Top 10 things to know about Microfinance

Microfinance, the technique of providing financial services to impoverished populations, was pioneered in the 1970s and is currently utilized globally. Here are ten things you should know about microfinance, and microfinance bank loans regardless of whether you're familiar with the idea or simply want more details. 

1. Individuals who have been shut out of regular banking environments can now access financial services through microfinance.

Over 1.7 billion individuals worldwide—or 31% of adults—are regarded as "unbanked," which means they lack access to credit lines, savings accounts, or bank accounts. People who were previously financially excluded now have greater prospects for stability and prosperity because of microfinance's opening of financial services channels.

2. Loans are only one aspect of microfinance.

Microloans are typically the first thing that comes to mind when someone thinks of microfinance. 

Although many people start with small loans to pay their schooling or purchase supplies for their businesses, microfinance can also include a range of other services: Insurance products enable customers to reduce risks, while savings accounts give business owners or individuals a secure location to keep their money while earning a little income. Payment services, fund transfers, and deposits are additional resources that can support improved financial well-being.

3. Microfinance expands personal agency potential.

People can progress toward financial independence by having access to small loans, business training, and other financial services, which empowers them to make financial decisions that will benefit their families and their future. Microfinance encourages self-reliance among vulnerable groups, such as women, refugees, and minority ethnic groups.

4. Repayment rates for microloans are extremely high.

Even though microloans are frequently given to people who traditional financial institutions consider to be "risky" due to their lack of collateral, high income, or credit history, the repayment rates for these loans are extremely high.

5. MFIs have substantial operating costs.

Providing microfinance services requires a lot of work, which is primarily done by microfinance institutions (MFIs). These are the local organizations that disburse loans, collect repayments, train people in financial literacy, gather borrower feedback, and more. 

Due in part to the fact that many MFIs serve customers in rural regions and frequently combine education and other financial services during their weekly visits, it is far more costly to distribute numerous small loans rather than one big loan.

6. Interest is charged by many microfinance organizations.

Interest on loans is a common way for MFIs to pay for their overhead. In contrast to the informal market of supplier credit and loan sharks, these interest rates are low, even though they may be exorbitant by formal sector norms. This indicates that incentives for lenders and microfinance target borrowers align.

MFI costs are also increased by factors like inflation and internal disputes. The monthly cash flow of a household is commonly used to determine the loan amount, which has the benefit of separating loan performance from any one activity that working poor households often handle. It also aids in avoiding excessive debt.

7. Microloans have the potential to enhance livelihoods and raise incomes.

The measurement of microlending's impact by the actual borrowers. Increased sense of security and higher energy cost savings, as demonstrated by borrowers who used their loans to purchase more energy-efficient BURN cookstoves, are further indicators of positive impact.

8. Microfinance is still expanding.

The need for microlending keeps growing. In 2018, over 140 million borrowers received microloans, with women accounting for 80% of these loans. It is anticipated that the microfinance market will surpass USD $300 billion by 2026, with global funding for microfinance reaching USD $60 billion in 2020.

9. Systemic problems require further attention.

Although microfinance was first hailed as the answer to world poverty, it is only one tactic to increase access and economic opportunity. Numerous individuals in developing and  developed countries deal with issues like social and gender inequality, inadequate public infrastructure, and a lack of health and educational resources that perpetuate systemic poverty. 

Microfinance has the potential to increase people's ability to increase their incomes and enhance their quality of life by fostering financial inclusion and capital access in local communities.

10. People's lives are significantly impacted by microfinance.

Microfinance has enabled millions of individuals to take advantage of possibilities that they might not have otherwise had, from assisting farmers in increasing their yield and providing funds for girls' college educations to assisting female entrepreneurs and facilitating the establishment of businesses by refugees in new countries. 

MFIs offer loans to improve communities' access to clean drinking water, reduce the gender gap in entrepreneurship, and enhance overall quality of life. Access to business training, financial transfers, and savings accounts can transform a tiny firm into a flourishing enterprise that generates employment for others. The goal of microfinance, which is to promote good change through financial inclusion, continues to have an impact on millions, if not billions, of people worldwide.

Bottom Line

Which lender you choose will determine your microloan. Generally speaking, the process will require you to submit documents like an application, a business proposal, and proof of identity. The websites of lenders provide information on how to apply for a microloan, such as JS Bank which offers microfinance loans.