Microfinance for Dummies

by | Feb 25, 2021

The world is a prominent place. However, people still lack access to essential financial services in many parts of the world. The financially marginalized population needs to be aided with financial help even if they do not have any collateral.

It is Microfinance that bridges the gap between the dreams of marginalized humans and financial accessibility.  

Microfinance is the most unloved part of the financial system.

How does micro-financing work?

Microfinance is a category of financial services targeting individuals and small businesses who lack access to conventional banking and related services – Wikipedia

The business included micro-loans, micro-savings, and microinsurance. They are small loan providers to business owners and entrepreneurs to help them get their business off the initial ground.

The business runs at various ranges in different parts of the world. Hence, the word “small loans” has different meanings around the latitudes. India defines it as an amount less than INR 1 lakh, whereas the USA defines this as $50,000 (INR 36 lacs)

Coming straight to the business, it has four pillars that stand the entire building.

  1. Advise
  2. Invest
  3. Partner

The microfinance business supports the financial industry people and the urge to establish their own business, seek financial help, and advise them on cash flow management and other financial tasks.

  1. Advise

They target coaching, support and governance to help finance providers deliver high-quality service and establish financial equitability to all.

2. Invest

The business focuses on investing in various ways to reach the financially excluded audience. They make investments to expand and accelerate financial inclusion around the globe.

3. Partner

MFIs create partnerships that help them create opportunities to sustain the new products they launch and introduce policies.

Financial Inclusion

The sole purpose of all microfinance businesses is to establish financial inclusion around the globe. It means that every individual will have access to finance to help them fulfil their finance transaction.  Various offers and products that a microfinance business introduces to the audience to attain its ultimate goal include Transactions, credit cards, and insurance.

A transaction account is a gateway to other financial services, so it becomes necessary for people to access the transaction account. Credit cards also help the audience access financial help from the microfinance business.

Digital Financial Services

It becomes challenging in this digital era if you do not incorporate digital resources and services into your business.  In the past few years, the microfinance business has accepted digital services to handle their system and other facilities effectively.  These digital financial services provide a vast area of benefits that include

  • Effective Payment Services
  • Cross border remittance
  • Credits and savings

Along with these, the businesses work in a highly curated way to perform the business’s smooth functioning. The borrowers who receive the microloans must take courses that include bookkeeping, cash flow management, and other skills to correct the loans.

Importance of the Institutions

This business is essential for financially backward people who have no access to bank loans.  The business has helped entrepreneurs in the USA with no collateral to take out a loan of $50,000 or less and jump-start their ventures.  The most significant importance and benefit of this business are the women who could break the poverty cycle through small loans.  The microfinance industry has set a rapid growth record in the past years.

In 2018, the surveys suggest that the total microfinance borrowers counted were $139.9 billion over a loan of $124 billion.

Source: Microfinance barometer 2019

In this majority of loans were sanctioned by India, followed by Bangladesh and Vietnam.

Does it work?

Many people find microfinance business in the right way to eliminate poverty by giving financial aid. However, some blame it for increasing poverty as more loans and interest tends to burden the poor into more debts.

At Finflux, we believe microfinance can serve as a valuable tool for the country’s financially backward population.