Most banks and financial institutions are shy of lending to low-income households, rural women, and small businesses as they consider their high-risk profile and high-cost transactions. The reason is that these borrowers are found in hard-to-reach locations. Since the transaction size is small, the cost of funding becomes high and unviable.
A finance company lending small sums of money to the poor so they can work their way out of poverty is referred to as a Microfinance company. Microfinance companies active across Asia and the Pacific have been helping low-income families stabilize their cash flows from income. During times of crisis, a Microfinance company helps borrowers cope and build. In good times, they allow them to grow their business and prosper.
How Does Microfinance Help the Economy?
Here are five ways in which Microfinance companies help poor communities across different regions
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Empowering Women by Financing MSMEs
Many micros, small and medium enterprises are owned and run by women, and providing them with financial support helps them improve their income and livelihood. In many Asian countries, especially Pakistan, MSMEs account for most enterprises. The microfinance companies help provide long-term financing for women to develop their businesses.
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Delivering Finance as Well as Education Access to Rural Women
Microfinance companies help rural women to achieve financial independence and empower them to make the right decisions. In countries like China, 45% of the rural population has no collateral or education to arrange for finance. Microfinance companies give microcredit to poor rural households and provide measures to women borrowers to improve their skills and literacy.
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Helps to Rebuild Livelihood for Women Post Conflicts
Communities, especially women, are affected by armed conflicts and disparities in the regional economy. In certain parts of the Philippines, decades of conflict and economic stagnancy have led to lower income below the national average. Some of the largest Microfinance companies are focusing on micro-enterprises owned by women to rebuild their economic base and improve livelihood.
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Importance of Microfinance for Small Businesses Outside Capital Cities
Small businesses in small regional towns require working capital to help them with their operations and invest in technologies for business growth. Places like Georgia have a 60% population living in rural areas and secondary towns where agriculture and small business helps to create jobs and increase incomes.
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Nurturing MSMEs to Grow and Diversify Economies.
In countries like Mongolia, MSMEs account for 90% of the businesses and generate around 50% of all jobs despite the country having natural resources. To help small businesses, microfinance companies, with financial support from financial institutions, can create long-term stable financial support, providing new business opportunities and more jobs and helping the Mongolian economy.
Conclusion
Microfinance has played a crucial role in filling in the gaps for marginalized households, which powerful institutions that control “capital” have not done. A book by Ananya Roy, “Poverty Capital Microfinance and the Making of Development”, focuses on those who manage poverty.
