Microfinance, small loans available for people with little or no capital, has been around since the late 1800s. Jonathan Swift introduced the Irish Loan Funding system, whose purpose was to help improve the lives of impoverished Irish citizens. Since then, the concept has grown, and millions of people around the world, especially in underdeveloped countries, now have access to financial services that were once beyond their means. These services assist them in starting businesses so they may become more financially independent.
How It Works
The purpose of microfinance is to provide loan services for those who would otherwise be ineligible. One of the first modern institutions to receive attention for this was Gremeen Bank in Bangladesh, started by Mohammad Yunus in 1976. Along with the loans, Yunus also recommended a list of “16 Decisions,” which was a way for the poor to improve their lives.
Microfinance loans are not based on collateral, for those who apply for them generally have little to offer. Instead, some institutions insist upon a savings account of sorts to hedge the possibility of default. If the loan is repaid successfully, the funds revert to the borrower. Other institutions operate on a group idea, where several people are pooled and repay their loans as a group. This adds an element of peer pressure to loan repayment and also provides others to assist in opening a business if the borrower is having difficulty.
The Role of Technology
One of the drawbacks to early microfinance was the need for companies to have an office and employees to disburse funds and perform tasks such as background checks. This led to higher interest rates on loans and made the system less effective at achieving its goals. The rise of technology, particularly mobile phones, has enabled many companies and financial social enterprises to cut back on the number of employees needed and reduce their fees. Loans can now be applied for and disbursed online, with little need for a large staff and a centralised office. For example, FINCA organisations around the world offer digital services that are accessible on all types of phones from the cheap basic phones all the way to the latest smartphones like the iPhone 8, allowing customers to use these phones for instant transactions without the need to travel to a bank branch. In areas with bad roads and unpredictable weather, this makes banking and applying for loans more feasible. FINCA predicts that by 2020 mobile phone usage will be universal.
In addition to the ease of online transactions, new technology has improved the security of borrowers. It also makes it possible for lenders to perform background checks more efficiently and has made it possible to detect fraudulent applications. In some areas, borrowers are able to access their account information with a simple swipe of their finger. New technology also makes it possible for lenders to monitor the location of their borrowers to better know how to assist them. As technology progresses, the ease with which these loans are applied for and distributed, as well as the way in which services provided are determined, will only increase the chances of those in need getting the resources they require to become financially independent.
Microfinance offers opportunity to those who have no other resources. Through these programs, people in impoverished areas and those who have no other means to obtain capital have the chance to improve their situations, through both loans and education, and the advances in smartphones and tablets are making this possible.
Photograph by JESHOOTS