Wednesday, 10 January 2018

How Microfinance Lets You Empower Entrepreneurs and Small Businesses

Microfinance for entrepreneurs and financial services for small and medium-sized enterprises is becoming a viable source of credit for millions of people and businesses who otherwise wouldn’t have access to financing. The global microfinance and SME financial services market is on track to grow 10 to 15 percent this year, the Consultative Group to Assist the Poor projects.

While much of this growth is occurring outside the United States, microfinance is growing in America as well. Seven percent of U.S. households are unbanked, meaning that no one in the home has a checking or savings account, while nearly another 20 percent are underbanked, meaning that they have an account but also obtain financial services outside the traditional banking system, according to the latest available FDIC data.

The growth of microfinance creates opportunities for those who wish to support unbanked and underbanked entrepreneurs and small businesses. Here’s a look at how microfinance works, what technology and platforms are being used to facilitate it, and how you can help support microfinance opportunities to empower others.

Understanding the Idea of Microfinance

Microfinance is the providing of financial services to entrepreneurs and small business owners who don’t have access to traditional sources of capital due to low income or limited credit. Microfinance is so named because it deals in amounts smaller than traditional financial services. For instance, the average microloan is only $13,000, with $50,000 representing a high amount for a microloan.

Microfinance financing can be extended through forms such as microloans for small loan amounts, microcredit for small credit lines, microsavings accounts with no minimum balance, micro-insurance policies with small premiums and policy amounts or other services.

To make microfinance possible, financial providers use various strategies to offset risk and expenses. For instance, microloans typically have high-interest rates. Borrowers may be allowed to work together to repay loans, acting together as guarantors, with peer pressure serving to help enforce loan repayment. Microinsurance policies may collect premiums together with microloan repayments. Microfinance institutions receive support from donors, private equity funds, and other financial institutions.

Microfinance was originally conceived with the goal of eliminating poverty, and is often provided by nonprofit groups. As the industry has grown, for-profit microfinancial services have also emerged.

Microfinance Technology and Platforms

A number of technologies help to facilitate microfinance. Mobile phones form the basis of the microfinance economy, allowing individuals in underdeveloped countries as well as low-income areas of developed countries to remotely access online financial services. Microfinancial institutions often serve areas where they don’t have a physical presence by relying on agent bankers, such as local shop owners and merchants. Agent bankers use portable devices to conduct transactions and rely on biometric technology, such as fingerprint scans, for security.

Today’s leading microfinance platforms include nonprofit lenders such as Kiva and Zidisha. For-profit microfinance institutions such as the Citi Foundation are also available.

How You Can Help Support Microfinance

If you want to invest in microfinance, there are three basic ways to do it, says microfinance consultant Hugh Sinclair. The riskiest method is to invest directly in a microfinance institution (MFI), which Sinclair does not recommend for the average individual. A lower-risk, indirect method is to invest in a specialized microfinance fund (MIV), which in turn invests in MFIs that lend directly to borrowers. A third, indirect method is to invest in a peer-to-peer (P2P) lending platform, which then lends to borrowers. Popular platforms such as Kiva and Zidisha are examples of P2P platforms.

Platforms such as Kiva rely on on-the-ground partners to do due diligence in evaluating credit risks for loans, and they also take steps to verify the identity of borrowers. Kiva’s site contains more details about lending risks.

Investors typically use digital payment tools such as PayPal to transfer funds. For security, be sure to use a mobile device with the latest security technology, such as an iPhone 7 with Touch ID and encryption, as well as a secure network such as a VPN connection.

Microfinance provides you with an opportunity to help extend financing to entrepreneurs who would not be able to get started without your help. Be sure to do your due diligence in researching reviews of microfinance platforms before investing in them, and use a secure device and connection when transferring funds.

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