What is Microcredit?
Microcredit is a type of lending that features small loans given to individuals in order to help them gain employment or start a business. Normally, the common demographic of these borrowers are impoverished and female.
The idea was brought to fruition on the basis that there were skilled people who simply did not have access to financial assistance to execute their goals. Many of these people either did not have enough collateral to ask for a loan from a national bank or lived in villages with a barter system (a system without a designated currency that serves as a medium of exchange).
The godfather of this system of microfinance is Mohammed Yunus of Bangladesh’s Grameen Bank. He started the system in 1976, providing loans to groups of women of around $27, an amount enough to buy the fundamental tools for starting a small business. Yunus always prioritized making an impact over monetary gain, which made him realize that collateral wasn’t an option. Rather, catering to groups of borrowers would be a smarter method of risk aversion.
With successful repayments, borrowers were entitled to incrementally larger amounts of loans, similar to a modern credit score. Oddly enough, despite the lack of collateral and poor status of many of the borrowers, the “[M]icrofinancing institution Opportunity International reported repayment rates of approximately 98.9% in 2016.”
The major critique of microcredit, in general, is that the money could be misused by the borrower. Instead of establishing capital and assets that could be used to generate economic growth for themselves, they may use the money on consumption, which leaves no lasting positive effects for the borrowers. However, this is not the case for most borrowers who, through microlending, were able to pursue businesses and new economic opportunities to better their families financially. Yunus has famously argued in the past that people are not poor “because they were stupid or lazy;” rather, “the financial institution in their country did not help them widen their economic base.”
Microcredit’s Social Application
According to the World Bank, more than 500 million people around the globe have directly (or indirectly) benefitted from the use of microfinance. With existing operations in several third-world countries–Uganda, India, Indonesia, Bangladesh, etc.– there is no doubt that microcredit has and will contribute to the alleviation of poverty.
Another benefit of microcredit, with its primarily female borrowers, is its empowerment of women to find money-making ventures, especially in third-world countries where women don’t normally have access to such opportunities.
These new money-making ventures have had a multiplying effect. New business owners who took out microloans from a lender can now hire new workers who previously didn’t have a job. As these previously unemployed workers take advantage of new job opportunities, their families reap the benefits and there is a basic multiplier effect on the socioeconomic status of the town in which these borrowers live.
However, the impact of microlenders isn’t all positive. Large, for-profit microfinance institutions have been criticized for their operations because they essentially aim to profit from the poor. In fact, on many occasions, formerly non-profit institutions turned for-profit, hoping to profit off a large number of poor citizens as seen by the highly controversial Compartamos Banco in Mexico. Yunus, himself, conveys his disagreement with this approach; he believes the “incentive for microfinance should be poverty alleviation, not profit.” The large institutions argue that by converting to a profitable business, they can extend their reach and gain access to new investors.
Regardless of the goals of the institution in regards to profit, it is quite clear that microcredit can have a beneficial impact at a large scale by (micro)investing in the future of people and small villages.
Fintech’s Role in Microcredit
Fintech–or financial technology–is the automation and digitization of financial services. From digital money to digital lending, the relatively new industry of Fintech attempts to revolutionize fundraising, retail banking, investment management, and many more aspects of finance.
With new Fintech companies, such as Robinhood and Acorns, who have gained traction among traders and investors, there is no doubt that the world is adopting digitalization, especially in the financial sector. In fact, experts estimate that the global fintech market will grow by nearly 25% between 2020 and 2025.
Specifically, digital commerce and mobile payment institutions have had rising valuations as Fintech becomes increasingly adopted. Because many in third-world countries are rushing to avail of loans, microfinance has essentially “leveraged the true potential of” financial technology. New models are being used by these Fintech companies to carry out faster transactions.
A method called “Quick Processing” has helped to speed up transactions. By moving to an online platform, lenders and borrowers can digitally send and fill out forms with ease, thereby improving accessibility and efficiency. Another advantage of this system is that borrowers can receive status updates on their application for a loan from the lenders. This increases transparency and fosters efficient communication by informing borrowers of potential issues in their applications. Also, with the help of a “digital wallet” borrowers can receive their money fast and avoid the hassle of going through numerous verifications. This new medium for communication between the lender and the borrower helps the lender as well by providing a multitude of user data that can be used to judge future borrowers.
Conclusion
Undoubtedly, there is immense potential for the widespread application of microfinance in several third-world countries beyond those who have adopted the system. The key to unlocking this potential is Fintech as it brings a level of efficiency and transparency never seen before. With the introduction of digital lending and quick processing in the world of microfinance, poor citizens who previously didn’t have access to financial services can now truly rearrange their economic situation for the better.
Sources: Globe News Wire | Business2Community | Investopedia (Fintech + Microcredit)
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