Piggybacking On Microfinance: A Microloan Is For Everyone!!

Most banks and credit unions make accessing credit or other financial services challenging for people with low income. Worry not. If you’re also feeling low on funds and have an imminent expense ahead, avail microfinance. What is microfinance?

Microfinance or microcredit is a banking option to particularly help those low on funds. It’s indeed easy to get loans from the microfinance groups. Their eligibility criteria are always minimal.

Depending on the borrower’s creditworthiness, a microloan may span from $50 to $50,000. If you already feel microfinance is your thing, here are more details you must check before applying for a microloan.

What is Microfinance?

It is as simple as any other banking credit available to the public. However, there are some criteria you must know of. Firstly, these loans are mainly for those who are low on funds. Often, people from lower socioeconomic backgrounds need loans for small-scale needs.

It might be buying a small firm or an agro land. It might also be refurbishing their home or funding their personal needs like Medicare.

Did you know that Wells Fargo charges you $10 every day unless you maintain a $500 minimum daily? Yes, that’s true for them and most other banks in the same range. Now the question is where will the people unable to maintain that kind of funds go?

Microfinance is a one-stop solution for them. These microfinance banks offer traditional banking services ranging from savings A/C to personal loans. Meanwhile, there are small-scale checking accounts, microinsurance, and other things.

Contributions of Muhammad Yunus and Grameen Bank

Speaking of microfinance, we can’t disown the contributions of Muhammad Yunus from Bangladesh. He pioneered the process in a country where 18.7% of the population is still below the poverty line.

At the same time, most people in the country have lived with an unorganized economy. Hence, it was next to impossible to implement banking and finance in a financially unstable country like this, with only a few organized industrial sectors.

What Muhammad Yunus did was lend out a small amount without collaterals. But he chose people with a purpose. His scheme went out to people who wanted to change their financial status and had an idea awaiting funding.

That’s why the recovery rate of Muhammad Yunus’ Grameen Bank was exceptional. Meanwhile, The Grameen Bank also leveraged giving loans to women.

Yunus, a Nobel Peace Prize winner, noticed that women were much a lot of artisanal work that could flourish if done on an organized scale. And that is what happened. The prosperity in tier 3 and rural sectors of Bangladesh after the 1990s can be attributed to Muhammad Yunus’ microfinance strategy.

It is the same strategy that is followed worldwide today.

Key Features of Microfinance

Microfinance is for the low-income individuals, the unemployed, homemakers, etc. It is a token to start a new business or seek self-employment. So, people usually use microloans to make more money. In this way, Microfinance has been leveraging a stronger economy wherever it has been successfully implemented.

Microfinance institutions give loans to people living on $2 a day. The reaso being- however small their income, a disposable amount (anything) is always a window for saving. Meanwhile, this mammoth population cannot access traditional banking services like credit, insurance, etc.

Unable to avail themselves of banking services, they often turn to loan sharks, friends, family, and others. Hence becoming bootstrapped.

Group Lending Models and Social Collateral

In microfinance, group lending has been a commonly followed model. There are two such models. These are collective or cooperative lending and relationship-based banking.

In relationship-based banking, minuscule entrepreneurs and businesses get loans quickly. However, group loans are based on social collateral.

If you don’t know what social collateral is, know it is no formal concept. Instead, it is the art of using social networks and social goodwill to screen, monitor, and reinforce loan repayments.

Flexible and Small-Scale Loan Products

Microfinance organizations support a wide range of financial products. It ranges from basic activities like opening savings A/C against $0 MIB, offering small-scale start-up capital loans, and running educational campaigns to teach people microfinance investment skills.

But how flexible are the small-scale finance programs? That’s easy. Firstly, these microfinance institutions don’t always rely on collateral for loan recovery. Instead, they work with entrepreneurs with a hands-on approach to ensure that they do good and can repay the loan.

Objectives of Microfinance

Microfinance is not done from a bare profit perspective. While any bank can’t sustain without profit making, it is also true that microfinance systems run based on a circular economy.

Mostly, when the borrowers take loans, they are not in a position to repay. However, they start a new business or venture or do some artisanal start-up to ensure they are economically stable and have a surplus within the payback period.

In the large arc of microfinance, these are some of the main reasons why banks give loan small scale loans:

• Promoting Economic Development
• Supporting Entrepreneurship and Small Businesses
• Reducing Poverty in Rural and Underserved Areas
• Empowering Women and Marginalized Groups

How Does Microfinance Work?

Microfinance is taking microloans. Then, repaying the amount to retake a loan. I found a real-life example that can explain how microfinance works. Peter is a Kenyan maize farmer. He took a loan of $125 from Apollo Agriculture, a cooperative that the Kiva Bank runs.

