Introduction
This guide is for you if you’re looking for a new investment opportunity or are just curious about how microfinance works.
In it, we’ll explain how microfinance can benefit everyone involved—from investors and lenders to borrowers.
Whether you want to learn more about the benefits of microloans and savings accounts or get started in the field yourself, we’ve got everything covered here.
What is microfinance?
A financial service for the impoverished is microfinance or those unable to get a traditional loan. It is a way to help people get started with small businesses, pay school fees, and cover other costs.
Microfinance loans are small loans that can be as little as USD 100 in some cases. They are given directly to individuals or groups who want to start their own business but need more money upfront to do so without assistance from others.
This type of activity has been going on since the 18th century when British philanthropists began loaning out money at low-interest rates to help improve education among children living below poverty line conditions in London slums during this period (Encyclopedia Britannica).
Microfinance Products and Services
Microfinance is about more than money. Microfinance is a way to provide small loans, savings, and insurance to people who need it.
It’s not charity—it’s a business. Microfinance organizations (MFIs) like Kiva partner with local entrepreneurs on the ground to make sure that their services are being used in the best possible way for their communities.
Microfinance does have its critics—some say that giving money away to poor people isn’t practical unless you know how much they need it or can follow up with them afterward to see how they’ve used the funds you provided.
But there are many success stories of people who were able to start businesses or buy the property after receiving microloans from MFIs, which will hopefully convince other skeptics of its value.
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Microloans
So, what is a microloan? A microloan is a small sum of money—typically under $5,000—given to an entrepreneur or low-income individual by a third party.
Microloans are typically used to fund start-up businesses or housing projects in developing countries.
While many international organizations offer these loans, it’s also possible for you to apply for one yourself directly through organizations like Kiva (kiva.org).
Micro savings
Micro savings is similar to microfinance but with a few key differences. Where microfinance loans are small loans (a couple of hundred dollars at most), micro-savings deposits are small deposits that can be made anytime.
Micro savings isn’t restricted to one type of use; they can be used for anything, whether you’re saving up for school fees or starting your own business.
Micro savings is more flexible than traditional savings accounts because the money isn’t locked away—you can withdraw it whenever you need it.
Micro-Insurance
Micro-insurance is risk sharing through a voluntary pooling of small individual contributions.
It can help people in developing countries reduce the devastating impact of natural disasters like floods and cyclones.
It’s important to note that micro-insurance is not the same as traditional insurance, which protects against damage to property or products. Micro-insurance aims to preserve your ability to earn an income (e.g., your job).
Micro-insurance helps vulnerable people recover more quickly after an unexpected loss of income due to sickness or disability.
-This helps them maintain their standard of living so they can continue making payments on loans or paying school fees for their children while they recuperate from illness themselves
What does microfinance mean for you?
If you are interested in microfinance, your first step should be to read up on the different models and types of microfinance institutions.
Then, find out how you can get involved with them. You should volunteer for a local organization that provides services for people who need small loans or other financial help.
Or you could work at a larger organization by answering phones or helping people fill out loan applications.
Whatever your interests may be, there are plenty of ways for you to help improve lives through microfinance.
As an investor
As an investor, microfinance is a great way to help people in developing countries. Microfinance funds are an excellent way to diversify your portfolio and invest your money for the long term. You can even invest small amounts of cash in microfinance funds (starting at $25).
Many people also enjoy investing in individual loans via LendingClub or Prosper, allowing investors to choose which borrowers get their money and what interest rates they will pay.
As a finance professional
If you’re a finance professional, microfinance is a great way to diversify your portfolio. By investing in the future of your community, you can support businesses that will help create jobs and build stronger communities.
Microfinance is also a great way to get involved in social impact investing (SII). SII investments are “investments made into companies or funds with the specific objective of generating both financial return and social impact through their activities.”
As an SII investor, you can support businesses whose profit-making strategies also positively impact society.
For example, one study found that microfinance loans were associated with lower infant mortality rates among rural households in Bangladesh!
As an individual
- Find a microfinance institution that matches your budget and goals. One of the biggest hurdles to getting involved as an individual is finding a microfinance institution that fits your needs and has programs you can afford.
A simple Google search will pull up lots of institutions in your area, but it’s essential to take the time to look into each one thoroughly before committing to anything.
- Make sure you are aware of what you are committing to. When assessing an organization’s website or brochures, make sure they clearly explain their business model and how they operate
—this can help you better understand whether their services are right for you (and, if so, how much money they will cost).
Conclusion
Microfinance is a great way to get involved in the business world. You can invest in loans, savings accounts, or insurance policies and help people with limited access to financial services.
It’s also an opportunity for finance professionals or students to learn more about macroeconomic trends and how they affect others around them.