Microfinance is the practice of extending a small loan or other form of credit, savings, checking, or insurance products to individuals who do not have access to this type of capital.

This allows individuals who are living in poverty to work on becoming financially independent so they can work their way into better living conditions.

Since a majority of the world is forced to survive on the equivalent of just $2 per day, microfinance becomes a solution that can help more women especially be able to improve their living conditions.

These are the benefits of microfinance in developing countries and why everyone should consider getting involved in this form of lending. So let us take a closer look at home microfinance has been empowering women around the globe in recent times.

• How Does Microfinance Empower Women Across Across the Globe?
• How do you Start a Microfinance Company?
• Does Microfinance Really Empower Women?

How Does Microfinance Empower Women Across Across the Globe?

A billion women, or 40% of the global female population, don’t have access to a bank account. Many of these women have simple dreams about a better life – to get books for their children or provide clean water and nutritious food for their families. 

Read Also: The Negative Impact of Microfinance in Developing Countries

Yet, they don’t have the means to earn income, receive capital or create businesses to invest in their modest goals.

Here are different ways microfinance is empowering millions of women across the globe today.

1. It allows people to better provide for their families

Microfinance allows for an added level of resiliency in the developing world. Even when households are able to work their way out of poverty, it often takes just one adverse event to send them right back into it. It’s often a health care issue that causes a return to poverty.

By allowing entrepreneurs to become more resilient through their own efforts at their own business, it gives them the opportunity to make it through times of economic difficulty.

Most of the households that take advantage of the microfinance offers that are available in developing countries live in what would be considered “abject poverty.”

This is defined as living on $1.25 per day or less – though some definitions extend this amount to $2 per day or more. About 80% of that amount goes to the purchase or creation of food resources.

By offering microfinance products that can be repaid with that remaining 20%, more households have the opportunity to expand their current opportunities so that more income accumulation may occur.

2. It gives women access to credit

Muhammad Yunus, who is often credited as the modern father of microfinance, once gave $27 to women out of his own pocket because he saw how the cycle of debt affected their work crafting bamboo chairs.

Most banks will not extend loans to someone without credit or collateral because of the risks involved in doing so, yet those in poverty do not have any credit or collateral.

By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace.

Yunus has always believed that credit is a fundamental human right. There are certainly some financial institutions which may disagree with his assessment.

Yet without credit, it can be difficult, if not impossible for someone in poverty, to pursue an idea that could bring about a giant payday one day. Microfinance makes that pursuit possible.

3. It serves those who are often overlooked in society

In many developing nations, the primary recipient of microloans tends to be women. Up to 95% of some loan products are extended by microfinance institutions are given to women.

Those with disabilities, those who are unemployed, and even those who simply beg to meet their basic needs are also recipients of microfinance products that can help them take control of their own lives.

Women are key figures in leadership roles in business, even in the developed world.

Catalyst has reported that companies with female board directors are able to obtain returns that are up to 66% better in returns on invested capital and 42% better in terms of sales returns than companies with male board members only.

Women also develop others more frequently when it comes to entrepreneurial roles. This comes from coaching, feedback, or investments. Even in the developed world, women helping women is an economic force that poverty can’t stop.

4. It offers a better overall loan repayment rate than traditional banking products

When people are empowered, they are more likely to avoid defaulting on a loan. Women are also statistically more likely to repay a loan than men are, which is another reason why women are targeted in the microfinance world.

There’s also the fact that for many who receive a microloan, it is their only real chance to get themselves out of poverty, so they’re not going to mess things up.

Zenger Folkman published a survey regarding ratings of high integrity and honesty in leadership roles that was separated by gender. The mean percentile of women displaying these traits was 55%, while for men, it was just 48%.

In business, the bottom line is this: integrity matters. Microfinance institutions have recognized this and approached women because of this.

As a side effect of this approach, many developing countries are taking a new look at what role women should play in society.

Instead of treating a woman as a second-class citizen, or the “barefoot in the kitchen and pregnant” attitude that has been prevalent in the past, the success of women in bring their households out of poverty is evidence that proves women not only have an initiative to get things done, but they produce consistent results.

For these reasons, microfinance institutions see total repayment rates of higher than 98%, though there can be several accounts that are overdue at any given time.

5. It provides families with an opportunity to provide an education to their children

Children who are living in poverty are more likely to have missed school days or to not even be enrolled in school at all. This is because the majority of families who live in poverty are working in the agricultural sector.

