Say you’ve got everything you need to run a small business, from ideation to business plan and more. However, what happens when you don’t have access to traditional financial resources from major institutions like banks, or friends and family aren’t able to lend you enough to get your business idea going?
That’s the question that we’ll be providing answers to in this article. Buckle up, because you still have a chance to turn your dreams into reality.
What is Microfinancing?
In essence, microfinancing was originally a means of lending out small loans (known as micro-loans) to those in need for access to credit, especially in rural communities. These small loans offered through microfinancing allowed many to improve their livelihoods by obtaining small loans to set up small businesses or buy farming equipment. Really useful, right?
The Cambodian microfinancing industry was first started by non-governmental organizations (NGO), and was especially created for those who had little to no access to conventional banking services. This group of people might not typically have a stable income, a good credit score or sufficient collateral, all of which are often requirements to be eligible for a bank loan.
Eventually, the National Bank of Cambodia set regulations to formally implement microfinancing into financial services. Some NGOs transformed into the Microfinancing Institutions (MFIs) that we know today, still providing micro-loans, with some even accepting deposits and offering money transfer services. Today, microfinancing is widely available in Cambodia for everyone, be it for those in the city or the provinces, and has become a huge, fast-growing industry on its own.
Benefits of Microfinancing
It promotes financial inclusion for the unbanked and underserved
As we all know, if we apply for a loan without a good credit history or some form of collateral, there’s a high chance that our loan application will be denied. That’s because the loan issuer is unable to determine if we’re able to pay back the loan in full and on time. As formal financial institutions such as banks typically exclude low-income households due to perceived higher risk and lack of eligibility, this means that a significant group of people is systematically excluded from receiving financial services due to their circumstances. Microfinancing helps these households by providing micro-loans to them that would be used to make investments (such as in education, health, livestock, machinery and more) to generate extra income, enabling them to better provide for themselves and their families. Microfinancing helps give these families a chance to work to improve their livelihoods, where there was previously none!
It drives productive gains in entrepreneurship and small businesses
In many developing countries, the self-employed – for instance tailors, hairdressers, farmers – comprise a majority of the labour force as formal employment was limited especially in rural communities. Sadly, it was difficult for these entrepreneurs to scale their businesses as they did not have access to financing. Microfinancing provided access to small amounts of credit at reasonable interest rates to allow borrowers to move from initial, perhaps tiny, income-generating activities to small enterprises. In fact, research conducted by the Abdul Latif Jameel Poverty Action Lab showed that expanded access to credit actually empowered entrepreneurs to invest more in their businesses, which led to an increase business activities! This included higher rates of business ownership, higher revenues, and even higher profits in some established businesses. How great is that?
It helps build good credit history
When given the chance to borrow, and if borrowers are able to repay their loan on time, they get the chance to build a reputation as a reliable borrower. Thus, with microfinancing, those who have been typically excluded from financing by formal banks and institutions have the opportunity to build their credit history by starting out with small loans! With these loans, and a history of good credibility and credit score, these same borrowers might be able to gradually take out larger loans in the future, perhaps even with banks. You see, microfinance provides an opportunity for everyone to chase their dreams of a better life, and makes it possible for them to do so.
Ultimately, although microfinancing could be a viable option with good benefits, it might be wise to exercise caution if you wish to borrow. Today in Cambodia, despite the initial spirit and intent of microfinancing, MFIs now charge a significantly higher interest rate for their loans, while many small MFIs have sprouted up to take advantage of borrowers in a predatory way. Though micro-loans are small, make sure you consider your financial situation carefully! An accumulation of these high-interest debts could make it difficult to repay. If possible, banks would typically be the safer avenue if you need to borrow as they are closely monitored and regulated by the NBC.
We hope that this article had been educational! Microfinancing is an established industry in Cambodia, and we’re sure it will continue to grow quickly. Make sure you learn all you can, and weigh the pros and cons before making a decision on a loan and institution! For more Finance 101 articles, you can check them out here.
