The Who, What And How Of Microfinance

By Arthur Pinkasovitch | November 08, 2010 AAA
The Who, What And How Of Microfinance

Many entrepreneurs in the developing world and even those living in North America are unable to secure the required resources to grow their small business ideas. As a result, many individuals fall victim to loan sharks who extend high interest loans, which under regular circumstances cannot be paid back. Bi-weekly interest rates of 50% are not uncommon and the borrower becomes trapped with compounded interest requirements. Microfinancing allows people to safely take on reasonable small business loans in a manner that is consistent with ethical lending practices. (For related reading, also be sure to check out Microfinance Has Major Impact)

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Helping Entrepreneurs
Organizations that provide microloans to the poor, support a wide range of activities ranging from business start-up capital to educational programs that allow people to develop the skills necessary to succeed as an entrepreneur. These programs can focus on such skills as bookkeeping, cash flow management and even technical abilities like sewing. Unlike typical bank loans, whereby a financial institution is primarily concerned with the borrower having enough collateral to cover the loan if an investment goes south, many microfinance organizations focus on helping entrepreneurs find success in their venture.

The benefits of microfinance extend beyond the direct effects of attaining a source of capital. Women, who often do not have the same opportunities in the developing world, are the preferred recipients of many microfinance institutions (MFIs). This leads to improved business education and the ability for a family to cope with economic pullbacks. Entrepreneurs who create a successful business create jobs, trade and overall economic improvement within the community. However, perhaps the most important measure of success is sustainability, whereby families no longer require the support of charities and are able to provide for themselves.

Critics of Microfinance
While there are countless heartwarming success stories ranging from micro-entrepreneurs starting their own water supply business in Tanzania, a $1,500 loan allowing a family to open a barbecue restaurant in China, to immigrants in the U.S. being able to open their own business, microfinance has sometimes falls under harsh criticism. According to the Wall Street Journal, recent protests outside the Reserve Bank of India against MFIs have claimed that the "exorbitant interest rates are pushing poor women to end their lives." Even a small $200 microfinance loan requires for the business to be successful in order to repay the MFIs.

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Getting Involved
Regular individuals with some extra cash can easily help poor entrepreneurs improve their communities. Although this type of charitable involvement would not be considered philanthropy, since the funds are eventually returned, it may have a greater long-term positive impact on the lives of the recipients than a single charitable donation. Individual lenders can lend their money to microfinance institutions which will then pass it along to selected entrepreneurs.

Certain microfinance organizations focus on providing women in Uganda with capital required to undertake projects such as growing eggplants and opening small cafés. Other organizations enable lenders to choose exactly who they want to support - borrowers are categorized on criteria of level of poverty, geographical region and type of small business. Some groups tend to focus their efforts only on businesses which are created with the intent of improving the overall situation of their community through initiative focused on education, job training and clean water businesses. Basically, the lender has absolute control of who the final recipient of his/her funds will be.

Conclusion
The dream for many foreigners coming to North America is to one day become a small business owner. Microfinancing organizations are allowing people to achieve such goals in developing economies through safer lending practices. These loans foster an entrepreneurial business environment that will hopefully improve the economic situation in the areas that need it the most. (For more information, see Microfinance: Philanthropy Through Industry.)

For the latest financial news, see Water Cooler Finance: Lions And Diapers And Dows, Oh My!

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