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There are many kinds of microfinance organizations. Microfinance can occur through institutions such as banks, cooperatives and nongovernmental organizations (NGOs). There are also organizations founded within particular communities with the aim of supporting their own financial development. These include associations, credit unions, community banks and Rotating Savings and Credit Associations (ROSCAs).
Some for-profit commercial banks offer their own microloans, or small short-term loans for low-income individuals or entrepreneurs who don't have collateral; these loans commonly are attached to high interest rates. Many commercial banks do not offer microloans, however, due to the perceived high risks. There are also banks that will only provide microloans when the loan has been guaranteed by a third party.
People living within a small community will sometimes form their own community bank. Community banks sometimes provide loans to groups of about five people, as opposed to one individual. The eligibility of each group member for future loans then depends on the success of every other member of the group, a tactic that can encourage solidarity. Cooperatives are similar to community banks but are not necessarily owned and operated by members of the community.
Credit unions tend to charge very low interest rates and provide loans to the union's members from their combined deposits. In ROSCAs, a smaller and usually interest-free variation on credit unions, groups of individuals invest their financial resources in one group member at a time. This gives each individual a turn at investing a lump sum of money in his or her own project. Thus, if 12 people each invest $5 US Dollars (USD) of disposable income per month in a ROSCA, they could be given $60 USD of capital to use one month out of the year.
There are also NGOs that might serve as microfinance organizations, in addition to offering related services in poor communities, such as business and financial training. Indeed, there are some NGOs dedicated solely to facilitating microlending both within and between countries. Several NGOs also offer the possibility of online microlending.
While many microfinance organizations have successfully helped people escape poverty, cases of exploitation and abuses of trust can and have occurred. When aiming to help people through microlending, one should carefully research several microfinance organizations and their success in terms of actually helping communities before investing resources. It is also possible to act independently of formal microfinance organizations. With some appropriate legal guidance, individuals can research people or communities in need, establish direct contact, and negotiate their own terms for making investments or donations.
You are right, Certlerant. However, when the microloan system does work, it can do a world of good for an impoverished individual or community.
People in this situation have never known what is like to have credit or to be able to invest in their homes and communities.
The hope is that microloans can really boost investment potential and turn a community's financial prospects around.
Although there are obvious advantages of microfinance in trying to invest in a low-income community or person, it must be difficult to sustain this sort of system.
Since the borrowers will rarely have any collateral or security to put up, the lenders really have to do their homework to make sure the loan can be backed up by other investors or that the co-signor will be able to pay if need be.
This is easier for banks or credit unions, but can be difficult for smaller community groups with limited access to financial information.
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