Microfinance is a form of microcredit that provides loans and financial support to various small enterprises and businesses for their growth and development. It has been proved in a study that around 1.6 billion people around the world are unbanked and without essential financial services. Most of the people falling in this group mostly belong to lower-income groups, have lower literacy rates, and are women.
Generally, big corporate companies prefer to spend on the middle-class and wealthier sections of the people, but they overlook the weaker sections of the people where there is a great scope for profit. For making the services more reachable, microcredits are a great way to help the weaker sections of the people with low-income groups and accelerate economic boost.
What is Microcredit?
Microcredit was founded in Bangladesh by a German bank in 1983. Microcredit or microfinance is a type of microloan provided to people with lower income groups or individuals who lack any collateral or a stable job and good credit history. Microcredit is one of the ways to boost economic growth and support small enterprises and businesses. More than 1.5 billion peoples are unable to take loans and start their own businesses, because of illiteracy and paperwork.
For removing this gap, implementing suggestions for increasing poverty outreach, and also finding ways to course correction, microcredit provides small loans and helps them in opening savings accounts. Microcredit can efficiently reduce the conditions of poverty among women. A survey conducted has shown that there are mixed results of satisfaction with microcredit, as many argue that microcredit is not helpful and has put many people in a debt trap.
How Does Microcredit Work?
The idea of microcredit or microfinancing was put forward to assist people from lower-income groups and individuals who lack basic financial services. To enable financial inclusion in various underdeveloped and developed countries, microcredit is a considerable way to elevate the unbanked population. The principle of the microcredit system was based on the traditional barter system without any cash exchanges. Microcredit can help to improve the financial conditions of women by giving small loans to them to start their own businesses.
The range of micro-credit can range from $10 to $200. The microcredit system often differs from the traditional banking system as information regarding microcredit may not be mentioned in the agreement, like information regarding the collateral may be required, which may not be mentioned. As per the agreement, individuals who have borrowed money and repaid their loan within the given time period can apply for loans with larger amounts.
Like any other lenders, microfinance charges specific interest on their loans and has definite repayment terms with payback at regular intervals. BiM money platform in Peru can be an example of a money mobile platform. They keep some part of the borrower’s income in their savings account as their collateral. In case the borrower is unable to repay the loan, then the income is used as insurance. On the other hand, if the borrower repays the debt within the stipulated period, then they can store their funds as additional savings.
Sometimes, in order to ensure that the borrower repays their debt, the lender offers loans to the borrowers in a group, so, for the whole repayment of the loan, the borrower falls under peer pressure and repays the loan. Through quick repayment of the loan, the borrower can gain good credit history. This can help them apply for a loan in the future. In microfinancing, the rate of repayment is often higher than the traditional form, although the peoples applying for microfinancing belongs to the lower-income group.
How Does Microfinancing Help the Company Grow?
Microfinancing is a great way to uplift the economic status of the poor, and conditions of women as highlighted in the adventures in love and credit reporting are imperative to tackle by providing them with various financial services and programs and supporting them with small loans to carry out their businesses. These can help to boost the economic status of the country and help millions of unbanked people or people who are devoid of basic financial services to open their own businesses. Mentioned below are some of the various ways microfinancing helps:
- Microfinancing helps millions of people who have great business ideas but lack funds to carry out their business plans. Hence, microfinancing helps such individuals to take small loans and start their own businesses. With timely repayment of the loan, they become eligible for great loans and improved credit history.
- Individuals who run small-scale businesses sometimes run out of funds for expanding their businesses. In such cases, microfinancing can give small credit to such small-scale enterprises to continue their business and carry out their business.
- Microfinancing is a great way to generate employment opportunities and create more revenue. It can help individuals from remote areas or belonging to low-income groups to open small-scale businesses. It has been reported that microcredit has helped a lot of people in creating jobs that help eradicate poverty.
- Microfinancing can boost the economic status of women. In the past eras, women were pushed behind closed doors for household activities, despite having brilliant business ideas. Microfinancing can help women around the world elevate their status. It can help a lot of women from remote areas to participate in various business opportunities and discussions, and go forward with their ideas.
- Microfinancing helps to save additional cash. When the money from the business is met, the extra money goes to their savings account, it is a very good way to save money for future needs.
What is the Impact of Microcredit?
Microcredit loan is beneficial for the underserved population, but if not used properly by any organization they may not yield any benefit. Just like there are appreciations for microcredit loans, there are critiques as well. We can better understand this with the help of an example.
In South Africa, many microfinancing institutions provided affordable loans in the remotest and poorest communities, where people didn’t have any kind of access to any financial institutions. These loans were aimed at giving employment opportunities to the youth, by developing the small business setup.
However, things didn’t go as planned, and most of the funds were used for consumer spending. The impact of digital field applications is huge. They didn’t develop any kind of business that gave employment opportunities for the long term. This just shows if the funds are not used properly, microcredit loans are not going to be beneficial for society.
At some point in time, micro-credit loan also needs to be repaid back. If you do not spend the funds you received for the sustainable growth of your business, then you will face difficulties in paying back. This has happened with many business owners as they do not plan and spend the money, which sometimes results in selling the business to clear the debt.
In the case of individuals seeking a loan, they should always keep in mind that a micro-credit loan is provided so that they can use that money to make themselves self-sufficient. So always, plan on spending the money on your sustainable growth, like some kind of employment by developing some skills, etc.
Frequently Asked Questions
Q1. What is an example of social investment?
One example of social investing is providing grants and capital to lower-income groups and remote sectors of the economy. It boosts the economy through job creation and stabilizes the cash flow.
Q2. What is a social investment strategy?
Social Investing means granting money for various ecological and environmental causes that boost economic stability by providing jobs in the market for lower-income groups and empowering women for small-scale businesses.
Q3. Why is social investment important?
Social Investing has various economic impacts on society. It helps in controlling crime rates by providing job opportunities, eradicating poverty, and improving health care, education, and energy conservation. It has a great impact on the lives of women and enables them to open small-scale businesses and shops to become self-independent.
Microfinancing is an excellent way to uplift economic status by eliminating poverty and reducing the crime rate of a country, for example, that can help resolve why people aren’t saving money in Mexico and also urge them to save money. It supports various small-scale businesses and enterprises to expand and grow their business successfully.
Microfinancing is a very helpful tool for women as it helps them to open their own businesses and become self-sufficient. Microfinancing can help in a lot of ways by helping to save extra cash in the savings account and helping to increase their credit score and enabling them to take more loans for business expansion.
- Jonas Taylor is a financial expert and experienced writer with a focus on finance news, accounting software, and related topics. He has a talent for explaining complex financial concepts in an accessible way and has published high-quality content in various publications. He is dedicated to delivering valuable information to readers, staying up-to-date with financial news and trends, and sharing his expertise with others.