Today we will talk about what microfinance organizations (MFIs) are, what money they exist for, who controls their work, and also what benefit the borrower can get from them. But first of all, it is necessary to determine the term itself.
What is microfinance?
Immediately after its appearance, the term “microfinance” referred to lending services that were provided to small and medium-sized businesses. This method was more affordable compared to the procedure that you had to go through in order to get a loan for a business in an ordinary bank.
However, over time, this term has lost its original meaning. MFIs continue to issue business loans, but now their clients are also private individuals. They are given the opportunity to receive a microloan - this is an instant loan, which does not require a thorough analysis of the financial condition and creditworthiness of the borrower.
MFI - what is it?
Thus, a microfinance organization is a non-banking organization whose activities are aimed at issuing loans to legal and physical persons. The scheme for issuing these loans is much simpler than in a bank. Like any other organization, full-fledged work of MFIs requires capital. A microfinance institution can attract resources from various sources. First of all, these are high interest rates on loans granted, as well as cooperation with investors. They can be both private individuals and banking organizations. In the latter case, an MFI is a subsidiary of such a bank.
Recognizing MFIs among other financial institutions is quite simple. They attract attention with their advertising slogans in the spirit of “Money to salary”, “Credit in 15 minutes”, “Quick money”, etc. Their services are distributed in crowded places. Often, such organizations have no more than 1-2 employees.
Types of MFIs
Each country defines its own types of MFIs using the legislative framework. She also determines the form of their registration. The main criterion that indicates that you have a microfinance organization is a simplified lending system. Thus, all legally operating non-bank structures that carry out lending under such schemes can be conditionally divided into the following types:
- Financial group.
- Entrepreneurship Support Fund.
- Credit union.
- Credit company.
- Credit agency.
- Credit Cooperative.
As already mentioned, many MFIs are subsidiaries of banks. Such activity is quite profitable for the latter. The fact is that the bank has the opportunity to issue loans, the interest rates on which are several times higher than those that are issued directly to themselves. Naturally, there is a great risk that such a loan will remain outstanding.
Who controls the work of MFIs
The main body controlling the work of MFIs is the Central Bank of the state in whose territory the organization exists. Licensing of these facilities is also carried out by the Central Bank. Microfinance organizations should also be included in the state register. In addition, they can obtain permits at those institutions that control the work of other financial organizations.
Federal Law “On Microfinance Organizations”
If we talk about Russia, then this direction in business appeared not very long ago. Accordingly, the laws that govern their activities were adopted only a few years ago. Currently, there are two laws that govern microfinance:
- Federal Law "On Microfinance Activities and Microfinance Organizations" (adopted 02.07.2010).
- Federal Law “On Amending Certain Legislative Acts of the Russian Federation in Connection with the Adoption of the Federal Law“ On Microfinance Activities and Microfinance Organizations ”(adopted 05.07.2010).
In accordance with the named laws, there are some restrictions on the forms and laws of contribution. If we talk about the amount of the loan, it should not exceed 1 million rubles. However, the issuance of credit in foreign currency is prohibited, regardless of the amount. In the case of investment, the bank may accept a deposit of at least 1.5 million rubles (from one depositor).
In addition, all microfinance organizations in Russia must ensure that information about the financial operations of borrowers is preserved. This means that when issuing a loan, an MFI does not have the right to require the provision of contact numbers for “friends” who can be informed of late payments under a loan agreement if it is not possible to contact the borrower himself.
Loans
There is an opinion that MFIs are ready to issue a loan to almost everyone who applies for it. But this is a misconception. Before working with a client, any organization must determine the creditworthiness of the client. To do this, use credit scoring. It is this system that allows a potential borrower to get a decision on granting a loan or refusing it for 10-15 minutes. In addition, this service is available even online.
Credit scoring is a borrower solvency analysis system, which is based on a specific algorithm and is carried out by processing personal data. The result of processing this data is expressed in points. This scheme of solvency of the client is used by almost all microfinance organizations. Loans, therefore, are issued not by an MFI employee, but by a computer program, since the decision depends only on the results of its work.
If according to the results of credit scoring a potential borrower is solvent, then he can get a loan almost on the same day. However, the amount for which a loan is issued is often less than the amount that was originally announced. The fact is that with the help of credit scoring it is possible to more effectively assess the solvency of the client than based only on his personal opinion, which is often overpriced.
The interest on the loan is calculated for every day, and not for a month or a year, as is the case with banks. Therefore, in most MFIs, loans are issued only for two weeks or a month. Otherwise, the loan overpayment may amount to two or three times the amount that the borrower received.
Investments
It is necessary to talk in more detail about where MFIs get their capital from. A microfinance organization can collaborate with investors. Since the state does not give its guarantees on deposits in MFIs, it is quite dangerous to invest their money in them. There is a rather big risk that the depositor will not only not receive interest, but also lose his contribution. Investments in microfinance organizations have a number of differences from bank deposits:
- The income that can be obtained from such investments exceeds the bank by 1.5–2 times.
- The risks of investments, respectively, are also significantly higher.
- In case of investing in MFIs, early withdrawal of the deposit is impossible in most cases (exception - this possibility is additionally specified in the contract). In banks, such a right is guaranteed to the depositor by law.
- An investor who has received income from MFIs must pay income tax to the state. Deposits with banks are taxable only in some cases.
As you can see, the return on such an investment is quite high, but the risk is maximum. Moreover, it increases significantly during financial crises, when the majority of borrowers sharply lower income levels. If such an organization is declared bankrupt, the investor will not be able to return even his contribution, not to mention interest, because often a microfinance organization is an institution that does not have its own property, which could be sold on account of debts.
Rating of leading Russian MFIs
Despite all the risks and high interest on the loan, every year there are more and more people who turn to microfinance organizations. The list of such companies is growing along with the demand for such services. Most popular are:
- "Platis".
- MoneyMan.
- "Quick money."
- "Loan."
- MigCredit.
- Zimer.
- VIVA Money.
- "Mani Fanny."
- Rusmikrofinans.
- MFI "Summit".
Microfinance organizations, the list of which is provided above, occupy the first ten leading places in the ranking, which was compiled in accordance with user requests and the frequency of mentioning in the media.
Instead of a conclusion
Given all the pros and cons of such an organization, we can conclude that loans in such companies are disadvantageous primarily to the borrower. A microfinance organization is an institution that was created primarily for the purpose of earning. Therefore, MFIs may be interesting in terms of investment.
However, the financial illiteracy of the majority of the population and the habit of living on credit contribute to an increase in the number of such organizations in the country. The main thing that attracts people is the ease of obtaining a loan, the absence of the need to provide a package of documents, the speed of receiving money in cash, and the ability to take loans even to those who have had a bad credit history.