The Microfinance global market was valued to be at US $178.84 billion during the COVID-19 crisis during the year 2020. As of 2022, the current market value has increased to US $207 billion and is estimated to reach US $394.8 billion by the year 2028 with an expansion of 13.8% in CAGR. However, the Microfinance market in the U.S. was valued at US $43 billion in the year 2020.
Over 27% of the Global Microfinance Market is accounted for by the United States according to the latest reports while China was expected to grow at a rapid 18.1% CAGR for the period of 2020-2027. Japan and Canada on the other hand are forecast to grow at 9.7 CAGR in the same period of time. While Europe and Germany both are expected to grow by 10.9% CAGR approximately. Microfinance has also heavily impacted fostering responsible finance in Myanmar’s infant industry, for example.
What is Microfinance?
Microfinance is a type of lending where businesses and individuals can borrow small-scale loans when they do not have access to traditional financial services. These banking services are targeted toward low-income individuals or small-scale businesses and startups. The objective of microfinance is to allow small business owners or individuals suffering from poverty to being able to ask for financial aid and successfully receive it.
Microfinance employs microcredit as its provision for its target audience and uses it as the heart and science of client assessment for its banking services. Microfinance is designed for people who happen to have little to no access to commercial and traditional banking services.
Further, microfinance institutions provide sustainable and inclusive banking services with their small loan structure. This helps people who are excluded from commercial and traditional banking services to get access to credit services that they wouldn’t be able to otherwise. These microloans are further used to open small businesses or fund and maintain existing ones. Microloans also heavily and positively impacts affordable housing, healthcare, and education by giving people access to microcredit, microinsurance, and other forms of financial services.
Importantly, microfinance as a concept also includes but isn’t limited to consumer loans, microinsurance, savings and checking accounts, payment systems, and more. Some benefits of microfinance and microlending include access to credit cards and other financial services that you otherwise would be excluded from due to various reasons like your credit history or employment history.
Microfinance also gives you the ability to start your own business or you can even expand, invest, or fund your own existing small business or businesses. However, it’s wise to remember that microfinance too just like any other lending service like commercial lending services has its disadvantages. Some of these disadvantages include very high-interest rates compared to other lending services and high risks of over-indebtedness.
How Does Microfinance Impact Us?
In point of fact, microfinance heavily impacts our society as its a subset of impact investing which means it has the agency to help our society in a positive way. The microfinance industry has garnered massive amounts of support and has a large appeal because of its potential to reduce or alleviate poverty by a huge margin for millions of people. This can also help millions of people all around the world to make their standard of living much better and more convenient. Microfinance plays a major role in stimulating local and small-scale economies and generating jobs for the public.
Approaches toward implementing microfinance in financially backward areas have shown successful results. The approaches have positively impacted the lives of low-income and unemployed or poor people by a huge margin. Additionally, it has also helped consciousness a stimulate societal change in areas of education and health.
Affordable and cheap housing is another societal aspect that can improve and benefit a lot from microfinancing. Microfinance also allows individuals and especially empowers women to raise private capital and invest leading to more stable interpersonal relationships. Microfinance’s success with nonfinancial returns is also a reason why impact investors learn from microfinance and its beneficial aspects from all sides.
Current State of Microfinance
The global microfinance market is currently growing at a CAGR of 14.8% and is forecasted to keep growing at the same rate for the period of 2020-2026. The microfinance industry in the United States, on the other hand, happens to be in a budding or nascent microcredit stage. The U.S. market is populated almost to the point of saturation with institutions providing microfinance services. These services are typically non-profit, non-depository, and credit-only criteria. There are various propositions regarding microfinance, its current course, and where it is headed.
For example, the formation of a regulatory system hyper-focused and dedicated only to microfinance and its aspects can help bring an opportunity to grow into a potential financial structure. The ratio of financially unstable and excluded from financial provisions and services individuals in the United States is comparatively way lower than in developing countries like Peru, China, or Bangladesh. The microfinance industry in these countries has thrived and expanded rapidly.
Benefits of Microfinance
Microfinance is a subset of one of the three social investments i.e.; impact investing. This allows microfinance to be an integral part of positive impacts on society. This means Microfinance has many benefits which can prove to be majorly advantageous for local economies and those who need its services. Some of these benefits include enhancing comfortability and quality of life by making use of provisions targeted towards lower-income individuals and communities.
These services ensure inclusivity and sustainability for financially excluded or economically disadvantaged people. Microfinance can act as a protective barrier when it comes to any type of economic crisis by providing a level of resiliency to people. This allows economically disadvantaged people to better provide for their personal needs and family.
