Microfinance, is mostly known as a financing model for, and used by, budding entrepreneurs and small businesses in third world nations. What’s interesting is it’s popularity is spreading and it’s now likely to be available in town or region near you. Microfinance has it’s roots in places like Africa, India etc and it’s helped people with its model providing start up capital to poor entrepreneurs and small businesses for years. Women in particular have been the beneficiaries of these loans and with the funds they have responsibly used them to create micro enterprises which provide an income to feed their family and in some cases their success also supports their community. So what is Microfinance?
Traditionally MFLs (Microfinance lenders) provide small loans to business people; particularly women in areas where they can not secure funds from traditional lenders like banks, and the loans are small enough repayment within a short timeframe is achievable. The lending requirements are usually considered fair and the loan can be co-guaranteed each other people, eliminating the need for collateral as security which is a typical requirement for secured loan. The speed of the transaction attracts borrowers and lenders who are people like us. Small investors looking for a good rate of interest and the feel good of seeing what is achieved by lending small sums to peers or budding businesses in poorer nations.
Savings are encouraged
Microfinance is also not just about borrowing money and starting a business. It is also about becoming education so the borrower is more financially responsible. Borrowers can learn how to save money and how to be wise when determining what to spend their money on. Using banks with good interest rates is also taught to them so that they can grow their money in time with the traditional banks. Business oriented financial education is available too and encouraged so the recipient becomes more financially literate and what they know can be passed on.
Training is also given
This is the most crucial part of microfinance. . A lot of people are interested in starting a business. Sadly, those who are from remote areas in developing countries don’t even have the basic skills such as reading and writing. Hence, they are unable to move ahead. It is not enough to just give them the opportunity to borrow money. They also need training, so they will understand how money makes money when it’s invested sensibly. The training they receive is applicable not only in their business dealings but also in their personal life. They are taught how to make the right decision and use tools to make informed choices.
Microfinance Lenders attract funds from ma and pa investors who love the human and social enterprise aspect their contribution makes. Yes they’re in it to make a profit but it’s more than that. There’s no doubting it provides a ‘feel good’ for investors and as a finance option it is now challenging traditional banks in richer nations. There’s more information on microfinance and how it works from Sharone Perlstein.