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Did You Know?
Entrepreneurship, microfinancing, and microcredit are
general financial business terms. The last two terms — microfinancing and microcredit — are specific to financing for the poor and underprivileged, many
who live in developing and emerging economies with little income or capital, to
realize and potentially allow for a life sustaining dream of financial
independence.
An entrepreneur is
an individual involved in entrepreneurship, someone who starts a business
with all the associated risks and responsibilities, but reaps the rewards of the
enterprise’s success.
Microfinance is
the general term used to describe the supplying of loans, savings, and other
basic financial services to the poor. Since capital or financial services involve small amounts of money,
the term microfinance helps to differentiate these services from
those that formal banks provide.
Microcredit involves the loaning of small amounts of
money or capital. Microcredit is a subset or part of microfinance. Microfinance can take the form of
microcredit, but also includes other financial services such as
microinsurance and microsaving.
Lesser Known Facts
An entrepreneur sees an opportunity regardless of his or her
available capital, makes a business plan, finds the lending, starts the
business, manages the business, and receives the profits.
A Business Plan usually consists of the following seven parts:
- Executive Summary — is a one-page document highlighting your
idea
- Company Description — partners; history; and legal structure, if
any
- Product or Service — a description of what you are selling with a focus
on the benefits for customers and the community
- Market Analysis — do your homework, know your market and
customer needs, including where they are and how to reach them
- Strategy and Implementation — a description of how you are going to
develop and deliver your product
- Management Team — a list of the biographies and backgrounds of the key
members of the team
- Financial Plan — include profits and losses, cash flow, balance
sheets, break-even analyses, assumptions, and business ratios
The most commonly used definition of global poverty is the
absolute poverty line set by the World Bank. Poverty is set at an income of US$2
a day or less, and extreme poverty is set at US$1a day or less.
Empowerment is a person’s ability to affect change and make
choices in their own lives.
Microfinancing has been proven to increase income, generate
employment, provide a more stable existence, and improve the quality of the lives of
the target beneficiaries.
A microfinance institution (MFI) is an organization that
provides microfinance services, ranging from small nonprofit organizations to
large commercial banks.
A microloan is usually under US$500.00.
A microenterprise is a small-scale business in the informal
sector. Microenterprises often employ less than five people and can be based out
of the home. Microenterprise is often the sole source of family income but can
also act as a supplement to other forms of income.
A microentrepreneur is the owner of a microenterprise.
Most microfinance credit is provided without collateral and
loans are small, usually less than US$100.
A credit rating is usually used to determine a bank or
financial institution's credit risk — it is an evaluation of an
individual or company's ability to repay obligations or its likelihood of not
defaulting.
Bankable people or those who are creditworthy are deemed
eligible to obtain financial services that can lead to income generation,
repayment of loans, savings, and the building of assets.
Collateral is the assets (or things you own) that are pledged by
a borrower to secure a loan, which can be repossessed in case the loan cannot be
repaid. In a microfinance context,
collateral can vary from fixed assets (a car, a sewing machine) to your
partners guaranteeing that they have the assets if you do not.
Credit scoring measures the risk associated with each credit
applicant or microborrower — it is an automated system that assigns
points for various credit factors, providing lenders with the ability to grade
prospective clients, and to calculate the risk of extending credit. In a
microfinance context, the credit scoring method is modified to take into
account a microentrepreneur’s experience, character, and capacity to repay. The
final credit score is an overall measure of the creditworthiness of the credit
applicant.
More than 50% of all microfinancing recipients or borrowers
live in South Asia.
About 3% of India's
population is cast into poverty each year because they lack insurance.
India and Bangladesh have the most MFIs (microfinancing institutions).
Microfinance clients are usually self-employed,
household-based entrepreneurs. Their diverse microenterprises include small
retail shops, street vending, arts and crafts manufacturing, and service
providing. In rural areas, microentrepreneurs often have small
income-generating activities such as food processing and trade.
An 8-year World Bank study in Bangladesh found that 48%
of the poorest households with access to microcredit loans rose above the
poverty line.
By
supporting women's economic participation, microfinance
helps to empower women, thus promoting gender-equity and improving the
well-being of the household, including safety within the family
structure.
According to results of Freedom from Hunger studies in Bolivia and Ghana, becoming a microfinance
client has led to increased self-confidence in women and improved their status within
their community.
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