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Posted by admin, April 12, 2017

A Closer Look at the Benefits of Microfinance Loans in Developing Countries

Microfinance, also known as microcredit, is as a way of extending a small loan or any other form of credit, checking, insurance products or savings to people who don’t have access to capital. Through microfinance loans, people living in developing countries can become financial independent and improve their standards of living.

With a majority of the world surviving with less than two dollars a day, microfinance has become the ideal solution for people to access credit. There benefits of microfinance loans in developing countries include:

Allows Individuals to Cater For Their Household Needs

Microfinance provides an added level of resilience in developing countries. Even when families are able to come out of poverty, it usually takes just one unfavorable event to send them back into it. In most cases, its health care issues that take a family back to poverty. When entrepreneurs become more resilient in their efforts at their business, it makes it easy for them to survive difficult economic times.

Individuals that take advantage of microfinance loans available in developing countries live in abject poverty, which is defined as living on less than $1.25 a day. However, some definitions have increased this amount to $2 a day. Individuals spend 80% of this amount in buying or creating food resources.

Microfinance loans, which can be repaid with the remaining 20%, give individuals and households a chance to expand their opportunities and accumulate income.

Gives Individuals Access to Credit

Muhammad Yunus, the father of microfinance, gave women $27 from his pocket after their business of crafting bamboo chairs was affected by a debt cycle. Many banks will not give loans to individuals without credit because of the risks involved, yet people living in poverty don’t have credit.

When microfinance opportunities are extended to these regions, people will have access to credit which will definitely help to reduce poverty. According to Yunus, credit is a basic human right. While some financial institutions that may disagree with this assessment, without credit, it would be difficult for anyone in poverty to take up a business venture that will bring him out of situation. Microfinance loans can make this possible.

Empowers Women

In many developing countries, women are the primary recipients of microfinance loans. About 95% of microfinance products offered by financial institutions are extended to women. Other recipients of microfinance loans are those who are physically impaired, those who want to cater for their basic needs and those who don’t have a source of income.

Women have occupied key leadership roles in many businesses, even in developed countries. Reports have shown that companies with women in the board of directors have obtained 66% higher returns on investment capital and 42% higher sales returns than companies with men occupying the same positions.

Repayment Rate Is Better Than Traditional Bank Loans

When people are economically empowered, they are likely not to get a loan. And the main reason why women are the main targets in microfinance is because they are likely to repay a loan than men. For many people, receiving a small loan is a chance for them to get out of poverty, which means that they will not mess up things.

Today, women are not being treated as second-class citizens or items of giving birth and cooking. In addition, the success of women to rescue their households from poverty shows that they have the initiative to get things done and produce consistent results.

For this reason, many microfinance providers see total repayment rates of over 98%.

Families Can Educate Their Children

Children who live in poverty will probably not enroll in school or miss school days. Many families that live in poverty work in agricultural sectors. These families require their children to work on these farms so that they can meet their financial needs. By receiving microfinance loans, they are able to cater for their financial needs and educate their children.

This is very important for families with girls because when a girl receives only 8 years of formal education, she is four times less likely to be involved in an early marriage. This means that girls will be able to complete their education and get a fair paying job or even further their education.

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