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What is Online Microfinance and How Does It Work?
Online microfinance is a financial service that helps economically disadvantaged people meet their capital needs. It can be used for various personal needs, such as education expenses, medical bills, home repairs, and small business ventures. Read on to understand online microfinance and why you should apply for it.
Online Microfinance is a financial service that provides loans and other banking and lending services to socially marginalised individuals with limited access to traditional banking methods. This financial tool aims to help reduce poverty and promote financial literacy and inclusion. Online microfinance has made it easier for people to access financial services digitally and has played a crucial role in empowering individuals and communities.
One of the primary products offered by microfinance providers is a microfinance loan. Otherwise known as 'small loans' or 'micro-loans,' these are collateral-free, short-term loans given to borrowers to support their business activities as an alternative to traditional loans.
Most small business owners in rural areas lack credit history and credit scores, so they cannot access traditional banking methods. They do not have collateral to pledge as security and thus cannot apply for loans. Online microfinance is important for village-level entrepreneurs as it provides access to resources and capital.
The primary purpose of online microfinance is to empower individuals and communities by providing them with the financial resources needed to improve their lives. These loans serve several essential purposes, such as:
Also Read - What is Micro Loan: Meaning, Objective, and How to Apply
Microfinance is important for helping less privileged communities, improving their financial situation, and promoting economic growth and stability. Some of the most significant advantages offered by online microfinance include:
Microfinancing works through the SHG-Bank Linkage Programme (SBLP) and Microfinance Institutions (MFIs). These institutions get funds from lenders, which they can use to provide affordable loans to economically weak individuals or groups. They work as informal Joint Liability Groups (JLGs) with 4-10 members. After receiving funds, borrowers repay their debts together.
Like traditional lenders, microfinanciers charge interest on loans. They create specific repayments at regular intervals. Some lenders require borrowers to set aside some of their income in a savings account, which can be used as insurance if the customer defaults. If the borrower repays the loan successfully, they have accrued extra savings.
Online microfinance serves as a lifeline to individuals from poor socio-economic backgrounds with limited access to funds from traditional banks. They can use these funds to expand their businesses, tackle emergencies, or improve their quality of life. Microfinance reduces poverty, facilitates empowerment and financial inclusion, and contributes to economic growth.
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