Financial Technology aka FinTech is the integration of technology and innovation with financial methods to improve the delivery of financial services to the general public. Examples include smartphones used for mobile banking and investing as well as cryptocurrencies etc.
Microfinance, also commonly known as microcredit, is a type of banking service provided to the unemployed, low income individuals or groups who have no access to financial services.
Organizations participating in microfinance often provide lending services such as microloans which can range from $100 to $25,000. Like conventional money lenders, microfinanciers charge interest on loans and institute specific repayment plans. Other than these, many of them also offer additional services such as savings accounts and micro-insurance products.
Some of them even provide financial and business education because the ultimate goal of microfinance is to give the poor an opportunity to become self-sufficient. The majority of microfinancing operations occurs in developing countries – Indonesia, Uganda, Serbia and etc. The World Bank estimates that more than 500 million people have benefited from microfinance initiatives.
Microfinance Supports Entrepreneurship
Due to the goals of microfinance initiatives, the microfinance organizations provide support for a number of activities. They range from providing for the basic needs such as savings accounts for individuals to more complex needs such as finance education and business loans for entrepreneurs as well as startups.
These programs primarily focus on cash flow management, principles of investing and professional skills like accounting etc. Unlike typical financing situations where the borrower needs to have sufficient collateral to cover the loan, many microfinance organizations focus on helping the entrepreneurs and startups to succeed.
When people seek help from microfinance organizations, the usual process is that they are required to take a basic money management class. The lessons cover the concept of cash flow, understanding how interest rates, financing agreements and savings accounts work, how to set a budget and how to manage debt.
Once they are equipped with the basic know how, they may apply for loans. Loan officers will help them with the application and oversee the lending process as well as approve loans. To many people, a loan as small as $100 may not seem much but to those in developing countries, this amount is often enough to start a business or engage in profitable activities.
Benefits of Microfinance
The International Finance Corporation (IFC) has estimated that more than 130 million people have directly benefited from microfinance initiatives. However, these are only available to approximately 20% of the three billion people who qualify as among the world’ poor.
Aside from the provision of microfinance, the IFC has helped to improve the credit reporting bureaus in 30 developing countries. It has also advocated additional relevant laws for financial governance in 33 countries.
The benefits of microfinance go beyond providing loans to people as capital to start a business. When the entrepreneurs succeed, they will in turn, create jobs, trade and help to boost economic improvement within the community.
Non Profit Investing Versus Profit Investing
Till today, there is still a great divide between those who invest for ecosystems and financial self-sustainability compared to those who invest for financial returns. The former group consists of people who really want to make a difference in solving real world problems whereas for the latter, some say that microloans of $100 are not enough to provide independence and only cover basic needs like food and shelter so it defeats the purpose of independence because it keeps them the recipients in subsistent-level trades.
Some also mention that no matter how low the interest repayment rates are, they are overall a burden to the borrowers and the borrowers might end up poorer than when they just started. The cycle of bad debt might just snowball rather than truly help them become independent.
In summary, the ultimate goal of microfinance is to help the poor become self-sufficient and if investors are looking for financial returns, it might not be the most suitable option. Diversification is probably a better choice – investing in microfinance and the usual fintech startups.