What is microfinancing?
Micro financing is a broad term used for describing a diverse number of products of financial aid such as microloans, micro savings and micro insurance. It was originally conceived to take finance to people who do not have access to banks, have no credit history or collateral, or have no financial education and live in developing countries or in extreme poverty.
The idea is simple: by giving a very small loan to someone living in a poor country, you could help them lift a small business that would eventually help their family move out of poverty. When that loan was paid, the money would be reintroduced to help another borrower, thus, getting more families out of their difficult situations.
According to Plan International, “over 2 billion adults and 800 million young people worldwide do not have access to formal financial services and in sub-Saharan Africa less than 30% of women have an account with a financial institution”.
This concept was introduced by pioneer Muhammad Yunus, a Nobel-Prize winner, who thought it could help financially marginalized people, by providing them with the necessary capital to start a business and work toward getting themselves out of poverty.
How does it work?
Many people all over the world, live in a circle that does not always allow them to find resources to improve their living situations. They struggle to find work or have very low wages, they hardly ever finish basic education and find o other solution than to have children as another person represents another chance for income, but unfortunately most children that are born into those conditions, never brake the circle, and it is a story that repeats itself over and over again.
Microcredit institutions provide the resource, such as the loan, as well as products like savings accounts with no minimum balance and insurance, at a much lower rate with lesser premiums. With these opportunities, small families have a way of breaking the never-ending cycle, even when they don’t use them to run a business. Only by having more options, like not needing any more children or the chance to send them to school instead of work, they already perceive a greater benefit than before they got the loan.
What are its benefits?
People are also most likely to pay because they are grateful to be given an opportunity they normally wouldn’t have gotten. Microfinancing has the highest payment rates, since people rely on the small amounts of money they are lent to, and paying it back allows them to get another loan and so forth.
Another benefit is that most of the time, taking out a micro loan requires the person to receive training, with courses that span from book-keeping to cash flow management. Eventually, this education intends to help people not only repay the loan, but to maintain a healthy business through a long period of time. With expert business training and planning, more start-ups can avoid costly mistakes and are more likely to be successful in repaying their microloans and building a solid credit history in the process.
How has the concept of Microfinancing evolved?
Yunus thought that people would use their money to start a business, however, evidence nowadays shows that often, borrowers use the loan to meet their day to day needs. In case of an emergency, to put food on the table, and even pay for their children’s education.
Then, microfinancing appeared to be the solution to ending poverty around the world. But has it really been as successful as economists thought it would be?
From its original conception to our current date, the conception of Microfinancing has completely changed. Although it has occupied researchers minds over the past decade, the findings have not supported the first hope for microcredit, as it has not created real evidence that it lifts families out of poverty. Then, how come it is still not viewed as a failure in economic history?
Financial diaries of people living on $2 or less per day have shown that microcredit helps many families deal with emergencies, make critical purchases that they couldn’t otherwise afford, and put food on the table in times of scarcity.
In the end, Microfinance became a key strategy to expand options for poor people by offering more reliable financial services. It is a way for families to build or rebuild a credit history, to become financially independent, resilient and more able to provide for this families in times of scarcity or need.
And it has proven to be helpful not only in small communities or Third World countries, but also with small entrepreneurs all over the world in any economic situation. Microfinancing supports the talent of students, young businesspeople, retired people, immigrants, women, among others who would normally struggle to get lines of credit or loans from traditional banks, as well as investments or funding for any size of project.
This is the way many unexperienced filmmakers, artists, chefs, etc. are financing their projects. And the same rules apply for these kinds of microloans, as people feel grateful to be given the chance and to be able to continue funding their business ventures, they rarely fail paying the money back.
The history of microfinancing is fascinating, as it presents an unexpected lesson that applies to many things in life: bringing more opportunities to people helps them become more ingenious, cunning and better equipped to deal with the difficulties they may be presented with. Rather than not trusting people, or by giving them things for free, we should be working on creating more initiatives to give people the right tools and teach them to make the most out of what they can get.