Microcredit is seen as a magic wand, which can help the poor escape poverty, however, in recent years, the shortcomings of microcredit schemes have become clearer and have shown, that not everything in lending to the poor is profitable. Experts of the MANIVEO FAST FINANCIAL AID company, office site https://work.moneyveo.ua/, elaborated on these pros and cons, the main ones are described below.
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Benefits of microfinance
- The ability to invest your funds and gain access to markets and industries, which were previously unavailable due to the financial threshold.
- Empowerment, especially for women, due to less financial and social dependence.
- Microfinance often happens in groups, therefore each person is responsible for the investment behavior of the entire group, which is called joint liability. It increases social capital, eg: know-how exchange, partnerships, building trust.
- Changing financial markets. known, that the usurers, that flourished before the rise in popularity and prevalence of microfinance, offered extremely high interest rates. To stay competitive, today they are forced to reduce them.
Microfinance Limitations for the Borrower
- Lack of extensive investment know-how and proper analysis of profit and risk.
- Spend money on such items, like food and health, may seem attractive, as it can improve the well-being of the borrower in the short term, However, the direct financial benefits of these products are limited.
- Short loan term limits investment opportunities. The time limit leads to the fact that, that investing with a long term perspective, eg, in education, impossible.
- Similar strategies due to limited investment opportunities. This leads to, that most microlenders invest in the same type of investment, eg, in fertilizers, soil or seeds, therefore they often rise in price, making investments less profitable.
- Possibility of insurmountable scarcity, which will create a great financial and social burden due to the shared responsibility structure. for example, in India it leads to bankruptcy of people, who then begin to commit suicide - and this problem is enormous.
Microfinance Limitations for Lender
- In case of bankruptcy, there is no collateral, which could offset the deficit.
- Profitability is negligible, which jeopardizes the ability to provide services such as assistance, monitoring and consultation, and, Consequently, this leads to increased risks.
- The short-term benefits of a loan are more attractive, than the associated long-term liabilities, this can lead to, that too many people will get a loan - and this can lead to negative consequences for the borrower, and for the lender.
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