How does a microcredit work for Africans
Microfinance: Originating in Emerging Markets
(Micro) credit for the poorest of the poor
Microfinance is the trend - not only in emerging countries, but increasingly also in western nations, such as Germany. Despite the same name in both regions, there are significant differences in microfinance in Western countries and in micro-loan provision in emerging countries.
In the following, we will explain the key factors in traditional microfinance in more detail.
Origin of microfinance
The Grameen Bank, founded by Muhammad Yunus, is often cited as a pioneer in microfinance. The Nobel Prize winner founded the Grameen Bank in Bangladesh in 1983, which grants microcredit to people planning to start a business without collateral.
Other sources refer to Wilhelm Raiffeisen, who coined the idea of microfinance much earlier through the agricultural cooperative movement, which among other things includes mutual financial support for self-employed farmers. Still other sources refer to the Equity Bank from Kenya, which has revolutionized microfinance from a business point of view since the late 1990s.
The fact is, however, that all three pioneers - especially the two microfinance institutions from emerging countries - have the following factors in common as basic elements of microfinance.
Microfinance idea and target group
Around 80% of Africans and around 65% of the inhabitants of Southeast Asia do not have a banking relationship and therefore do not have the opportunity to use financial services such as microfinance. The vast majority of the population in both regions are largely uninteresting for local banks.
It is precisely on this majority, however, that an ever-increasing number of microfinance institutions (MFIs) are concentrating, providing the poorest of the poor with small loans (microfinance) for setting up businesses. This type of microfinance, however, is not about a new generation of development aid, but about the financing of interesting business ideas that should generate sustainable income.
Community spirit in microfinance
Since the microloans are granted without collateral, the lending is preferably made to a person who is strongly anchored in their social environment and thus belongs to a group or community. This creates peer pressure, either directly or indirectly; this is also referred to as a moral guarantee for microfinance. Provided the community jointly vouches for a microcredit. The joint guarantee is, however, common for microfinance in the emerging countries.
By the way: It is interesting that both the Grameen Bank and the Equity Bank grant micro-loans primarily to self-employed women, as they have proven to be more reliable than men when it comes to repaying micro-loans.
The "micro" in microfinance
As the name suggests, microfinance is about small amounts of credit that are given to start a business. The Grameen as well as the Equity Bank (microfinance institute of the year 2009) mainly grant small loans, some of which are well below US $ 100. At Equity Bank, for example, the smallest microfinance is around US $ 10.
Since an enormous number of small loan amounts are granted, the credit risks can be diversified accordingly. For microfinance institutions, this has the advantage that you can keep the loan default rate in microfinance relatively low, despite the comparatively higher risks.
The microloan is often only made available for a relatively short period of time. A "typical" microfinance has a term of 6 to 12 months, whereby terms of 3 or 18 months are not uncommon for microfinance.
Microcredits are typically repaid in installments; the first repayment can be due after a week, depending on the agreement.
Interest in microfinance
In general, the following rule applies: higher risk = higher costs (interest). This is also reflected in microfinance for start-ups from emerging countries.
Since the microloans are granted unsecured, the microfinance institutions also charge higher interest rates in line with the higher risk. With microfinance, these are usually between 20% - 40% p.a., depending on the respective creditworthiness.
Microfinance business model
The two large microfinance institutions, Grameen Bank and Equity Bank, each have a banking license and thus act as a bank. This has the essential advantage that both microfinance institutions can accept deposits in addition to "normal" loans and microfinance so that they can refinance themselves at low cost.
Since the banks only pay a very low interest rate on the deposits in relation to the interest income of a microfinance, it is possible for them to earn a considerable interest margin of up to over 20% via the microfinance. It is therefore hardly surprising that both banks are now worth several hundreds of millions of euros - so microfinance could also be described as lucrative development aid.
Economic benefits of microfinance
The economic benefits of microfinance are undisputed. As microfinance builds small businesses and even hires more people, microloans are seen as catalysts for economic growth in emerging markets. With small loans from microfinance, business ideas can be realized and business start-ups made possible.
For example, microfinance can be used to set up a mini kiosk, buy a washing drum, finance fertilizer to increase agricultural production and invest in drug development.
Microfinance thus fulfills the benefit of financing an offer which usually does not yet exist, but which meets an already existing demand.
Microcredit in Germany: finance your business start-up with the Microcredit Fund Germany!Continue reading
As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.
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