Microfinance has the potential to revolutionise how finance works. It has already brought significant changes to the way lending and borrowing works in developing countries. So, what is this seemingly ideal concept of finance? How ‘micro’ can finance be?
We answer these questions and more as we explore the basics of microfinance. If you need money now, it could be a better option than the best payday loan from a licensed money lender in Singapore.
Microfinance 101
‘Microfinance’ combines the words ‘micro’ and ‘finance’ because it deals with financial services involving very small amounts. While microfinance is the generic term used to cover all related transactions, it actually can be divided into three essential categories:
- Microsavings – Most major banks have a minimum balance requirement that many of the poorest in society cannot meet. As a result, these people cannot enjoy the convenience of facilities such as ATM access, which most of us take for granted. Microsavings accounts have either a zero or a token balance requirement, giving everyone access to everyday banking services.
- Microcredit – This is the aspect of microfinance that has captured the world’s imagination over the past 15 years. It involves giving very small loans, some as low as S$50. They may be even lower, depending on the borrower’s needs and the lender’s discretion. The value of the transactions rarely exceeds S$2,000.
- Microinsurance – Ordinary insurance companies deal exclusively with registered businesses and this puts the insurance safeguards out of the reach of informal, casual ventures. Microinsurance extends this coverage to virtually anyone with a business idea and the will to pursue it.
Microfinance in action
We now know the three essential pillars of microfinance but how does it all come together? Is it really better than a payday loan from a licensed money lender? Let us consider some scenarios to see microfinance in action in the developing world.
Microsavings
John lives in a remote village and works as a subsistence farmer. Most of the money he earns goes into his family’s needs and buying seeds for the next crop but he has still managed to save a small amount. Those savings are not enough to open an account in any of the banks in the town nearby. He fears that the monsoon rains may damage the paper currency notes, rendering them worthless. There is also the anxiety over possible theft.
A microsavings account allays his fears of losing all his savings. Moreover, he can now earn interest on that money. His bank account gives him the safety and security of cashless transactions.
Microinsurance
John’s wife, Jane only has a basic education but cooks well. She wants to help with the finances and her plan is to open a small food delivery business. She will need some cooking utensils as well as a bicycle to deliver the packages around the village. Each of those things is essential to her business and their damage or theft would cripple the entire operation.
It is impossible for her to obtain insurance from ordinary insurance companies since they are worth less than $200. However, a microinsurance service provider agrees to cover that amount. Jane is now free to purchase those items, content in the knowledge that she is covered and her business assets are secure.
Microcredit
Now that John and Jane have built up some savings and have immediate peace of mind, they can think of the future. John’s idea is to add irrigation pipes to his small plot of farmland. It would save him the time and effort of watering his crops manually. He plans to invest those savings of time and energy into clearing an adjacent plot of land to increase the arable area.
While major banks have always rejected his applications for a small payday loan of $200 to purchase and install the pipes, he now manages to secure microcredit. The irrigation system is installed and John watches as his crops flourish. Because of the increased yield, he even has the money to hire farm help.
John and Jane are representative of countless people around the world who have the desire to work hard. Unfortunately, they cannot even qualify for a credit payday loan from the average bank or licensed money lender. This simple scenario shows how you don’t need the best payday loan in Singapore to succeed if you have access to microfinance.
