A microfinance provider belongs to For-profit social organizations.
Microfinance is a type of financial service aimed at entrepreneurs of small businesses enabling the disadvantaged members of the society to gain access to essential financial services.
Microfinance is often sold as a perfect development tool. It is because microfinance providers are institutions that provide small loans to entrepreneurs. They are especially important in developing areas of the world.
Advantages of microfinance providers
1. Easy access. Microfinance provides small loans for entrepreneurial activities to individuals who are not able to get a regular bank loan due to having no collateral, and because banks do not typically lend such small amounts to this particular type of customer. For people who live in poverty without any access to capital, microfinance providers help those in need of earning money to improve their financial situation.
2. Lower interest rates. Microfinance allows people to obtain a loan at a lower rate than when borrowed from a typical bank. However, there are also administrative costs of those very small loans which can be considerable for poorer people.
3. Job creation. The new entrepreneur can provide employment to other people who live in his area to help increase incomes. The effective use of microfinance can help create new job opportunities in deprived areas as a result.
4. Improves social wellbeing. Microfinance has beneficial effects on society as a whole. For example, with employment, entrepreneurs can gain access to social insurance, health-care services for themselves and their families, or build their credit score.
5. Empowers women in traditional countries. In many developing countries, more than 50% of successful applicants for microfinance are women. It is because, in some of the countries with old-fashioned cultures, females have it very difficult to obtain loans or traditional banking services.
In addition to benefits, however, there are some potential problems with microfinance.
Disadvantages of microfinance providers
1. Immorality. Some people claim that microfinance is an unethical action because as a for-profit business organization, those microfinance lenders earn profit from the poor, the unemployed and underprivileged by charging quite high interest rates.
2. Limited amount of finance. Because microfinance providers only offer small amounts of money (due to high risk of defaults on repaying the loans), it may be difficult for borrowers to access larger amounts of capital.
3. Limited eligibility. Not all poor individuals can qualify for microfinance as they have lack of financial history, lack of entrepreneurial skills, not-convincing business plan or poor previous credit record. Because microfinance providers belong to for-profit business social organizations, they have to minimize their own risks by ensuring that all borrowers have the full ability to repay their loans on time and in full.
4. Small scope. Loans received for small projects may be a great deal to one entrepreneur who badly needs some start-up capital, while this does not make much difference to the overall country’s development and economic growth.
In short, microfinance providers are specialist finance businesses in developing countries helping small businesses to start operating.
