Ngern Tid Lor, as a company providing microfinance services through car registration credit services and being an insurance broker, focusing on creating transparent and fair access to financial services for those who cannot access financial services in the system, we understand well that microfinance institutions have roles and importance in sustainably developing people's quality of life. We therefore focus on developing products and services to answer customers' needs and elevate the standards of this industry to be accepted, and another important thing we try to do continuously is trying to promote the occurrence of correct knowledge and understanding about the role of microfinance
The Eurasian Union of Scientists defines "microfinance is providing various financial services such as deposits, loans, payments, money transfers and insurance to poor people and low-income households, including their small businesses"
The role of microfinance (micro-level financial institutions)
Microfinance is banks and money lenders that provide micro-level financial services such as deposits, loans, payments, money transfers, and insurance. The importance of microfinance is providing highly needed financial services to poor people and low-income households, entrepreneurs and beginning businesses who may not access such financial services from other types of financial institutions
The role of microfinance in economic development is responding to the needs of economically disadvantaged populations. In summary, the purpose of microfinance is to provide capital for occupation, health care, housing improvement and repair, starting small businesses, and to respond to other needs of disadvantaged groups, especially poor people and near-poverty people in the United States and other countries around the world
What are microfinance institutions
According to World Bank assessment, approximately 1.7 billion people worldwide cannot access financial services. The World Bank is an international financial organization consisting of 189 member countries with the purpose of reducing poverty problems and sharing wealth to developing countries. Micro-level financial institutions or microfinance function to provide financial services to the disadvantaged in those developing countries. Songbae Lee, senior investment officer of Calvert Impact Capital, Inc., a non-profit investment company located in Bethesda, Maryland, which works with investors to provide funding to various community sources worldwide, defines microfinance institutions as
"...financial institutions that lend money in not high amounts to people who cannot access regular loan sources. The definition of the term 'not high amount' depends on geographical context. In India, microfinance means loans in amounts less than 1 Lakh, which is worth approximately 1,500 US dollars (as of March 2017), while the U.S. Small Business Administration (U.S. SBA) defines microfinance as loans in amounts less than 50,000 US dollars."
The MicrofinanceInfo.com website states that many financial institutions provide microfinance financial services. For example, credit unions, commercial banks, non-governmental organizations, and even government banks. These financial institutions are considered microfinance as well. The website also states that the goals of microfinance institutions which are comparable to the roles and duties of micro-level financial systems include
- Functioning as good financial institutions that help develop sustainable communities
- Mobilizing resources to provide financial services and other support to poor people, especially women, for income generation that helps alleviate poverty problems
- Learning and evaluating to find methods that help people escape from poverty problems faster
- Creating self-employment opportunities for the disadvantaged
- Training poor rural people in basic skills and encouraging them to utilize existing resources for participation in rural employment and income generation
What is a Microfinance Company
The definition of microfinance companies has changed over the past several years. In the past, the importance of microfinance was having an important role in alleviating poverty problems. Data from the Investopedia website states that "for many long years, the main purpose of microfinance was social assistance. Therefore, microfinance institutions in the original form consisted of Non-governmental Organizations or banks established for the special purpose of providing microfinance services and government banks only."
