What is microfinance?
Micro-finance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. Micro-finance allows people to take a reasonable small business loan safely, and in a manner that is consistent with ethical lending practices.
How does Microfinance work?
Micro-finance allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices. Micro-financiers must charge interest on loans, and they institute specific repayment plans with payments due at regular intervals. Some lenders 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.
Overview of Micro-finance in the world
Micro-finance is a large concept but it is not a new concept, and micro-finance has existed since the 18th century. There are two typical operations: Non-profit Micro-finance and Profit-seeking Micro-finance.
Normally, some NGO, funds, or organization is providing micro-finance services to these low-income or underemployed individuals, who have limited financial resources. The interest will be lower than traditional financial institutions.
On other hand, banks are major players in profit-seeking micro-finance by providing loans to their customers. However, more and more non-banking companies are engaging in micro-finance nowadays.
Non-banking companies in Micro-finance
These non-bank enterprises are usually classified as non-banking financial companies, and most of them are not allowed to take deposits from the public. This is the big difference between non-banking financial companies and banks. Moreover, these kinds of financial companies have different names in different jurisdictions. For example, NBFC in India, NBMFC in Pakistan, OJK license in Indonesia, Money lending license in Nigeria, Pico Finance in Thailand, and Sodom in Mexico, etc.
What is the business model for Non-banking financial companies?
The traditional model of a non-banking financial company is to provide small loans in a short period, and this business is normally operating in physical places. However, the business is becoming a modern model, since the technology is developing rapidly in recent centuries.
These companies will be releasing loans through an online platform, and most of them designed their own phone apps as well. Borrowers can easily get loans by uploading the required documents and information by using these apps. And borrowers need to repay loans with interest in a short period.
Moreover, there could be multiple parties involved under this modern model. For example, a technology company could provide such an online platform for a financial company; a payment company could set up a gateway for a financial company to release and collect money.
Benefits and risks for modern model
The new modern model for micro-finance is allowing financial entities to attract more consumers and operate a business efficiently. These entities are growing rapidly by using this model.
However, this modern model is usually in gray areas in many counties. There is no existing proper law or regulation for this kind of business. For example, the Indian government stopped fintech companies(one type of modern model) several months ago. It is hard to say what will be the future for a modern model of microfinance.