Microfinance is a financial service set up in order to incorporate the low income and poor people into the banking system. Microfinance is geared towards providing
micro loans to the poor and economically marginalized people in the society who cannot afford to give collateral for loans.
Microfinance services are available in many countries but more prominent in developing countries where you have high population of poor and low income people.
For small business owners or intending entrepreneurs, microfinance institutions are places you can apply for small loans for your business. Microfinance services include but not limited to micro credit as well as insurance.
Microfinance services could be provided by the government, private institutions or non-governmental organizations like the NGOs. Some microfinance institutions have access to financial resource banks and other financial institutions while some others are self-sufficient.
Since the microfinance initiative came about, lots of people have benefitted from its services. It is an effective way of encouraging independence among poor people and reducing poverty. Poor and intending entrepreneurs now have an opportunity to utilize their skills instead of waiting around and praying for charity.
However, the big question that arises is how the microfinance gets loan repayment since the loan is offered to poor people and small scale business owners who cannot afford to provide collaterals.
HERE’S HOW IT WORKS
Due to the inability of young entrepreneurs to provide collateral for the loans applied for, the microfinance finds other ways to ensure that the debt is paid. One of such ways is by creating relationship with these young entrepreneurs. The whole essence of microfinance goes beyond just lending money. It creates a community where young entrepreneurs and low income earners get to know themselves as well as their financial officer. The community becomes like a family and they grow to build trust in one another such that with time, they get to borrow even from members of the community instead of going to the financial officer.
Here, they are also educated on managing debts, finance management, investments, savings, etc. The community becomes an avenue for members to share their success stories and challenges. The financial officer also provides an opportunity for them to pay debts together. Those who pay their debts are rewarded and can have access to higher loans in the future. This sort of reward encourages others to pay their debts.
Another way in which the microfinance ensures that debts are paid is by making it mandatory that the borrower pays a particular amount monthly until the debt is paid. The good thing here is that the monthly payment is like a sort of savings which you get to collect once the debt has been paid and if the debtor refuses to pay, the microfinance takes the money.
Furthermore, while some microfinance institutions might accept debt payment in instalments, some might not. It is important to note that microfinance laws vary with different countries. As a young or intending entrepreneur, this is an opportunity you can take advantage of at the very beginning of your business if finance is holding you back. Make enquiries about the microfinance services in your country and decide on the next step for you. Meeting with other entrepreneurs is definitely going to help you know if you are on track or not.
Was this article helpful? Let me know what you think.
Do not forget to SUBSCRIBE to get more business tips and ideas delivered to you!