Microfinance – Poverty to Profit
Poverty elimination has traditionally been the domain of the interest-based growth agency and revenue generation has always been an important part of the business. Rarely have the two overlapped: business shareholders have no interest in providing money away, and development banks have little to offer profit-oriented investors. For perhaps the first time in financial development history, the substandard are viewed as potentially profitable.
Have you ever heard of microfinance? It consists of many financial services, such as microloans, savings and insurance, for substandard people. This program is generally used in growing nations, as a way to assist individuals in increasing their earnings, get money to pay their taxes and as an overall solution to decrease poverty.
Microfinance is a financing tool that sustainably provides minimal loans to the working poor. A few borrowers, usually five to ten people, assemble themselves into groups. The first set of loans are prolonged to the first subset of individuals within the group, for instance, two out of the group’s five people, and once these loans are repaid, another subgroup of people obtain their loans for their development. This goes on through the entire group, distributing until a final loan is extended to a designated group leader.
The individuals who benefit from these facilities are peasants, unemployed or self-employed people with surprisingly low incomes. Some of these individuals have very few assets to use to get a loan and, even if they do have property, they often don’t have documents to prove ownership.
One of the reasons for microfinance is helping poor individuals set up businesses. This is very helpful for the individual over time because they would have a way to make some money.
As a part of microfinance, the microloan is credit offered to substandard individuals, to improve their financial status. It highlights the building capability of a micro-entrepreneur and also helps them begin their business and through hard times.
Several organizations offer microloans, among them being non-profit organizations trying at making the globe a better place for substandard people too.
Variations of this general concept abound, but the basic main principle remains the same: a borrower is much more likely to repay promptly if not doing this affects one’s selected group partner, usually an acquaintance. The mercy replenishes the fear of a faceless bank for one’s neighbor. This non-traditional concept of social collateral banking permits the substandard people to get out of the poverty cycle: the provision of capital allows for more significant business investment, which results in improved earnings, resulting in higher residential savings and eventual financial independence.