Microfinance institutes offer banking services to that part of the population that is unemployed or whose purchasing power is low such that without a microfinance they will not have any benefit from financial services. The chance to have a loan, to be able to take an insurance and save money by the financially weak is provided by microfinance institute.In order to permit small businesses to play in the pitch of foreign trade, microfinance institutes issue them limited resources.
Help in foreign exchange business
As a stimulating agent for global and regional trade in developing countries
Statistics has shown that an increase in trade in a country by 10% will cause a positive impact on the country’s income by raising it 5%. If a country does not get involved in international trade, the possibility for that country to expand its horizons in terms of its benefits from global trade, low available raw materials, improvement of its technological capacity and thereby gets left behind when it comes to international expertise.
The status of developing country is attributed to African countries and are known for low exchange of goods between themselves of just 10% while Africa as a whole accounts for only 3% of global trade. On the other hand, European countries have a record of 65% of goods exchange activities between its countries.
Among the various barriers in developing countries that limit global trade includes the financial power to start-up businesses and become entrepreneurs. Microfinance institute come in as a tool to empower the local population to get into production and as production increases the country turns to export some of the produce and this will lead to increase in global exchange.
Assisting people in the developing countries have access to financial services
The government of the United Kingdom (UK) on an assessment of the economic situation and business operation in the developing countries around the world noticed that 45% of the employed population in the developing countries is being offered by small businesses. The challenge of raising finance to either start up or later expand a business as the entrepreneur get new ideas remains a challenge to this vital sector that leads to economic growth in these developing countries. Studies show that 2.5 billion people in the world have no bank accounts nor insurance. Microfinance institutes by providing bank accounts and saving services (financial services) to the poor, this will help them enter into the foreign exchange world by being able to transfer and receive funds from partners all over the world hence boost trade in the country.
One of the means to achieve the goal of an efficient financial service to the population by the microfinance sector is through education. For example in sub-Saharan Africa we have the Financial Education Fund which has a duty to educate the poor to under their consumer right, give them loans to invest on their business ideas and teach them to manage their finances as well.
The money transfer service offered by the microfinance sector can serve as a medium of exchange to connect with persons overseas (friends, family or business partners). Using international money transfer systems like Anelik, Money Gram and Western Union microfinance institutes can make international payments for its customer without him opening a current account. This can be seen as a means by which a business man can use as a payment method in international trade. In such a situation the amount sent during one transfer transaction is not a large amount but it has been observed that such transactions takes place millions of times within the week worldwide then the figures exchanged star becoming large.
One of the reasons why the traditional bank do not offer small loans is that they make the cost of running the bank difficult as example, the resource that a bank needs to give a $50 loan is similar to that needed to give a $1000 loan. Microfinance institutes (MFI) have decided to carry on them the cost to send staffs to study the local area like a village before they get into it to operate. They offer microcredit loan services as trade finance product which has a loan cycle that is shorter than that of the traditional banking sector. The payment plus interest can be made weekly and the term of payment can extend from six months to about a year.
Other financial products offered by micro financial institute include:
Micro saving. The minimum balance set by micro finance institute is very low or practically non-existent which makes keeping money for future use easier. This money can help during emergency situations like school fees or purchase of a household.
Micro insurance. An insurance covers a business man on damages that could happen loss of property, health problem and loss of a body part that does not permit him to carry out his business at best conditions. Knowing that he is covered by the micro finance institute, the entrepreneur turns to focus more on his business and this in turn increases his productivity.
Micro leasing. Some entrepreneurs who are not capable of acquiring the machinery for the production and delivery of their goods they can lease the machinery with the help of the micro finance institute.