Types of Microfinance Credit Schemes

by Dave Guilford; Updated September 26, 2017
Types of Microfinance Credit Schemes

Microfinance credit schemes are becoming a beacon of hope to the developing countries. Microfinance, or micro lending as it also known, is the practice of lending small amounts of money to entrepreneurs in impoverished nations to help them to start essential businesses in their communities. Often the amounts of money involved are too small for a conventional lender to be interested in lending, so micro lenders have sprung up to fill the need. With eBay's recent entry into the microfinance realm, micro lending is quickly coming to the forefront of socially conscious investing.

Significance

The significance of microfinance credit schemes cannot be overstated. These credit facilities enable impoverished persons to start businesses, rebuild after natural disasters like floods and hurricanes, and to receive both short- and long-term loans to meet their financial needs and improve their overall quality of life. The impact of micro lending is changing the economic landscape of the areas where it is most prevalent. In India alone, it is estimated that 18 percent of the overall population have some form of microfinance account.

Function

One process of micro lending that has been successful for people at both ends of the economic spectrum is a microfinance credit scheme like that of eBay's MicroPlace. Socially conscious investors can go to MicroPlace and invest whatever amount they want, and even choose the area where the money will go and what annual return they would like to earn on the money. MicroPlace then distributes the investment to the micro lenders that service the chosen area or project. The money is lent to the impoverished entrepreneur who uses the money to start or finance a business that enables the entrepreneur to rise up out of poverty. The entrepreneur repays the loan with interest, and the original investor has helped raise someone out of poverty and earns a return on his investment at the same time.

Time Frame

The loans made to the poor are typically very short-term in nature. Since the amounts involved are very small, often as little as $50 at a time or less, the money is usually repaid in 60 to 90 days. An ancillary benefit of the short turnaround time on the loans is that the money can then be lent to a new entrepreneur, and the same $50 may end up helping four or five different individuals in a year's time.

Geography

According to the MicroFinance Bulletin, at the end of 2006 Asia comprised 70 percent of the world's microfinance account holders, Latin America made up another 20 percent, and the remaining 10 percent were scattered throughout the rest of the world. In Africa, where the need is arguably the greatest, only 4 percent of the overall population have access to microfinance lending schemes.

Warning

Unfortunately, there is no shortage of unscrupulous individuals and companies that traffic in human misery. Microfinance is no exception. Many microfinance lenders charge exorbitant interest rates on the loans, often more than 30 percent interest on a short-term loan. When investing in a microfinance credit scheme, be sure to research the micro lender that will ultimately lend the money you invested.

About the Author

Dave Guilford has been a freelance newspaper and magazine writer for more than 10 years. As a former stockbroker, commodities trader and life insurance agency owner, he writes on personal finance, investing, insurance and retirement planning. A former international yacht racer and yacht brokerage owner, Guilford is a frequent contributor to "BoatU.S. Magazine." His work has also appeared in "Latitudes & Attitudes Magazine."

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