The families need the children to be working and productive so their financial needs can be met. By receiving microfinancing products, there is less of a threat of going without funding, and that means more opportunities for children to stay in school.

This is especially important for families with girls. When girls receive just 8 years of a formal education, they are four times less likely to become married young.

They are less likely to have a teen pregnancy. In return, this makes girls more likely to finish schooling and then either obtain a fair-paying job or go onto a further educational opportunity.

6. It creates the possibility of future investments

The problem with poverty is that it is a cycle that perpetuates itself. When there is a lack of money, there is a lack of food. When there is a lack of clean water, there is a lack of sanitary living conditions.

When people are suffering from malnutrition, they are less likely to work. A lack of sanitation creates the potential of illness that prevents working days.

Microfinance changes this by making more money available. When basic needs are met, families can then invest into better wells, better sanitation, and afford the time it may take to access the health care they need.

As these basic needs are met, it also means that there are fewer interruptions to the routine. People can stay more productive. Kids can stay in school more consistently. Better healthcare can be obtained. This creates a lower average family size because there are more guarantees of survival in place.

And when that happens, the possibility of future investments will occur because there is more confidence in being able to meet basic needs.

7. It is a sustainable process

How much risk is there with a $100 loan? Some investors might pay that for a decent dinner somewhere. Yet $100 could be enough for an entrepreneur in a developing country to pull themselves out of poverty.

This small level of working capital is sustainable because it’s essentially a forgettable amount.

If there is a default on that money, the interest and high repayment rates of other microloans will make up for it. Then repayments are reinvested into communities so that the benefits of microfinance can be continually enhanced. Each repayment becomes the foundation of another potential loan.

This is why many microfinance products have relatively high interest rates. Some institutions may charge the equivalent of a 20% APR, but others have interest rates which exceed 800%.

Although interest is high, recipients are invested into making these products work because virtually all institutions put repayments back into new loans that target the most vulnerable households in the developing world.

8. It can create real jobs

Microfinance is also able to let entrepreneurs in developing countries be able to create new employment opportunities for others.

With more people able to work and earn an income, the rest of the local economy also benefits because there are more revenues available to move through local businesses and service providers.

It’s not just the entrepreneurial level that benefits from job creation through microfinance. Grameen Bank in Bangladesh employs over 21,000 people and their primary financial products are related to microfinance.

That’s tens of thousands of jobs that are created by the industry with the sole purpose of being able to drag people up and out of poverty.

9. It encourages people to save

Microloans are an important component of microfinance, but so is saving money. When people have their basic needs met, the natural inclination is for them to save the leftover earnings for a future emergency.

This creates the potential for more investments and ultimately even more income for those who are in the developing world.

Some microfinance institutions have seen an extraordinary number of savings occur when products are extended. The Unit Desai of Bank Rakyat Indonesia counts 28 million savers to just 3 million microloan borrowers.

Now saving isn’t always seen, especially from borrowers, but this is part of the expected microfinance process. Small loans make small financial improvements for households living in poverty.

The difference between making $1.90 per day and $2.30 per day is not much in reality, but by definition, that amount takes someone out of extreme poverty.

Instead of big improvements, microfinance allows for small improvements. When enough of those improvements occur, then there is a safe place for people to store their income thanks to this industry.

10. It reduces stress

There is a valid argument to be made that some microloans go to cover household expenses instead of business needs. Some are using these loans to pay bills or purchase food. It’s true.

Yet without this product available, there wouldn’t be an ability to pay bills or purchase food. So even though it may not always be used for business purposes, it still serves a purpose by reducing stress.

Stress cannot be underestimated when it comes to poverty. Even in the developing world, the stresses of poverty can be overwhelming. It causes people to seek out coping mechanisms that are not always healthy. And, in some cases, it may even cause families to break apart.

Sometimes childbirth is a coping mechanism for poverty simply because an extra set of hands means an extra chance for income.

By reducing these stress markers, households can focus on the job at hand to provide for themselves, even if that means net income levels for that family may not rise in the near future.

11. It allows people to feel like they matter

The feeling of receiving a credit product for the first time cannot be ignored. It’s a feeling like you’ve made it. That you really are somebody because you’ve been trusted with credit.

This feeling applies to everyone, even in the developed world. When a person feels like they matter, it changes who they are at a core level. Instead of focusing on how they can just survive, then begin to look for ways to thrive.