Microfinance runs on microcredit; this provides people to get access to credit which wouldn’t be possible otherwise. Commercial banking services have strict credit rules and only allow credit and its services to be accessed by those with a legitimate and positive credit history. Microfinance benefits us in various other ways by allowing individuals and small businesses to gather enough funds and help financially empower them. This further helps in spreading more education about microfinance and the numerous ways it can impact our lives positively.
Besides that, microfinance helps in generating new job opportunities and creates employment opportunities within a community by providing individual capital and allowing people to start their own businesses. This creates a chain reaction where small business owners or entrepreneurs have the opportunity to create a successful business and in turn generate employment by creating jobs, trading and additionally helping not just individuals but entire communities of people with overall societal and economic development.
Current Trends in the Microfinance Industry
According to recent studies, the global microfinance market is expected to flow and progress at a considerable rate through the forecasted period. The forecast period is from 2023 to 2028. As of 2023, the market is progressing at a stable rate as factors like the adoption and implementation of innovative and unique strategies by investors and key players are at play. These factors make it more likely for a stable and beneficial increase in the microfinance market in the near future.
As a matter of fact, the recent success of microfinance has led to a series of chain events like the downsizing of commercial banks, an increase in the number of partnerships, an increase in the amount of local currency and its deposits, and the birth of commercial microfinance. Microfinance as a tool to fight corruption is something that we can clearly see as a rising trend in the global microfinance market.
Criticisms of Microfinance
Microfinance like any other financial structure has multiple different downsides to it. Regardless of its positive impact on societal issues like housing and healthcare, microfinance still has its cons. Some of these cons include but aren’t limited to micro debt. Micro Debt is considered the dark side of microfinance.
Microfinance and its provisions can expose a community to external debt and make them prone to over-indebtedness. The target audience of microfinance is low-income individuals and small-scale businesses who often lack the incentive to generate enough funding to pay off these loans which can trigger an unhealthy dependence.
Likewise, microfinance is infamous for its tendency to have high-interest rates on its loans and other banking services. This further enables over-indebtedness. Microfinance is targeted toward financially unstable or poor people and happens to have significantly higher interest rates than commercial banks which are typically targeted toward people belonging to the middle class or higher class range. Microcredit usually isn’t functional amongst poor people and rarely ever reaches its actual target audience.
Frequently Asked Questions
Q1. What are some criticisms of microfinance?
Microfinance has very high risks of over-indebtedness due to its tendency to have very high-interest rates. As microfinance is heavily focused on low-income individuals and poor people, it can act as a stimulus toward unhealthy dependence. This can negatively impact any community by shattering its local economy.
Q.2 What is the difference between microfinance and a bank?
The biggest difference between a bank and a microfinance is the existence of collateral. While microfinance focuses on lending to people money who have severely low income or are in an extremely unstable financial state, banks on the other hand offer their lending services to anyone that can pledge their assets or have collateral in return for monetary aid. Microfinance is small business and individual focused and thus provides money to needy individuals who might not have access to much more conventional methods of lending services.
Q3. What is the problem with microfinance?
Microfinance has its pros and cons and most of those cons come from challenges that currently lack any solution. Some of these challenges include constantly changing government policies, a constant lack of requisite individual capital, numerous socio-cultural misconceptions, a lack of proper infrastructure to host these services to those in need, etc. Due to microfinance’s approach of harsh repayment methods and higher interest rates, it can result in failure in local communities and financially poor individuals in need.
Microfinance is a growing industry. It is rapidly growing as one of the most successful forms of financial structures in developing countries like Bangladesh, Peru, China, etc. However, it’s still in the budding stage when it comes to developed countries like the United States where the ratio or percentage of poverty struck individuals is comparatively way lower than that of those in developing countries.
Due to this huge difference in the ratio of poor people, microfinance has thrived and grown exponentially in numerous parts of the world. In saying so it’s wise to remember just like any other financial structure or banking service, microfinance too has multiple downsides which can be the make-it or break-it factor for a significant amount of people.
Furthermore, microfinance and its services like microlending and microinsurance can have very high-interest rates which can easily lead any low-income individual prone to over-indebtedness. Microfinance exposes local economies to external debt and can prove to be a failure fundamentally.
Although, this does not mean that these downsides are also there to microfinance as there are tons of benefits that can be worth the risks like microfinance’s role in asset-based financing and flexible repayment schedule to better serve Africa’s smallholder farmers, for example, have brought significant societal impact.
- 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.