Microfinance is a concept of providing financial services for entrepreneurs, small businesses, and various individuals who lack the necessary resources and accesses to banks and other related services. Usually, the model aids several entrepreneurs who are trying to start their businesses. In some regions, especially in South Africa, microfinance has become a social movement whose objective and goal is to provide financial services to low-income families. This idea is simple. It is an act in the fight against poverty. With this loan, low-income individuals are expected to utilize and leverage the money to help lift them out of poverty. There are definitely some holes in the overall system, but the movement is still the first acts in breaking the vicious cycle of injustice.
So how does it work? Is this simply just another way to increase the overarching debt we are already seeing in these communities?
When answering these questions, you need to first start off with the concept of poverty. Poverty, by definition, is the general scarcity or dearth of a person’s financial or material possession. Almost half of the world lives less than $2.50 a day. As this trend continues, the impact that it has on our society will continue to grow stronger. Problems such as violent crimes or high school dropout rates are predicted to increase depending on a child’s zip code. It can even go as far with nearly a billion people, who are entering the 21st century, will not be able to read a book or sign their names. So what can we do? How can we prevent this from worsening?
This is where microfinance comes into play. Before, the concept was used to help establish new growing startups into fruitful and successful businesses. Now, its intended goal is to give these families and individuals an opportunity in creating success with the necessary financial aid to make their dreams tangible.
The way it works is that micro financial firms supply loans, savings, and other basic financial services to low income communities. These financial services, however, can only provide a small financial package. The reasons these packages are so limited is that the loans are paid back. Though these packages are small, they do provide these families an opportunity to go a long way and eventually break the cycle.
Various comprehensive impact studies have shows that microfinance does help very poor households meet basic needs for stability. This of course is more apparent depending on the how far along the individual is in the actual campaign. This means that the magnitude of impact is positively related to the length of time that a client has been involved with the program. In addition to stability, microfinance programs and loans allow low-income individuals a sense of security. Having access to credit, these people are able to take advantage of various economic opportunities for them and their families. For example with insurance, low income families can financially cope with the sudden increased expenses in emergency situations such as death, serious illnesses, or loss of assets. This type of problem beforehand would be unthinkable and incredibly taxing on the person.
While there are huge benefits, there are also some negatives. The overall interest that these families have to pay back can be a bit costly. Also the impact that it has on a person is not a guarantee and does take time. Some points in which microfinance can improve on is by providing some consulting tips for these families in how to best mange their loan. This will provide these people with a stronger sense of financial economics that will better serve them in the future. Still, microfinance is moving in the right path. The concept recognizes a problem and is finally acting upon it.