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Role of microfinance in funding small and medium enterprises in developing countries

Rural economy forms the backbone of most developing countries. That being said, the problem is that significant developments in infrastructure are a little difficult to come by; thereby birthing a dearth of economic viability. In such a situation, microfinance institutes are often the only significant pathway towards alleviation of poverty, thus bettering economic condition.

Small and medium enterprises (SMEs) have long been one of the more chief sources of employment and livelihood for the citizens in most developing countries, including India. On the other hand, microfinance is crucial, when it comes to escalation of business growth by way of generating steady working capital.

So much so, that microfinance has been solely instrumental in catapulting many small businesses to the next league of augmented productivity and increased turnover.Listed below are some ways in which microfinance institutions can help fund SMEs based out of developing nations:


By providing easier access to credit facilities

Microfinance institutions serve as primary credit and lending facilities for both low-income individuals and small and medium enterprises that fall shy of accessing easy loans from the organized financial sectors.

Moreover, most of these institutions provide micro loans and other financial services that attach affordable rates of interest and entail simpler procedures and minimal documentation. Here, the financial performance of SMEs, among other factors, depends on the ease with which they can avail loans from institutions of microfinance, essentially indicative of a symbiosis.


By implementing inclusive policies

SMEs often hire unskilled and semi-skilled labourers - many of whom belong to the economically deprived and marginalized categories - to carry out their routine operations. Microfinance lenders collectively target aspirations of these sections of people, thereby developing business models aimed at allaying poverty and improving their standard of living.


By aiding business expansion

Probably the most significant function of microfinancers is offering SMEs a blueprint for business expansion and assistance to expand their operational footprint beyond the traditional strongholds. This primarily happens by way of aid to SMEs to increase the number of outlets, access more uncharted business areas and eventually become formidable contenders in the market.

Moreover, a group of people, sharing common aspirations and interests, can avail credit facilities from microfinancing houses. What happens here is that should one of the participants default at the time of repayment, there is usually a chance that the share would be distributed and shouldered by the other members of the group.

This way, microfinancers usually find it relatively easier to recover their loans; something that leads them to lend further, thereby allowing SMEs to utilize the funds, up their productivity and increase profits in the process.


Microfinance institutes tend to enjoy better credibility

You might attribute it to the cooperative attitude of microfinancers, but SMEs have a tendency to trust microfinance houses more. Another reason behind this might be customized financial products that are in tune with the exact demands of SMEs and the nature of their businesses.


To sum up

Developing nations have, beyond much doubt, embraced the concept of microfinance loans and microfinance institutions, and it is no surprise that these micro lending houses have come to be the lifeline of SMEs based out of these countries. It is with the help of micro loans, that many deprived sections of the society have been able to integrate with the mainstream.

We, at Reliance Money offer innovative microfinance solutions to SMEs in partnership with microfinance institutions.