This brings us back to the stress that poverty creates on people. People, when they are approved for a microloan for the first time, will often have a reaction that is similar to Steve Martin’s reaction in The Jerk when he discovered his name in the phone book.

And this is why Yunus feels that credit is a fundamental right. Without credit, survival is often the best possible outcome. With credit, there is hope that anything can be possible.

12. It offers significant economic gains even if income levels remain the same

The gains from participation in a microfinance program including access to better nutrition, higher levels of consumption, and consumption smoothing.

There is also an unmeasurable effect which occurs when women are empowered to do something in their society when they might not normally be allowed to do so.

As spending occurs, these benefits also extend outward to those who may not be participating in the program so that the entire community benefits.

The most important weakness of microfinance is that the effects of raising income levels for the poor can often be questionable.

Although it raises the possibility of income accumulation and savings, microfinance products also raise the possibility of creating a further indebtedness that may potentially extend the cycles of poverty for an infinite period of time.

Although some may look at consumption in a negative view, those who have gone without for so long will see improved consumption as a sign that things are getting better.

Consumption smoothing allows an entire community to realize the benefits that microfinance can provide.

It isn’t always about the money. Sometimes economic success comes from stability.

Yet if you were to ask the average person who was the recipient of a microloan how they felt about the experience, you would be told that they were happy the loan was available.

This happiness is reflected in the high repayment rates that are almost always seen in programs offered within developing countries. That in itself shows that the benefits of microfinance, at a core level, are almost always leaving a positive effect.

How do you Start a Microfinance Company?

Nearly 140 million borrowers worldwide received funding from microfinance companies in 2018. Rural borrowers accounted for about 65% of that number, reports the Microfinance Barometer.

Currently, more than 10,000 companies operate in this market. Yet, the industry is still misunderstood or poorly perceived by the general public.

Microfinance institutions have anywhere from 100 to six million clients and may include micro-finance banks, savings and credit cooperatives, non-governmental organizations and other legal entities.

Their services appeal to marginalized populations and low-income individuals. Many of these companies also offer financial training and programs aimed at reducing poverty rates. Some receive funding from major commercial banks.

The microfinance market has a 9% annual global growth rate, which is significantly higher compared to other industries. Digital technologies, such as blockchain and social media, as well as the globalization of microenterprises, have contributed to this growth.

A growing number of microfinance companies are using Internet-based strategies to expand their reach, launch new products and improve the customer experience.

Although the cost of providing credit remains high, the rising popularity of microlending is having positive financial and welfare impacts for low-income individuals in developing countries.

Research the Latest Industry Trends

Market analysis is paramount for any entrepreneur planning to start a microfinance business. This industry is constantly evolving, which is why you need to keep up with the latest trends and adapt to the ever-changing environment.

As mentioned earlier, microfinance companies are no longer targeting only the poor. Many of these organizations are shifting to individual lending instead of group lending, offering a variety of loans to finance education, health, housing and small businesses.

The types of financial services provided by microlending companies are more diverse than ever before; insurance products, money transfers and savings accounts are just a few examples.

Additionally, customers have access to longer-term loans with flexible repayment rates. Financial experts estimate that a growing number of salaried workers will apply for microloans over the next years.

Also, it’s important to note that many microfinance institutions are now financing small- and medium-sized businesses, not just low-income individuals.

Increasingly, more non-profit microfinance companies are embracing these trends to gain market share and expand their reach. Many of them have turned into profit-seeking institutions.

As an entrepreneur, you need to consider these aspects so you can choose a sustainable business model. Furthermore, you must be open to innovation and digital transformation in order to build a successful venture.

Microfinance Business Models

Before you make a business plan, research the different types of microfinance companies. Do you plan to start a microfinance bank, a credit union or a cooperative?

Another option is to set up a non-governmental organization that offers microloans and other financial products to entrepreneurs, low-income families and so on. Each business model has different legal implications.

A microfinance bank, for example, involves higher costs and requires more paperwork than a credit union. In addition to a general business license, you may need a banking license and one for trust and powers (if you wish to offer trust department services or other fiduciary services).

The legal requirements are slightly different for credit unions. The state of Florida, for instance, requires them to have a National Credit Union Share Insurance Fund (NCUSIF) insurance policy besides business licenses and permits.

Starting this kind of business comes with its challenges, but you can mitigate the risks by hiring an attorney. He or she will tell you what documents are needed to achieve legal compliances and avoid hefty fines.

