Everything that I hear about microfinancing in developing countries is positive. Funds are made available to would-be entrepreneurs that probably would not get funds from banks. This helps develop businesses and increase the middle class in countries. It provides jobs and raises standards of living. I am not aware of any drawbacks.
Studies show that, oftentimes, charities and other organizations misuse or misspend their money from donations, and much of it doesn't go to who it is supposed to go to. Microfinancing provides a personal alternative and a way to donate money to a business who you know will use it wisely.
Micro-financing, especially when women are the recipients, provides a wonderful boost to poor, rural communities. Many of these programs require that the recipients give back to their communities to strengthen them from within. For example, a micro-loan of a goat provides milk for the family. The first kid born to the goat is sold to pay back the loan. Subsequent goats are then loaned to other families, and when these goats breed, they pay back their loan. Soon, a rural community has better nutrition and relative wealth all around.
Microfinancing helps entrepreneurs in developing countries by giving them credit to finance their businesses. Often times, the people running these businesses are too poor to qualify for any standard kind of loan; and they cannot afford to invest in materials or equipment that would help them produce goods or transport them. A microfinance loan would cost them some money in interest, but they should be able to pay that interest with the proceeds from their business.
Evidence suggests that microloans are nothing other than beneficial to the areas in which they are granted. They are good for the lenders as well, with over 90% receiving their money back, according to microlending site, Kiva. They help business owners and, in turn, that can grow the local economy and create prosperity where there was none before.
By giving out loans to low income small business you not only help that individual, but everyone their business might employ or interact with. It is like the comparison of giving a man a fish versus teaching him how to fish. By giving those small business money today, we are helping them provide for themselves in the future - instead of just setting them up to constantly need more hand-outs.
Currently potential "lenders" in developing countries either refuse to lend to low income, untested entrepreneurs or they act more as loan sharks than banks, charging exorbitant interest rates that only ensure the failure of such entrepreneurs. By offering loans at reasonably rates, microfinancing has supported many now-successful small businesses, allowing them to thrive. This in itself is a positive thing. In addition, it has provided proof that such entrepreneurs ARE worth making loans to, so local banks may be taking another look at these potential borrowers. The local lenders now must also compete with the lower interest rates charged in microfinancing. This is a win/win/win situation for all involved.
Microfinancing low income entrepreneurs offers aspiring business men and women an opportunity to become successful. Often these hard-working individuals do not lack internal drive or the desire to become successful; all they lack is a small amount of capital. These small loans are beneficial all the way around as they have an incredibly high rate of repayment to the loaner, they offer a low-income individual an opportunity to generate revenue successfully, and finally it benefits the government as the entrepreneur becomes capable of paying taxes on the new income they generate.
This is a win-win situation. The poor entrepreneur gets the funding he/she needs to either start a local business or to improve, build up an existing one. The individual donors know that all their contributions are going to a needy individual, not just to feed them but to enable them to do something to feed themselves through their own self- efforts.
Yes, microfinancing gives people in developing countries the opportunities they need to become successful and help their country as a whole. These are the kind of people who actually require a loan or similar service to get ahead with life, not Joe living in Smithsville who wants a loan to buy a fancy car which he can't pay back.
Microfinancing low-income entrepreneurs in developing economies is a positive thing. Helping low-income entrepreneurs helps the worldwide economy. The stronger other economies become, the less assistance they will need in the future.
I think that, in low-income businesses, there needs to be microfinancing, so the owners can see how a business needs to be run. They may know the trade or the product they are selling, depending on the business. But, if they do not know about simple accounting, it might be hurting them. Microfinancing will enable them to learn, and then progress from there on.
In order to build an economy it needs to be built from the bottom up. Small business is the way to build an economy. When we can put people to work and stop unemployment it helps to stabilize the economy. Also when we put people to work in any small or large medium size city or town we can see that money being made is money being spent within the local economy.
Since I couldn't find a single argument against micro finance, I feel obliged to provide one. Micro finance has run into trouble where the individuals or businesses that receive money are not adequately instructed or screened during the loan process. Therefore the default rates on micro loans are historically higher than for the prime loans, and about equal to the default rate of subprime loans. Additionally, there have been recent scandals where for-profit firms operate under the guise of benevolent intentions and charge customers egregious interest rates, sometimes up to 30% per annum. Additionally, the industry is young and fractured, and as a result there is large industry-wide overhead, as small operations must support burdensome infrastructural needs to supply the loans. Therefore margins are small, the operations are sensitive to economic downturns and heavily reliant on specially priced loans from large financial institutions and charitable donations rather then an independent capital base. While I agree that micro finance is a net benefit to society; there are concerns out there, a few of which I have outlined above. I regret that the illiteracy of previous respondents has resulted in a skewed +/- spread for this question.