Currently, various microfinance service companies are organizations that are a mix between government banks, non-profit private organizations, business organizations, and large money lenders focusing on responding to the financial needs of millions of customers worldwide who are poor or near-poor
What is the goal of microfinance
ING, a global financial company with a strong business base in Europe, states that the goal of microfinance is to provide financial services to people "who cannot access funding sources through regular channels due to having low income, having income from non-conventional occupations (Irregular), and having irregular income" or in other words, helping households and entrepreneurs in disadvantaged positions to access financial services at appropriate prices for capital in occupation, asset accumulation by saving money, providing necessities for families, and protection from risks in daily life such as illness, death, theft, natural disasters
Data from ING also states that microfinance was developed by Bangladeshi economist named Muhammad Yunus, who is known as "the Banker of the Poor". In 1976, Muhammad Yunus founded Grameen Bank in Bangladesh to provide "Microcredit" services, which means providing loans to poor people. Before that, general banks focused on lending credit only to customers with medium and high income, including wealthy customers. Muhammad Yunus's concept of microcredit was accepted very quickly and became very popular, leading to the establishment of microfinance institutions with similar principles around the world and developed into the microfinance financial system as it is today
With all these efforts, Muhammad Yunus and Grameen Bank jointly received the Nobel Peace Prize in 2006. The Nobel Prize committee stated that the Nobel Peace Prize was awarded to honor Muhammad Yunus and his bank "for their efforts to create economic and social development from below" or in other words, the Nobel Prize committee respects Muhammad Yunus's principle of creating economic opportunities for grassroots people upward
ING explains the importance and purpose of microfinance in terms of historical development that "Over the past several decades, microfinance has been developed to cover various financial products such as deposits, insurance, payments, and money transfers." The main meaning of microfinance still refers to providing loans in not high amounts to poor people, only that currently microfinance covers more diverse financial services when compared to the time when this principle was newly developed by Muhammad Yunus, stating that currently microfinance means or refers to financial products that have been designed to respond to various needs of low-income people such as group loans and group guarantees. In addition, ING also provides additional information that
"The main target of microfinance is households with low status or slightly higher than the poverty threshold (Poverty Threshold – income not exceeding 1.25 US dollars per day). Most borrowers are women. Although microfinance principles were developed from countries in the southern hemisphere to help traders, businesspeople, or farmers with small businesses to continue operating businesses, this principle is beginning to be accepted in Europe and the United States."
What are the benefits of microfinance
Microfinance has several benefits, especially for economic development. Data from the Vitanna.org website and Plan International organization states that microfinance benefits include
- Helping people provide necessities for families The Vitanna.org website, which is a financial services website, states that microfinance is a channel that helps households strengthen economic opportunities to increase income
- Helping people access loan sources The Vitanna.org website states that "Microfinance helps people access credit sources that lend money in not high amounts, which helps solve poverty problems very quickly." Plan International, which is a global organization dedicated to campaigning for children's rights and gender equality for women, states that "General banks will not lend credit to people without assets or with few assets, and generally will not lend credit in the same not high amounts as microfinance institutions. However, microfinance is based on the philosophy that even small loans can stop the poverty cycle"
- Helping people in society who are often overlooked The Vitanna.org website states that approximately 95% of microfinance institutions' loan money is lending money to women, disabled people, unemployed people, even people who come to borrow money to use for daily life expenses. Microfinance helps people live the way they want
- Creating future investment opportunities Microfinance stops the poverty cycle by providing opportunities to access funding sources. When basic living needs are met, people will invest in improving and repairing housing, health care, and even investing in small businesses
- Creating sustainability The Vitanna.org website states that "There is only a small risk from loan amounts at about 100 US dollars, but nevertheless 100 US dollars is enough for entrepreneurs in developing countries to pull themselves out of poverty." Plan International gives a consistent opinion that a 100 US dollar loan is enough to start a small business in developing countries, which helps entrepreneurs and families escape from poverty
- Creating jobs Microfinance helps entrepreneurs in poor communities and developing countries create employment opportunities for others
- Promoting saving The Vitanna.org website states that "When basic living needs are met, generally people will save the remaining money for future emergencies"
- Creating economic benefits even if income level remains the same Benefits from participating in microfinance projects include eating food with higher nutritional value, higher consumption levels, and ultimately a growing economy even if it's just a small poor community level
- Bringing better interest rates Plan International states that "Microfinance tends to focus on customer groups who are women, who statistically have less possibility of default than men. Therefore, these loans not only help women stand on their own but from the lender's perspective are also considered safer investments
- Promoting education Plan International states that families receiving microfinance financial services will have less possibility of having children drop out of the education system for economic reasons
Although microfinance finance may involve loans and financial services in not very high amounts, it has had impacts around the world over the past four decades. For small businesses that need cash or just a little additional credit for business opportunities, microfinance may be a solution to such problems, and for small money lenders and banks looking for new business opportunities, entering the microfinance business, even if just starting from lending credit or providing financial services in small lump sums, can be counted as opening the door to great business opportunities with customer bases worldwide
Source: smallbusiness.chron.com