Since microfinance first came to the public’s attention in the 1980’s, the usual storyline has been that these funds have created and expanded an opportunity for underprivileged and under-resourced individuals to escape the cycle of poverty. While there has been a large amount of positive publicity for microfinance and its financial services for newly entrepreneurs, the social movement has also succumbed to various criticisms for increasing the vicious cycle through high and unrealistic loans and interest. The one thing that people need to understand is that there will always be positives and negatives when it comes to borrowing money. But before you do, make sure you take into consideration the holistic view of microfinance and what it can do for you personally and financially.
Below, I have outlined four important questions and issues within microfinance. These questions will outline the overall foundation and risk a person may take when it comes to borrowing a microfinance loan.
What is microfinance?
Microfinance is the term used for the provision of financial services to the working poor. Generally speaking, many of these underprivileged and under-resourced individuals are unable to have access to normal banking services. Microcredits or microloans are small loans offered to poor people to finance small income-generating activities. Usually, these microloans were intended to help the recipients generate income through small-scale economic activities. This means small businesses or investment opportunities that they would not be able to afford beforehand. Now, the funds themselves can also be used to cover daily life cost or social expenditures.
Who is microfinance for?
Microfinance was designed to help those who were economically regarded as poor. While much of the diverse group is usually found in developing countries spread throughout the globe, there have been some recipients who live in industrialized nations such as the United States. A majority of the clients has been reported to be women.
What are some of the benefits of the program?
The overall mission is to provide low-income individuals with the means t o participate in the economy and generate their own income. With this loan, these people are able to become micro-entrepreneurs and establish their small businesses that they couldn’t have done beforehand. This type of financial access, especially for these low-income individuals, is often rare and unheard of. While the interest for the loans may be counterintuitive of the program, the funding itself still gives these individuals an investment opportunity to develop and grown as business leaders.
What is the interest and how high are these interest rates?
The interest charge on the microloan is typically high, reportedly around 30 percent. The reason why these loans are so high is because of the transaction cost and risk many MFI institutions are taking with these individuals. Typically though, these loans are often small amounts. But because operation, administrative cost, and currency exchange fluctuations, these rates have to be high to accommodate the overall loss the actual loan is taking.