Enabling entrepreneurs to grow-out of low-income situations by helping them build their business can stimulate economic growth on a national level. However, all over the world, and especially in developing countries, there are people who have great business ideas, but no means to develop them. They are found ineligible for conventional business loans, fail to raise venture capital, and definitely do not have the money to start up independently.
Seeing as these businesses are usually not the international start-up type but rather local traditional ventures, crowdfunding platforms do not offer an effective solution either. So, how can people in these situations get their businesses off the ground? For many, the answer lies in microfinance.
Supporting Emerging Markets Through Microfinance
There is no doubt that promoting new business in developing countries is a good idea – it is one of the best ways to help these countries become emerging markets. For this exact reason the concept of microfinance is so important today. We asked Sharone Perlstein, a microfinance specialist who is currently on a mission to increase microfinancing in Indonesia, to walk us through this fascinating field.
1. What Is Microfinance?
Microfinancing is essentially providing small loans at manageable interest rates to people with low incomes who wish to start a business. The microloans are usually used to buy raw materials and merchandise, cover setup costs, etc. Loan conditions and amounts vary from country to country and also depend on the local business environment.
Sharone explains: “Someone seeking a microfinancing agreement in a developing country, particularly in a rural area, would not be likely to receive as much money as a city dweller in a developed nation, but the granted amount would potentially create the same level of possibility in both cases, because costs are much higher in first world urban areas.”
2. Microloan Repayment Rates
IFC (International Finance Corporation) data shows that in developing and third world countries, over 130 million people have already used microloans to start businesses. The repayment rates for microloans are among the highest in comparison to most types of loans available worldwide. According to Sharone Perlstein‘s website, 98.9% of microfinancing is repaid in full. With such high repayment rates, it is clear that microfinancing is helping a huge number of people launch and maintain successful ventures.
3. The Future of Microlending
With the help of technology, microfinance is continuously evolving. One of the main challenges being addressed is providing microloans to unbanked populations. A good example is the cashless Aadhaar card, which is helping India become 80% cash free, and enabling lenders to offer microcredit loans to borrowers who have no bank account. Microfinanciers in other countries are using mobile phone technology to create systems that allow lending platforms to approve unbanked loan candidates and borrowers to receive money and manage their loan repayment online.
In terms of services, microlenders are also beginning to diversify so that they can offer even better support to people who want to grow new ventures from a low income starting point. For example, some have begun offering business insurance and even savings programs.
For people who need financial assistance in order to improve their own lives, support their families and bring new business to their communities, microloans are a real boon. But that’s not all, they also seem to be strongly benefiting the businesses that provide them.
Microlending presents investors with a low risk way to invest in economic growth where it is well needed. It’s clear that Sharone Perlstein is quite excited about the future of microlending, and we are right there with him waiting to see how it continues to evolve.