Microfinance is a type of banking service offered to people who normally have no access to finance. People excluded from regular banking services are farmers, the poor, and often women. Microfinance has sometimes been called ‚financial inclusion.‘ However, this is a contentious term because there is still much debate about how accessible microfinance is for people.
Microfinance is mainly associated with micro lending. However, microfinance institutions (MFIs) also provide other services like financial and business education, and micro insurance.
EDUCATION
Many MFIs provide financial and business education to their clients. Clients learn how to budget; how savings accounts work; and how to manage debt, to name just a few things. Often, customers cannot receive microfinance without attending these lessons.
This education is beneficial in several ways. Learning how to manage budgets is important if you do not want to acquire too much debt. But managing budgets is also about making sensible investments for the future. Sometimes it is appropriate to spend lots of money and go into debt if you can get greater income in the long run. So MFIs also provide lessons on what investments you should and should not make. Knowing what to invest in is key to becoming a successful entrepreneur.
Learning how savings accounts work is also useful. Most people save money naturally because they want to guard themselves against risks like personal accidents or natural disasters. But saving money by keeping cash under a pillow is different to having a savings account. Putting money in a proper account is crucial due to inflation. Inflation refers to a rise in general prices in the economy. If you do not have a savings account that collects interest, inflation will be financially damaging because the value of your paper money will fall. This means you will be able to buy fewer goods than before.
Finally, it is important to learn how to manage debt. Although too much debt is a bad thing, debt on its own is not necessarily a problem. If you take on debt to invest in something that will bring plentiful rewards in the long run, that is positive. Likewise, managing sustainable amounts of debt over a period of time is a good way to show that you can be trusted with money. Lenders and other financial institutions may offer more flexible deals in the future. You also might begin receiving lower interest rates when borrowing money.
GROWING YOUR BUSINESS
Just as important as the education is the finance itself, whether in the form of a loan, savings account, or insurance. Accessing this finance is crucial to growing your business. Loans enable you to make investments. So for example, you may buy new equipment like a sewing machine to increase profits. Savings accounts and insurance protect you against inflation and unforeseen difficulties in the future.
The core insight of microfinance is that traditionally financially excluded groups can be just as innovative as everyone else. Poverty does not exist because the poor are lazy or uncreative, but because they do not have enough resources. By giving people access to finance, MFIs hope to give everyone the chance to use their natural, creative potential to better themselves in the future.