Apollo aims to help farmers improve their production through modern farming means and effective farming aids, which they can’t buy independently. When the production is higher, the farmers’ share of profits also increases. Hence, they have no issues paying back the loan amount.

Peter purchased and planted high-yielding seeds with the loan money. He also refinanced the loan and invested in farming on a larger scale.

The following story is Catherine’s. She owns a small cereal company in Rwanda. She bought grains in small amounts from 3500 different farmers. Then she channels the same and sells to supermarkets.

With a small loan of $35,475, she bought a tractor. It helped her to collect more grain and convey the benefit to more farmers.

These are not the only ways microfinance works. But these examples will give you an idea of how the magic happens!

Not all microfinance institutions work like classic banks. Often, they start as nonprofits to boost the local economy. They emerge into full-fledged banks when they have enough customers to afford financial credit.

Often microfinance institutions are NGOs, who also work on the same model. Then there are specialized banks like Northrim Bank, Relyance Bank, or Grameen Bank.

Advantages of Microfinance

Microfinance is a redressal for many small-scale operators who don’t get help from conventional banks. On that note, microfinance groups boost individual and community economies in many ways. These are:

• Bridging the Gap for Financial Inclusion
• Promoting Self-Reliance Among Borrowers
• Encouraging Entrepreneurship and Job Creation
• Supporting Community Development

Challenges and Criticisms of Microfinance

Working with a small-scale economy is highly risk-prone. Firstly, the rate of returning profit is very low. At the same time, the profit cycle is too low as many borrowers only pay back the principal, and some barely pay interest.

Microfinance has been globally known since the 70s. Since then, some of the common issues that small finance banks have faced are:

• High Interest Rates and Over-Indebtedness
• Limited Access in Remote Regions
• Dependence on External Funding
• Ethical Concerns and Impact on Vulnerable Communities

Mobile Banking and Digital Lending Platforms

Need convenient, easy, and affordable loan processing? You can shift to digital personal loan. Did you know that microfinance also runs on the digital banking process. Let’s start if you have a smartphone and a net banking A/C.

Firstly, I will discuss software for microfinance and allied platforms like Velmie. These apps offer loans digitally. Enter your documents and apply for the scheme you want. Brands like KMPG are leveraging microloans through AI apps.

Similarly, other small finance companies are also going digital. The best part is that your digital loan can be validated within an hour. The first step is ID verification and authentication from a selfie and uploaded docs. Then the next step is selecting the scheme you like. The final step is the bank’s AI validating your creditworthiness and making an offer.

Differences Between Microfinance and Traditional Banking

The microfinance companies and traditional banks differ in their approach.

Accessibility for Low-Income Populations is the policy on which microfinance companies run. However, traditional banks give out loans to borrowers with fair credit scores. While bigger banks like the Bank of America offer a minimum loan of $25,000, microfinance banks provide as low as $50.

The bottom line is that small-scale banks focus on Smaller Loan Amounts. At the same time, Social Collateral vs. Traditional Collateral is another divide we must discuss. Conventional banks take in assets as collaterals. However, small banks use pursual and another hands-on approach like joint entrepreneurship with borrowers to ensure they can quickly repay. 

Microfinance vs. Microcredit

Microfinance banks work on both. However, these two are two explicit models. Microcredit is a loan from small artisanal businesspeople and entrepreneurs to grow a business.

Your Financial goal setting can enjoy a takeoff, with microfinance around. Mostly, microcredit loans have short repayment tenure. So, pay back and refinance your loan quickly.

Most importantly, microcredit loans are always unsecure.

Microfinance is the broad arc of a range of financial services. However, the analogy with microcredit is it is also dedicated to low-income individuals and groups.

The microloans come with an APR of 8 to 13% in the US. But you won’t be eligible for the loan if you have a fixed income security.

Impact of Microfinance on Global Development

Globally, the market for small businesses and minuscule retailers is quite vast. This year, the microfinance market has reached a valuation of $215.51 billion. Of course, this growth is supporting SME expansion. At the same time, microfinance can support other goals like:

• Supporting the UN Sustainable Development Goals (SDGs)
• Reducing Poverty and Promoting Gender Equality
• Enhancing Local Economies

Conclusion

Microfinance is a genuine option for low-income individuals. There are hordes of people who don’t have access to conventional banking services. Most small finance schemes aim to help the impoverished become self-sufficient. You may borrow as low as $50 from microfinance institutions.

But I would like to mention one thing in an ending note. The interest rate (8 to 13%) is slightly above par if you target the financially impoverished segment. Banks should try and keep their profit motives at bay.