What is micro-lending?

“Poverty is unnecessary” Mohammad Yunus. 

Although the term is new, the concept of micro-finance has been used throughout history. It has been dated way back to the 1700s, where the poor were given a small number of loans to the lower class. 

Moving forward, Muhammad Yunus played a key role in shaping the new version of microfinance around the 1970s. The story of the “Banker for the poor” started when Mohammad Yunus helped a group of women. These 42 women had the talent of making bamboo stools in the village of Jobra, Bangladesh. However, the traders of the village would only lend the funds at the condition of selling the stools at a specific price, which was slightly higher than the cost of the raw materials. As a result, the women fell into severe debt. 

Consequently, Mohammed Yunus stepped in and lend them 27$ of his own money, which paid off the borrowing needs. By selling the stools at a fair price, the women eventually climbed up the ladder breaking free from the debt cycle.

This incident led him to build the Grameen Bank, which won him the Nobel Peace Prize award. The Grameen Bank lends loans to the poor who do not have the access to financial services from a legit bank. “The Banker to the Poor” currently provides over 2.5 billion dollars of micro-loans to more than two million families in rural Bangladesh of which 94% of them are women.

Understanding Microfinance

The main purpose of microfinance is to serve the needs of the economically marginalized population of the world. In other words, microfinance institutions and bankers provide loans, insurance, and savings to small-business owners who lack access to traditional financing services. Overall, micro-finance includes credit and non-credit activities. 

In particular, microfinance is primarily aimed at those who earn $2 per day! What’s more, microfinance has been identified as the most powerful tool to fight against poverty. 

How does microlending work?

Despite the fact of having a strong business plan, qualifying for a business loan is not an easy task. In particular, the extremely poor people or the ones with very low income do not have a slight chance to start up their businesses. This is where micro-financing companies hop in. At the end of the day, microfinancing is availed to outgrow smaller loans to qualify for a traditional bank loan. 

Microfinancing includes many financial services like loans, savings, insurance, fund transfers, and small business loans to entrepreneurs. The whole purpose of Microlending organizations is to facilitate small business loans to new startups and businesses. 

Interested investors can search for a suitable microlending online platform through websites. Then, the lending platform will calculate a credit rating from various things like real-world credit history, any ownership of assets, and the history of repaying any previous microfinance. However, since there is less security in microlending than in traditional bank loans, the interest rate is higher.                                                         

Why Get a Micro Loan?

Although the interest rate of a microloan is higher than any proper bank loan, it is still better to opt for a microloan rather than a bank loan. 

For starters, microloans are easy and convenient through websites whereas, bank loans are cleared through proper physical appearance and lots of paper work. Secondly, if you are financially weak at the start-up of your business, a microloan would be the solution. Besides, if you are confident to boost your business over time, then paying the high-interest rate at the start is not a big issue. 

Let’s get down to business!

Quratulain Merchant

A content mother, a former student of Hisham Sarwar, and a professional SEO blogger on multiple niche giving services at Fiverr.