Financial services play a vital role in the economic growth and development of cities and communities, as well as on a global level. These services provide businesses with access to credit and a means for saving and investing money. Microfinance banks make these services accessible to individuals and businesses within underdeveloped communities around the world.
Finance and credit sources outside of the microfinancing industry consist of informal agreements between lenders and borrowers that often come with high borrowing costs in terms of interest rates. Although these sources provide a certain level of financing, lenders may come and go within a community, which creates instability in terms of a community’s potential for economic development. Microfinance banks provide a level of stability within underdeveloped regions by creating multiple outlets for daily banking activities. Using different technologies, microfinancing methods make banking activities accessible within community locations through ATMs, mobile phones and locally based mini-branch offices.
Microfinance banks exist in a variety of forms that provide needed financial help in underdeveloped economies. Microfinance banks exist in different forms, some of which include nongovernmental organizations, credit union-type businesses, wire services, and commercial and state banks. These banks specialize in providing small loans — also known as microloans — to people who would otherwise have limited or no access to financial assistance. Both individuals and businesses within underdeveloped countries can use microfinancing to fund small-business enterprises within their local communities.
Access to Credit
Underdeveloped regions, such as areas in Kosovo, Latin America and certain sub-Saharan African countries, typically have little to no access to traditional banking organizations, which limits a community’s capacity for economic development. Because of the lack of resources and assets available in underdeveloped regions, no markets exist for traditional banking institutions in terms of profit-making potential. Microfinance banks provide individuals and businesses with access to credit, which opens up opportunities for investment using the skills and talents within a community or region.
The microloans made available by microfinance banks enable communities and regions with limited resources to develop small-business opportunities. Small businesses often develop out of the existing skills and talents within a community, including businesses dealing with food preparation and clothing manufacturing. Microfinance banks play a different role than their traditional counterparts through the types of interactions they have with their borrowers. In effect, microfinance banks play an active role in supporting individual businesses, working to stimulate each community’s existing potential for economic growth. Microfinance agencies use different methods of engaging with borrowers and developing incentives for business success. One such method works with groups of borrowers within a community. Each group works together as a unit in matters concerning loan repayments and sharing business ideas with members, holding each other accountable for meeting their financial obligations.