Today you can often hear such abbreviations as MFO, MFI and MFC. They both come from the same world. MFO stands for Micro Financial Organization while MFC stands for Micro Financial Credit which this organization offers. MFI is understandably a Micro Financial Organization.
As you see from the name of it, microcredits are relatively small sums of money. They are usually given to people for daily needs or making insignificant purchases. Still, it would be a mistake to think that they do not relate to the global banking system.
So how did they appear and how do they work and why are they so popular?
As you understand MFOs are organizations which provide loans of small amount to people with low income or to entrepreneurs who run small businesses. They offer all types of classic financial services plus unordinary services. Among them can be education or special programs.
How Did It All Start
Naturally, small loans have always existed. In various forms, however. As far as it is known the motherland of the process is Asia where this tradition started years ago.
Nevertheless, what we consider as a modern micro credit comes from India. In 1970 there was developed a project called Grameen Bank, it can be translated as a village bank.
It was created by an Indian professor who tried to eradicate poverty in his country.
As a part of his project, he started to give small sums of money to poor people of India to help them start business or make a living. It became so popular that the project spread all over the world. This is when a project turned into industry. People giving money decided to structure themselves as official organizations dealing with small loans.
Soon after that large banks showed a lot of interest to the process. Among them were such major players as Credit Suisse, Deutsche Bank and Citigroup. As a result, around $20 billion was channelled in this sphere as the statistics of 2018 says.
Today micro credits are becoming more and more accessible. It is happening owing to the growth of smart phones. People can get a loan by the means of their devices. You can just download an application, add your bank card details and apply for a loan. In most cases it is not that difficult to get one.
Many people interested in this sphere wonder will the system retain its best features in the future? Since the problem of poverty is not eradicated yet, people do need small sums of money. It means that MFOs will be popular for many years which makes it a tempting business to start.
As you understand, progress is impossible without enough support. Even though the system of micro loans started to become popular among people it still needed someone to back it. It goes without saying that first backers of this process were long-sighted enterpreneurs, later on worldwide banks joined to the process.
Nowadays this system also has financial support. For example, there is such a modern technology as P2P micro-credit websites. These are online platforms which give people an opportunity to support enterpreneurs via the Internet.
Of course, micro economy would be unable without support of the government. Authorities do encourage this process and offer various programs to let their citizens fight against poverty.
Rating Agencies do provide a lot of help as well. They support funders and make the sector absolutely transparent so that people could see that there is no risk in investing.
As you understand a person who is involved in modern business are called micro-entrepreneurs. They run their own organization, or work with a small group of employees or simply work in a specific sector of business. In most cases they are enthusiasts who try to turn their hobby into way of making money.
Because of the business specifics these people cannot get financial services through traditional banks. They cannot meet the requirements to get a sum of money which is necessary for their quite modest needs. Banks simply do not work with such amounts of money.
What is a way out? Right. Micro financial organizations. Not only do they help poor people with daily needs but also they support enterpreneurs providing adequate loans and condtions.
Even though the system of micro loans is flexible and differs from traditional approach it still charges interests to exist. This is the catch. In most cases their rates are much higher compared to typical institutions. However, this is not because MFOs are so greedy, the fact is that it is more expensive to administrate such loans.
Here is what these rates can cover:
- Traditional operational costs
- Exchange rate risk
- Risk of borrower default
- Involvement of Others
Taking everything into account it is quite obvious that the industry of micro economy is already quite developed. Of course, it is getting more and more flexible and includes all the modern technologies and tendencies. Using it is really convenient and beneficial for enterpreneurs and borrowers as well.
Even though it may seem unsafe to apply for a micro loan, it is not. There are a lot of secure organizations which do help. The only drawback is the level of interest rates. They are really high. Nevertheless, it is a good way out for those who need money.
All things considered, you still need to think twice whether you want to get money or to start your own MFO. There are still risks but they are manageable. Be wise and enjoy financial opportunities. As long as you follow this simple rule your financial state will be okay. Good luck!