Microfinance used to be untouchable – just like apple pie or Mother Teresa. Now, it is increasingly coming under fire. Mainstream media everywhere these past few years has begun asking awkward questions about microfinance, for example: are microenterprise loans effective for increasing entrepreneurs’ incomes and innovative potential? Well… Yes, they are. When micro-loans are attached to promoting business skills, access to information and technologies, and with careful screening and monitoring to ensure the effective utilization of loan capital, they can have a huge impact on innovation and enterprise growth.

But let’s take a step back. What is microfinance? The term is still recognized as relatively new. A more popular and practical term that is often used is microcredit. This is because microcredit emphasizes the main activity of the various financial institutions involved – providing credit. Gradually, other services such as insurance (life and non-life), savings and remittance services, have been developed or piloted and are being bundled together under the term microfinance.

Microfinance has existed in various forms for centuries. However, the birth of modern microfinance dates back to the mid 1970s in rural Bangladesh when an economics professor, Muhammad Yunus, loaned a group of women $27 to finance the group’s own small business. The women repaid the loan and were able to sustain their business. From Professor Yunus’ experience, the Grameen Bank project was born and today works in over eighty-thousand villages with more than six million borrowers (click here for more data). So, while the loans may be small, the number of business owners receiving them is huge!

The basic idea behind microfinance is that skilled people in underdeveloped countries and outside of traditional banking and monetary systems could enter the formal economy with the assistance of a small loan. Microcredit arrangements frequently differ from traditional banking, where terms may be required to guarantee repayment. In Microfinance, there might not be a written agreement at all. Sometimes the microcredit is guaranteed by an agreement with the members of the borrower’s community, who are expected to compel the borrower to repay the debt.

MICROENTREPRENEURS: THE NEW FOCUS OF MICROFINANCE

Don’t be mistaken, microfinance is not just for the poor! Microentrepreneurs can benefit from it as well! Whether you have been dreaming about opening your own café or a tailor shop, microfinance could help you fill the gap between that dream and reality.

Although the focus on the poor has been an important feature of microfinance and it very much remains so, in order to achieve greater sustainability, MFIs also offer their services to the non-poor, such as small farmers and microentrepreneurs. Therefore, the scope and the target beneficiaries have evolved over time since the establishment of the Grameen Bank in 1983.

The developmental assumption was that small enterprises were important net generators of jobs and that the backward and forward linkages produced by a vibrant SME sector contributed to economic growth. Thus, microenterprises became a more popular target for intervention.

NOT ONLY FINANCIAL CAPITAL

However, it is often the case that microenterprise loans are not enough to increase entrepreneurs’ income and innovation level. There are obstacles and challenges that microentrepreneurs face while starting their microenterprises. Lack of entrepreneurial or management skills are identified as the most challenging factors as well as lack of knowledge and access to technologies. It is in such cases that MFIs and governments use microfinance as a type of industry for sourcing innovative and creative solutions for alleviating the problems of sustainable micro-entrepreneurship development – for example by directly providing or facilitating entrepreneurial training, identifying opportunities and organizing workshops on product positioning and product differentiation in the market.

FORBES’ WORLD’S TOP 50 MFIs

In 2007, Forbes’ ranked the World’s Top 50 Microfinance Institutions. Go here to read more about it. Some of them are:

  1. FINCA (Ecuador)
    FINCA’s microfinance program is a network of 20 microfinance institutions and banks that provide responsible financial services that enable low-income entrepreneurs to start their own businesses and invest in their future.
     
  2. Microcredit Foundation Sunrise (Bosnia and Herzegovina)
    It provides loans for starting, maintaining and developing jobs for production, trade and service activities in the field of micro-entrepreneurship with the purpose of investing in turnover funds and working material.
     
  3. ASA (Bangladesh)
    Globally considered as the most efficient model of micro lending for its elegance of scale, innovation and sustainability. Currently, eight million people in Bangladesh are part of this program, and find it immensely beneficial in improving their quality of life.
     

TO SUM UP:

  • Microentrepreneurs can benefit from microfinance for the sustainable development of their businesses.
  • However, they not only have financial obstacles but they also lack many business skills and certain knowledge regarding market and technologies.
  • That is why MFIs provide financial capital as well as business support services or information to avail necessary business skills, training, and market information by the clients.

Header Image Courtesy of: Flickr

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