The term “microfinance” covers a wide range of financial products (such as microloans, micro-savings and micro-insurance products) that microfinance institutions give to those collaborating with them.
Micro financing generally refers to that process that brings about the provision of basic financial services such as loans, saving accounts, and insurance for low-income but economically active people.
Microfinance, which can also be called microcredit, is a type of banking service provided to unemployed or low-income individuals or groups who may not have any other access to financial services.
Most times, the term microfinance refers to the provision of small loans otherwise known as micro-credits for micro-entrepreneurs.
Micro financing services are provided to unemployed or low-income individuals, this is because a good number of these individuals are trapped in poverty or have limited financial resources, and they do not have enough income to do business with traditional financial institutions.
This service is useful when they cannot get funds from traditional financial institutions or the local moneylenders, otherwise known as “loan sharks”, who charge interest rates of up to several hundred percent a month.
Their only option is to resort to micro finance institutions who offer regulated access to money. The goal of microfinance is to ultimately provide individuals, micro businesses and impoverished people an opportunity to become self-sufficient to a high extent.
Microfinance allows its clients to take on reasonable small business loans safely with lower interest rates, and in a manner that is consistent with ethical lending practices.
Asides from providing loans for individuals and micro or small businesses, Micro financing organizations also carry out various activities such as providing the basics—like bank checking and savings accounts—to startup capital for small business entrepreneurs and educational programs that teach the principles of investing.
However, just like conventional lenders and traditional finance institutions, micro financiers must charge interest on loans and institute specific repayment plans, and they institute specific repayment plans with payments due at regular intervals.
Sometimes, micro finance institutions require loan recipients to set aside a part of their income in a savings account, which can be used as insurance if the customer defaults.
However, if the borrower repays the loan successfully, then they have just accrued extra savings.
Microfinance Products and Services
The following products and services are currently being offered by microfinancing institute:
Microloans
Micro finance institutions provide this major service to individuals and small businesses. Microloans, also known as microcredit, are loans that have a small value, but can be used to run one business operation or the other.
These loans are generally issued to finance entrepreneurs who run micro-enterprises in developing countries such as Nigeria.
Micro Savings
Asides from micro loaning, micro finance institutions also help individuals and small business owners save in bits to achieve one business goal or the other.
These individuals and business owners have the opportunity to store small amounts of money for future use without minimum balance requirements. Just like traditional savings accounts in developed nations, micro-savings accounts are made available for individuals when the need arises.
Micro-Insurance
The next service provided for individuals and small business owners is micro insurance. Due to the level of risks and uncertainties in developing countries, individuals and small businesses are in need of micro insurance.
Micro-insurance, just like its non-micro counterpart, reduces risks and helps provide risk management for individuals and small business owners.
Conclusively, although microfinance has been happening since the 1970s, it is now much more relevant to investors, finance professionals and individuals.
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