Depending on the state, you may need a microlending license, consulting contract documents, non-disclosure agreements, deposit insurance, credit insurance, risk insurance, payment protection insurance and more.

These requirements vary among states, so your best bet is to consult an experienced law firm.

Draft a Microfinance Business Plan

With more than 10,000 microfinance institutions, the competition can be tough in this industry. Therefore, you need a solid business plan and a well-thought-out marketing strategy.

Analyze the market, define your target audience and assess your startup costs before getting started and then put everything in writing. Your microfinance business plan should cover the following aspects:

• Overview of the microfinance market, key industry players and trends
• Market and competitive analysis
• Company description
• Financial products and services
• Mission and goals
• Strategy and implementation
• Potential opportunities and threats
• Regulatory policies
• Minimum capital requirements
• Sources of income
• Financial projections
• Management
• Sales and marketing strategy
• Pricing strategy
• Payment options

Determine what products and services you want to offer. Unlike microcredit companies, which only offer small loans, microfinance institutions typically provide a wide range of financial products, such as savings and pension plans, money transfers and insurance policies.

To put it simply, microcredit is an integral component of microfinance.

Your business plan should clearly define your target audience. Decide whether you want to focus on small business owners and entrepreneurs, educational institutions, non-profit organizations or low-income borrowers in general. Use this information to develop a sales and marketing plan.

Determine where you’ll get the money needed to start your business, such as your savings, family funds, investors or bank loans. To increase your chances of success, you may specialize in particular products or services, such as:

• Microloans for startups
• Equipment and vehicle loans
• Home equity loans
• Commercial mortgages
• Residential mortgages
• Financial consulting

Register Your Business

The best legal entity to use for a microfinance business is either a limited liability company (LLC) or a general partnership.

An LLC separates your personal assets from your business assets and involves less paperwork than a corporation. Additionally, it provides more flexibility and doesn’t require a board of directors and other formalities.

Once you’ve made a decision, register your company with the state and apply for a tax ID number. Simply head over to the IRS website and fill out an application form to obtain your EIN (employer identification number).

Next, open a business bank account and apply for loans or grants if you need startup capital.

Depending on your location and the type of legal entity, you may need specific licenses and permits. For example, a zoning permit may be required in certain states if you rent or purchase commercial space for your business.

Again, it’s recommended to reach out to an attorney. The financial industry is tightly regulated and the fines can be hefty, so don’t take unnecessary risks.

Develop a Marketing Strategy

Consider your target audience as well as your products and services when drafting a marketing plan. If you’re targeting local consumers, advertise your services on the TV, radio and in local newspapers.

You may also send brochures and introductory letters to small businesses, schools, households and other prospective clients. Attend local business and finance events, seminars, workshops and conferences to connect with other industry professionals and grow your network.

Depending on your budget, you can also give away branded merchandise, place billboards around the city, distribute flyers or sponsor local events, such as fundraising campaigns.

Another way to promote your microfinance business is to set up online advertising campaigns on Google and Facebook. In this case, it would worth hiring a marketing agency.

They can leverage Facebook’s algorithm to laser-target your audience and create highly personalized ads.

Furthermore, join your local chamber of commerce to market your services and get referrals. Consider creating different packages for each type of customer.

A microloan for female entrepreneurs, for example, may have different payment terms and interest rates than one for low-income households. Likewise, your online marketing efforts should be tailored to each type of client.

Does Microfinance Really Empower Women?

The assumption that microfinance promotes empowerment is partly due to microfinance’s often group-based structure. Microfinance Institutions (MFIs) often require beneficiaries to join or form groups as a method of support and accountability for loan repayment.

The ongoing monetary links between group members can create social capital, such as trust, that stimulates members to “address social issues” and can lead to concerted efforts to protect other women from men.

Microfinance is also assumed to promote women’s empowerment due to its poverty alleviation outcomes.

Research efforts to determine whether microfinance can help alleviate poverty have been conducted across the globe. Literature shows that there is evidence to support the benefit of microfinance on poor people overall.

A study in Bangladesh found that microfinance decreased poverty rates of borrowers and raised household consumption per capita. This contributed to wider non-group member advancement in the local economy and promoted income growth. 

Morduch and Haley also add to this, claiming that microfinance positively impacts on the amount of people living in absolute and extreme poverty.

