Small industries refer to industries or businesses working on a smaller scale. They consist of few employees and workers and few machinery setups. Typically, they run in small groups but significantly contribute to the economy.
Yet, they face massive financial challenges starting the business. In lower-income or underdeveloped countries, not everyone can start a big company. That’s why they can’t generate revenue in bulk. So, they rely on small businesses.
But, gathering the capital to start the business sometimes becomes difficult. This is where microfinancing can change the story. Microfinancing focuses on giving business loans to small industries, especially to women. Thus, it can help entrepreneurs to grow and increase economic growth.
So, let’s learn about the role of microfinance in stimulating small industry development in a low-income economy.
What Is Microfinance?
The term Microfinance is often mistaken with the term Microcredit and used interchangeably. But in reality, both the terms have different purposes to serve. You can say Microcredit is just a portion of microfinance. The main objective of microfinance is to help individuals or groups who are usually unnoticed financially. That means microfinance works for poor people’s and women’s welfare by providing them with loans and other financial help to start and grow their businesses.
Microcredit, Microloans, Microinsurance, and Micro savings are some of the crucial elements of Microfinancing. It empowers entrepreneurs who usually can’t get loans from general banks as they are not flexible enough to provide small loans.
As it focuses on financially helping women more specifically, women entrepreneurs get the chance to eradicate poverty in their community through business with the help of microfinancing.
The Impact of Microfinance on Small Industry Development
Needless to say, a country’s economic growth depends a lot on its industrial growth. This industry expands, combining big businesses and small businesses. So, the development of small industries means the development of the economy.Therefore, it becomes apparent to strengthen your small businesses to become the country’s backbone. However, financing small businesses is challenging in a low-income economy.
When traditional banks refuse to provide loans for small businesses, microfinance banks can come to the frontline and solve the problem. They solve multiple financial problems like –
The Big Loan Amount
Not every other entrepreneur in low-income countries needs big loans. A person planning on starting a small business does not even have any way to repay the loan. As a result, big loans are useless to them, and banks also don’t grant them loans.
In such a scenario, microfinance banking programs can provide them with loans. Thus, they can get to start their income journey.
Big Interest Rates
Regular bank loans generally include high-interest rates, causing a lot of tension for the business owners. Meanwhile, microfinance banks set fair interest rates for poor people so that they can repay the loan on time with zero stress.
Mortgage Assets or Collateral
You do not need to give microfinance institutions any collateral or asset as a mortgage. They provide loans without collateral, just wanting you to repay them on time.
Not Having The Knowledge of Investment
Traditional banks only assess your loan application, review it, and give you the loan. But they do not help you with business knowledge in any way. So, you might waste the money without the knowledge.
On the other hand, microfinancing institutions have different education programs where you can learn how to utilize the loan to grow your business.
The Need To Have Moderate Job or Business Establishment
Big loans from banks are hard to get as you already should have a high- paying job or business with which you can repay the loan. If you don’t have any earning sources yet, the possibility is that banks won’t accept your loan application.
But, while applying for loans in microfinance banks, you do not need such a job or existing business.
Challenges of Microfinancing
Besides having benefits, some challenges also show up in newer microfinancing systems. Although some rules and regulations exist to operate MFIs (Micro Financing Institutions), some entities do not maintain or change the process for their benefit.
Exorbitant Interest Rates
Critics say that some institutions set interest rates to the highest bar. Rural or poor people find it nearly impossible to repay loans with such high- interest rates.
Multiple Indebtedness
One of the remarkable challenges is that some individuals are taking loans from multiple MFIs. Thus, they cannot keep up with repaying loans to multiple institutions, bringing losses for both the individual and the MFIs.
Limited Financial Education
Although MFIs must educate people about financing and business, some are not doing it. Again, it brings financial illiteracy, and finances are going in vain.
The Role of Government and NGOs in Supporting Microfinance for Small Industry Development
Government and NGOs can do multiple things to support microfinance for small industry development.
● The government can make it easier for microfinance groups by creating simple rules. They can also give tax breaks and help with money for microfinance.
● The government can make laws protecting people who borrow money and those who lend it. This helps everyone understand how microfinance works.
● The government can make sure everyone, even in faraway places, can use microfinance.
● NGOs can give money help, like loans and savings, to small businesses.
● NGOs can teach and help people run their businesses better. This makes it easier for them to use loans and do well.
● NGOs and the government can work together and make reasonable rules that help microfinance and small businesses.
Conclusion
Although there are some disputes related to microfinancing regulation, there is hope that the low-income economy can be developed with it by overcoming them. To do that, the Governments, MFI bodies, and NGOs have to work together, and enough financial and industrial literacy is needed for the general people.
