Market Basics: Microfinancing Options
The main aspect of microfinance is to provide very small loans, which can be as small as €100. This loan is not simply provided, but there must be a valuable reason behind the financial service. For instance, some microfinance institutions will concentrate on women which want to start an agriculture business, while others will focus on geographical or demographic characteristics. Another notable aspect to point out is that under monetised societies (societies with a lack of directly available loan options) force its citizens to seek solutions by obtaining financing solutions from loan sharks (lender who charges extremely high interest rates), family or friends. By helping these people with microfinancing solutions, the institutions ensure that clients do not put themselves in danger or that conflicts with close family members arise as a result of nonpayment.
So, microfinance is about providing very small loans or financial services. But what else? As the long-term orientation of this financial sector is to teach very low-income individuals how to become self-sufficient, there has to be some academics and practical teaching behind the service. An important number of institutions ensure that the client has acquired basic knowledge about finance, money and banking before obtaining the loan or service. In that way, it promotes education as well as stimulate business growth.
Entrepreneurial minds which do not have access to classic baking services because of their level of income will tend towards microfinance. This is especially the case in emerging economies, where the local institution is often still developing its monetary system. If the business succeeds, the client will create jobs, diminish poverty and will be able to pay back the loan.
You might think that it is very risky for these types of banks, due of the high probability that the client will not be able to pay back the debt. Fortunately, this has since been disproven. In fact, the repayment rate for the microfinance sector is considerably higher than the rate for usual banking and other financial services.
A short insight into the history of Microfinance
The term microfinance has existed since the 1800s, but the first considerable action that took place was in Bangladesh. In 1970, the Grameen Bank in Bangladesh started providing micro-loans to citizens and supported those with a program named “the 16 decisions.” This educated customers about basic moves on how poor civilisations could improve their financial state as a whole. Please view the image below for a brief overview on the gaining popularity of microfinancing.
(Maes 2012, ResearchGate)
An key fact remains that the institutions which are active in microfinance are usually supervised by the World Bank, so that no corruption temptation comes in. The creator of this protectionist concept won the Nobel Price for peace in 2006 because of their efforts towards develop the microfinance sector.
AMSA’s opinion and look into the future of Microfinance
As the Asset Management Student Association is focused towards impact investing throughout the planet, the concept of microfinance is very much in line with our convictions. We believe that these types of institutions should have a better presence on university campuses, as a considerable number of students have not really formed an opinion about this branch of the financial activity. Nevertheless, in our opinion microfinancing remains to be one of the most important financial activities in efforts pursuing income equality and societal development.