Microfinance is getting quite some attention nowadays for both positive and negative reasons. Some say it can be a solution to address poverty or to facilitate financial inclusion. Others opine that it creates more problems for low-income people, by serving as a debt trap. As far as investment is concerned, though, it’s fairly easy to answer the question whether or not it’s a good idea investing in a microfinance business.
An Expert’s Take
Finance expert Sharone Perlstein is a staunch advocate of microfinance. He once got involved professionally in the FinTech industry where he found that microfinance possesses great potential in empowering those who don’t have access to banking and other traditional financial services in developing countries. He believes that considering the technological advancements that have been achieved so far, a “micro-revolution in the microloans markets” can be achieved.
Perlstein has a lot of optimism and enthusiasm for microfinance. In fact, he believes that microfinance helps low-income individuals in becoming successful entrepreneurs. This is why he went to Indonesia to help promote microfinancing. He acknowledges that the funds involved are relatively small, but these are deemed sufficient to address the needs of those who are not served or are not qualified to avail of the services of banks and other traditional financial services companies.
Moreover, as mentioned on Perlstein’s website, the repayment rates for microloans are among the best when compared to other financial services as offered by various types of financial services companies. This repayment rate is said to average around 98.9%, which means nearly all microloans get paid by borrowers. This means microfinancing can be considered a sound business opportunity. Investing in a company that specializes in microfinance can be a sound investment decision.
There are no large-scale comprehensive studies that investigate the overall feasibility of microfinance businesses in different parts of the world. However, there are local or regional studies that support the feasibility of microfinance business ventures. The study conducted by The George Washington University for international microfinance organization FINCA, for example, offers a positive outlook.
It’s important to emphasize, however, that microfinance is not a purely commercial venture. As can be observed in most of the feasibility studies conducted on the subject matter, the aspect of social responsibility is highlighted. Microfinance initiatives are launched not only for businesses to make money but more importantly to help those who don’t have access to traditional financial services. Microfinance is not mainly intended for generating profits.
With good management, a microfinance business is likely going to become successful. It can hence be said that it’s not a bad idea investing in a business that provides microfinance services. However, if the microfinance initiative is mainly aimed at helping people, profitability may not be prioritized. It would then be more viable putting your money in some other investment opportunity.