionals.
The System Works
Microfinance loans had a 98% repayment rate pre-pandemic and currently have a rate of 90%. This just goes to show that the system works.
The downtrodden are taking advantage of this system to eradicate poverty in their homes, families, and communities. They use this money to finance their small businesses, make a profit, repay their loans, and repeat the cycle.
While the lower rate might reduce the number of MFIs willing to give out aid, chances are these rates will increase. According to one estimate published by Allied Market Research, microfinancing could be over $496.9 billion by the year 2030.
Also, it is important to note that the lower interest rates of these loans compared to traditional banks allow recipients to repay loans without defaulting.
There’s More Work to be Done – Conclusion
Micro-financing is not perfect; not everyone who receives funding uses it for business. Some use this funding for necessities are forget about the long-term goals of starting a business.
Also, despite the best efforts of microfinancing, over 2 billion people worldwide live outside the banking system. There are about three billion poor individuals, and of that number, only 20% have access to microfinance. Microfinance has grown exponentially in the past few decades, but its reach has not cut across to the target market.
Regardless, the system works, and microfinancing is not only important to small businesses but fundamental to the survival of billions of people around the world.