In contrast, it can be argued that microfinance’s impact on poverty reduction and therefore empowerment may be minimal because poverty alleviation doesn’t often occur due to restrictions on women regarding access to markets, education and skills development.

Although poverty alleviation can be shown to benefit some microcredit recipients, evidence suggests that many women use their loans to support pre-existing ventures within limited activities that often produce low profits.

These businesses are generally seen as women’s labour and include enterprises such as handicrafts and smaller trades. Women who are restricted by male relatives from going to markets can have their work exploited, often because their children are sent to sell their products instead.

Social acceptance of traditionally male and female sectors has shown to restrict women’s access to more profitable work, limiting their access to increased income.

Another argument to support microfinance’s positive affect on women’s empowerment is the acclaim it receives for providing loans mainly to women.

The credit access provided to more women than men is seen as an important step to include women in the financial sector. However, the assumption that microfinance promotes empowerment simply because of access to credit has its limitations.

The assumption that providing loans mainly to women promotes empowerment is also challenged when looking at gender discrimination within MFIs.

MFIs often praise women as the more reliable beneficiaries of credit, specifically when it comes to loan repayment.

However, MFIs may not be excluded from gender stereotyping, specifically that “driven by social categorizations and cultural constructs, especially in developing countries where few legal barriers exist to discrimination” Agier and Szafarz claim the stereotype in question is that of women’s lack of entrepreneurial abilities.

They suggest there is a glass ceiling for women receiving microfinance loans. Women may have equal access to credit however they often “face harsher loan downsizing than men.”

Microfinance is further thought to promote women’s empowerment as it is suggested that it will spark a chain of events leading to social change. 

Mayoux discusses the assumption that access to credit in various program styles leads to a “virtuous spiral” of “economic empowerment, improved wellbeing and social/political/legal empowerment.”

It is assumed that once women have access to credit they will themselves work towards empowerment in a knock-on effect, similar to that conceptualised by “feminist gender lobbies.” Many MFIs claim that their work leads to social change potentially empowering women in their domestic and social spheres.

The issue with this assumption can be seen first in its specific use of the term empowerment. As discussed above, empowerment can be viewed differently.

Empowerment is defined in this instance by feminist gender lobbies, which may or may not lead to the empowerment of other women by their own standards or interpretations.

Furthermore, after decades of access to credit from MFIs, women are often still limited by gender stereotypes and traditional limitations. The expectation of women to maintain their traditional workload despite commencing their entrepreneurial endeavours can limit their opportunities to create income. 

Brett argues that many women are subject to traditional constraints such as domestic duties and looking after children, which can severely limit their productive activity, so much so that they may “realise a net income loss at the household level.”

Women are therefore arguably unable to fully benefit from their credit and utilize it in their business ventures as their time is limited.

It can therefore be argued that women don’t often progress from economic empowerment to the goal of social empowerment as they don’t make it past the first stage due to social constraints.

There are many approaches used by microfinance programs, differing in detail which can affect women’s empowerment in different ways.

According to Johnson, microfinance can take approaches that tackle gender inequality in its programs or can step back, providing minimal support, and putting responsibility on women to access credit.

However, MFIs that provide support to women and focus on the restrictions they face have a higher chance of effecting positive change. The assumptions regarding what empowerment is and looks like can determine the level of support provided to women and the approach taken.

To fully promote women’s empowerment through microfinance there are numerous considerations to be aware of.

First, MFIs must be aware of hurdles to promoting women’s empowerment, such as not making it a primary goal that guides decisions and not providing clear incentives that make women’s empowerment a goal that everyone accepts and aims for.

Read Also: Do Microfinance Companies Really Help Even the Poorest of the Poor?

Further, MFIs should not assume empowerment of borrowers just because they have access to microcredit.

If organisations truly want to empower women they should design their microfinance programs to provide incentives for borrowers, workers and husbands that encourage women’s empowerment through “well-defined and observable empowerment-promoting tasks and evaluation criteria.”

Mayoux also suggests that a “minimal gender package” should be used in microfinance.

This includes flexibility of loan conditions that cater for women’s goals and requirements and increase their control; and the provision of additional services that address gender issues, reduce women’s traditional workload, and advocate for women at both the national and local level.

The gender package can also address women’s group participation in “decision-making and strategies” to ensure they contribute to empowerment, not simply loan repayment; and ensure the establishment of gender policy in all participating NGOs.