Microfinance provides small loans to entrepreneurs in developing countries, with potential for two-fold returns for investors. It is a socially responsible investment that helps alleviate poverty and create business opportunities. The demand for microfinance loans is high, with a funding gap of $250 billion USD in 2007. Microfinance institutions lend to those in impoverished areas, charging reasonable interest rates and sharing profits with investors. Women have a higher success rate in borrowing, with many operating businesses from home.
Microfinance is the practice of making very small loans to entrepreneurs in the poorest sections of developing countries. A microfinance investment has the potential to generate two-fold returns for investors. Microfinance is the largest financial movement to alleviate global poverty and create business opportunities in poor areas, so it becomes a socially responsible investment. Furthermore, by investing capital in funds that issue microfinance loans, investors have historically achieved rewarding financial returns over risk exposure. While large sums of money have already been directed towards this nascent segment of the economy, it is likely that the full potential for microfinance investment has yet to be realised.
The demand for microfinance loans is robust. As of 2007, there was a funding gap, a disconnect between the amount of money required and the value of loans available, of $250 billion United States Dollars (USD). However, the amount of money going to microfinance from institutional and small investors has continued to grow in the United States and Europe.
To make a microfinance investment, investors must select a microfinance institution (MFI), which is a company that lends to those in the impoverished world. This MFI makes loans to individuals who are believed to be worth the credit risk and who are more likely to generate profits by using those funds wisely. The MFI charges a reasonable interest rate for the loan, and investors share in the profits made from those interest payments. Were it not for these MFI loans, the working poor would be forced to borrow money from loan sharks who could charge up to 1,000% annualized interest for a small loan.
The regions where microfinance investment could be allocated are some of the poorest areas in the world, ranging from East Asia and Eastern Europe to sub-Saharan Africa. The loans are provided to the working class in the currency belonging to the borrower’s nation. These investments, also known as microloans, can range in sum from less than $100 USD to more than $1,500 USD.
While any microfinance investment is at risk of borrower default, there is a higher success rate of lending to women than men in poor areas. Women tend to adopt a more conservative business approach, which reduces the failure rate. Additionally, since many women entrepreneurs also raise families, many operate businesses from their own homes, which eliminates the travel element and risk and makes it easier for lenders to locate them for microfinance investment matters.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
