The Power of Microlending in Emerging Economies

Microlending refers to the practice of offering small loans to individuals or small businesses. This financial service is majorly based on trust and is observed in the developing countries. The loan payment for the same is based on mutual accountability. These loans are opted for by micro-entrepreneurs, small scale companies, and others. The interest rates on microloans are higher than bank loans owing to the higher risk and administrative costs. They have short repayment terms and frequent installment schedules. Microlending uses different fintech platforms and mobile apps to digitalize as well as expand awareness about financial services. 

How microlending is adapting to a changing world? 

Microlending offers accessible credit to the global population, especially in rural or low-income communities, which is generally not offered by the traditional financial systems. This increases the adoption of microlending in the financial sector. Governments and NGOs promote microlending as a tool for poverty alleviation. This also promotes self-employment and small business development. Thus, microloans help contribute to income generation. The increase in usage of mobile phones and internet connectivity in emerging markets also fosters the growth of the microlending sector. Fintech startups and digital platforms are also able to collect repayments entirely online, making the process faster and cheaper.  

Collaboration between traditional microfinance institutions and fintech companies is opportunistic for the growth of the microlending industry landscape. The surge in usage of digital scoring models, mobile wallets, and blockchain is projected to enhance transparency, reduce costs, and improve risk management. In addition, usage of platforms like Kiva allows individual donors and investors to lend small amounts directly to borrowers around the world.  

Sectors where microlending makes a difference  

One of the most common applications of microlending includes the small business financing sector. A small amount of applied loan can help the borrower to purchase inventory, tools, or raw materials. This enables the entrepreneur to enhance operations and thus expand the business. Microloans are adopted in the farming and livestock sectors to buy seeds, fertilizers, chicken, goats, cows, and others. Microlending is also adopted by women entrepreneurs who run home-based businesses to improve household welfare and gain financial independence.  

Emerging patterns in microloan services  

The introduction of digital microlending platforms is one of the significant developments in the microlending sector. Many companies use mobile technology to assess creditworthiness, disburse loans, and collect repayments from the borrowers. This also helps the companies expand their reach. Alternative data sources such as mobile phone usage, utility payments, social media behavior, and GPS data are also used to assess risk as many borrowers lack formal credit history. In addition, the usage of artificial intelligence to assess credit scores helps financial inclusion for the microlending sector. 

Moreover, mobile wallets are also being linked to microlending services which enhance the process of disbursement and repayment. The introduction and usage of e-KYC enable the borrowers and lenders mitigate the risk associated with loan repayment. This also helps link the loan account with the mobile wallets of the borrowers. Thus, borrowers can receive funds directly into their mobile wallets and repay using the same channel. In addition, usage of blockchain technology fosters the growth of the microlending industry landscape. This helps ensure transparency and trust. In addition, the introduction and adoption of smart contracts help automate loan disbursements. This is also projected to facilitate repayment of loans and mitigate the risk associated with non-payment of the loans. 

Small loans, big change  

Microlending is majorly used in the financial sector to support entrepreneurship and improve the lives of the people in the developing economies. It helps individuals to manage their finances by providing access to small but critical amounts of credit. This helps them start a business, invest in education, or improve living conditions. This is projected to boost the growth of the microlending sector in the upcoming years. 

Also, the evolution of microlending from traditional, paper-based operations to digital models offers lucrative opportunities for the growth of the microlending sector. Innovations in fintech, artificial intelligence, and blockchain further enhance the ability of microlending to assess risk, deliver funds, and reduce operational costs. This is projected to boost the growth of the microlending sector in the upcoming years. 

To get more insights into the latest advancements in microlending, contact our industry specialists today! For any further queries, you can also chat with them directly.       

 

Short Description 

  

Microlending, also referred to as microcredit, is the practice of offering small loans to individuals and businesses who lack access to traditional banking systems. It helps fund small businesses, agriculture, education, and housing improvements. These loans are often unsecured and may be provided through group lending models to ensure repayment and community support.