How Does a Micro Finance Company Work and Operate

A micro finance company is a type of financial institution that provides small loans to individuals or small businesses who may not have access to traditional banking services.

These companies often work with low-income or marginalized communities, offering loans with flexible repayment terms that are tailored to the borrower's needs.

Their primary goal is to provide financial inclusion and support economic growth in these communities, rather than making a profit.

To achieve this, micro finance companies usually operate with a network of local branches or agents who can interact with borrowers and provide guidance on loan applications and repayment.

Microfinance is a type of banking service that provides financial assistance to low-income individuals or groups who wouldn't have access to traditional banking services. Microfinance institutions offer a range of services, including microloans, which can be as small as $50.

Microloans can range from $50 to under $50,000. This makes financial services accessible to people who might not have been able to borrow money otherwise.

The goal of microfinance is to help impoverished people become self-sufficient.

Microfinance isn't a new concept, small operations of this type have existed since the 18th century.

The first occurrence of microlending is attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens.

The modern form of microfinancing became popular on a large scale in the 1970s. The Grameen Bank, started in 1983 by Muhammad Yunus in Bangladesh, was the first organization to receive attention for its efforts in developing the microfinance system.

Dr. Yunus found himself interacting with destitute basketweavers who were trapped by unfair and predatory lending situations, and he made a few small personal loans that allowed the women to buy more materials and sell more baskets.

Dr. Yunus went on to found the Grameen Bank in 1983 on the principle that credit is a fundamental right, spurring similar lending models in more than 100 countries.

He won the Nobel Peace Prize in 2006 for his efforts in developing the microfinance system, along with the Grameen Bank.

The Grameen Bank suggests that its customers subscribe to its "16 Decisions", a basic list of ways people experiencing poverty can improve their lives.

The "16 Decisions" touch upon a wide variety of subjects, ranging from a request to stop the practice of issuing dowries upon a couple's marriage to keeping drinking water sanitary.

Kiva was founded in 2005 with a mission to expand financial access and help underserved communities thrive, by leveraging the internet and a crowdfunded lending model.

The primary goal of microfinance is to eradicate global poverty and improve financial inclusion, providing access to services that enable economic agency and financial freedom for all. This ambitious goal is achievable through the expansion of financial services and the extension of credit to those who would otherwise have limited options.

Microfinance has numerous benefits, including increasing household wealth, creating opportunities for others, and promoting better health and education. A loan used to launch a small business can help improve the economic health of a community by providing new job opportunities.

Some of the specific benefits of microfinance include:

The benefits of microfinance extend beyond the direct effects of giving people a source of capital, as entrepreneurs who create successful businesses can offer jobs and trade to help improve their community.

To register a microfinance company, you have two main options: registering as a Non-Banking Finance Company (NBFC) or as a Section 8 company.

The registration process for an NBFC is quite complex, involving the formation of a private or public company, raising the required minimum net owned funds of Rs 5 crore, depositing the capital in a bank, and applying for a license from the Reserve Bank of India.

A Section 8 company, on the other hand, offers a relatively simpler registration process, with fewer requirements and less stringent compliances.

To register as an NBFC, you'll need to meet the prerequisites, which include approval from the RBI, a minimum of Rs 5 crore in net owned funds, and a director with over 10 years of experience in financial services.

Here's a comparison of the two options:

The type of organization you choose to register will also affect the complexity of the registration process, with NBFCs requiring more steps and compliances.

Microfinance can be a game-changer for small businesses and individuals, as seen in the stories of Peter and Catherine. Peter, a maize farmer in Kenya, borrowed USD$125 to purchase higher quality seeds, which led to a significant increase in his harvest and earnings. He was able to reinvest his profits in his farm for another growing season.

Catherine, the owner of a cereal company in Rwanda, used a loan of USD$35,475 to buy a new commercial truck, which allowed her to expand her business and hire more employees. This had a positive impact on the entire community, as she was able to purchase raw grains from 3,500 small farmers across the region.

Microfinance can also take the form of savings accounts, such as those set up by Kiva Field Partner Xacbank for students in Mongolia.

Microfinance companies like Kiva partner with financial institutions to increase lending to microfinance institutions, which provide small loans to individuals who lack access to traditional banking services.

Microloans are designed for individuals who can't get loans from traditional banks, and they're usually offered by specialized financial services providers called microfinance institutions. These loans are typically small, ranging from a few hundred to a few thousand dollars.

The "micro" part of microloan refers to the amount of money lent, which is usually small, but the impact can be big, allowing people to grow their income and make a difference in their lives.

Microloans are extended to individuals who lack access to traditional financial services, typically by specialized financial services providers called Microfinance Institutions (MFIs).

The amount lent is usually between a few hundred to a few thousand dollars, which may seem small but can have a significant impact on an individual's life.

Microloans aim to provide enough money to make a difference to an individual's life, while still being manageable to pay back.

Kiva funds microloans by allowing individual lenders to contribute small amounts, starting with as little as $25.

The Asian Development Bank (ADB) launched its Microfinance Program (MFP) in 2010 to encourage international and local banks to increase their lending to MFIs, working with partner financial institutions (PFIs).

Microfinance loan terms can be a bit complex, but essentially, lenders charge interest on loans and require regular repayment plans.

Some lenders require borrowers to set aside a portion of their income in a savings account, which can be used as insurance if they default on the loan.

This practice helps borrowers develop a good credit history, allowing them to access larger loans in the future.

Repayment rates on microloans are often higher than those on conventional loans, with the Grameen Bank in Bangladesh reporting an average repayment rate of 98%.

By setting aside some of their income, borrowers can also accrue extra savings if they repay their loans successfully.