Offering financial services to poor people in developing countries is expensive business. The cost is one of the biggest reasons why traditional banks don´t make small loans, the resources requierd for a 50$ loan is the same as for a 1000$ loan. MFIs also have big personnel and administration costs. Field staff managers must perform village surveys before entering a village, conduct interviews with potential borrowers, educate the borrowers in credit discipline, travel to the villages every week to collect interest and distribute loans and control that the loans are being used for the given purpose. The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically six months to a year with payments plus interest, payed weekly. Shorter loan cycles and weekly payments help the borrowers stay current and not become surprised by large payments. Clearly the transaction-intense nature of weekly payment collections, often in rural areas, is more expensive than running a bank branch that provides large loans to economically secure borrowers in a metropolitan area.
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They are designed to create income-generating activities. Since the default rates are so high, the loans have been traditionally accompanied with high interest rates. However, many in the industry have been working to equip loan officers with ways to better determine creditworthiness. In the developed world, most people have credit history from credit bureaus that loan officers can review. Those data-points do not exist, but the prominence of mobile phones and the data from the phones has been used to help determine creditworthiness. Additionally, many microcredit institutions require financial literacy training as a way to help the microentrepreneurs succeed and increase the repayment rates of the microfinance loans. Microfinance institutions The microfinance industry is extremely large. According to India Microfinance, the following organizations are the top 10 largest microfinance services in the world: MBK Ventura (Indonesia) SDBL (Sri Lanka) Shakti (Bangladesh) GFSPL (India) CARD Bank (Philippines) BURO Bangladesh (Bangladesh) SKS (India) Spandana (India) Grameen Bank (Bangladesh) Lead Foundation (Egypt) Many of these are financial institutions, essentially commercial banks who earn a profit.
Another benefit of microfinance is that it encourages people to be financially independent and provides them financial resiliency to be able to cover any large unforeseen expenses. Additionally, microfinance helps to provide financial services to those in remote locations where traditional financial institutions do not have operations. It also provides education. Finally, microfinance can encourage entrepreneurial activity and business development in poverty-stricken areas. Some downsides of microfinance include claims that it can take advantage of those in tough economic situations, a situation similar to loan sharks. Some microfinance loans may include interest that can be as high as 30% or even higher. Furthermore, according to several studies, recipients of microfinance loans did not realize an improvement in their annual net income. Additional Resources CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ CBCA® Certification The Commercial Banking & Credit Analyst (CBCA)™ accreditation is a global standard for credit analysts that covers finance, accounting, credit analysis, cash flow analysis, covenant modeling, loan repayments, and more.
Microfinance is a type of banking service that provides financial services to low-income individuals or groups who otherwise have no other access to financial services. It gives them an opportunity to become self-sufficient by providing savings, loans, and insurance. In this post, we will discuss the viability of investing in peer-to-peer microfinance loans as an investment opportunity. Microfinance loans are a bridge for people with limited resources to become more entrepreneurial and productive. Most of these people are small business owners. And in most cases, they are locked out of credit brackets by banks. Microlenders give out loans in small amounts (often $100 to $250 per loan) to allow small business owners in developing countries to buy inventory or small machinery to increase their productivity and grow their business. Peer-to-peer microfinance lenders want to give individuals in the developing world the opportunity to directly lend to these type of individuals and small business.
Doesn't it annoy you when you take a direct flight only to find it does a stop-over en route, but that didn't appear on the ticket because you don't have to actually get off the plane? Within the "pure P2P" space there are two main players: Kiva Zip, and Zidisha. The former has only recently progressed from beta to alpha stage, and lends only in Kenya and the US currently. My views on Kiva, its transparency, operating efficiency and choice of partners are well documented and not entirely positive. Instead I will focus initially on Zidisha – the first genuine microfinance P2P lending platform, with a multi-country focus. Julia Kurnia founded Zidisha following a disappointing realisation that the operating costs of traditional microfinance lending, via a local MFI, required the interest rates charged to the end borrower to rise substantially. In her own words: "In order to manage the loans we opened an office [in Senegal], hired a loan officer – and saw our overhead costs shoot up to more than a third of the value of the loans we were making.
[Read related article: 5 Tips to Write a Great Business Plan] 2. Have decent credit. Even though you currently don't have a lot of money, good credit makes an excellent impression. Carefully review your report, ensuring that it does not have any false information; if it does, send out disputes accordingly. Did you know you are entitled to one free report each year? 3. Seal the deal with a personal guarantee or collateral. Your personal guarantee is your legal promise to repay the loan. Collateral, such as your house, is something lenders can use against you if you don't repay it. If you're confident your business will succeed, offering these two things makes sense so you can get a loan. 4. Invest some of your own money. A business owner who puts their own personal investment into their company along with a microloan shows that they are serious and will make sure their business succeeds. Why are interest rates higher in microfinance loans than in traditional banking? Microfinancing is designed for low-income borrowers who are a higher risk to banks.
But the intention has to be wanting to give as opposed to making an investment with the expectation of strong returns. If you want to learn more about investing and about how you can improve your financial situation, download my ebook Everything You Need To Know About Money – The Complete Financial Intelligence Handbook and develop the level of financial intelligence you need to make smarter financial decisions today!