Microfinancing 101: The investment that’s changing the world

Today, many social activists are actually contesting existing global aid models, acknowledging their emphasis on providing short-term support that doesn’t consider the ongoing needs of under-resourced communities. It’s one thing to offer aid after a natural disaster or immediately following global conflict – but what if communities across the globe could benefit from established, ongoing financial support?

The main issue with this concept is that offering ongoing financial support isn’t really sustainable for many NGOs or even government-operated organisations. There’s just no justification to putting together an ‘ongoing aid’ budget. So how do we fill this gap?

The answer, it seems, has been provided by non-profit organisations that have started to offer their own refreshing aid model in the form of microfinance loans. With a microfinance business model, non-profits can provide donors the opportunity to contribute to funds that are designed to build up local communities over the long term. 

What are microfinance loans?

The idea of providing communities in need with a loan rather than formal aid may sound counterintuitive at first. But in reality, the design of these microfinance loan products for low-income individuals in under-resourced communities is actually very different to the types of loans you’ll be able to apply for at your bank.

This is because microfinance loans aren’t designed expressly to generate profits for donors, but instead to stimulate local economies across the world. In other words, these loans are designed to provide much-needed financial services to individuals who don’t have access to capital through other formal financial services like banks.

The way they work is also a lot simpler than our mortgages or car loans. Microfinance loans offered by non-profits are designed in partnership with socially-aligned financial service providers (FSPs). These agencies are equipped to not only facilitate microfinance loans, but to also offer more tailored financial management support and resources like business coaching. It’s not about providing money, but providing local business owners with the means to make their own money and support their local economy. 

The benefits of microfinance loans 

For borrowers, microfinance loans provide a level of structure and direction that supports them in actively building up their businesses to the point where they’re not only profitable, but perhaps even expanding and creating local jobs. As microfinance loans are also repaid over set timeframes, donors aren’t going out of pocket to provide aid, ensuring that this financial support model is more sustainable and transparent than traditional charity donations or even aid contributions.

Here are just some of the more compelling reasons why Australian consumers and business owners have embraced microfinancing initiatives.

For business owners

Social and environmental responsibility have become vital concerns for many future-oriented business owners. For companies who are looking to swap out their profit-obsessed bottom line approach with a more holistic, ESG-focused triple bottom line model, partaking in social initiatives like microfinancing can actually make social impact performance far more accessible to smaller business owners. 

You don’t need to be a multinational corporation to make a difference. By participating in a microfinance initiative that suits your business and company finances, your company can make a meaningful contribution to its global community.

And then there’s the value of community. Companies that do give back also maintain the unique opportunity to solidify global and local connections. By sharing and celebrating your social impact performance, you can establish your brand as a globally conscious entity that wears its values proudly. 

For consumers

What’s the main barrier that prevents you from participating in charitable initiatives? Is it the cost of living and the fact that you have less disposable income to allocate towards charities and aid funds? With everything from mortgage repayments to fuel costs on the rise, Aussie consumers are spending a lot less – and we’re not just talking about your weekly supermarket run either.

In this regard, contributing to microfinance initiatives isn’t just helping build global economies – it may also be stimulating our own national economy. As microfinance loans are also repaid in full, consumers don’t need to go out of pocket to contribute to this positive change.

As there are a wide number of different microfinance initiatives available, consumers also have the luxury of choice and can select a cause that is most meaningful to them. And from here, consumers retain the opportunity to track the impact of their loan, seeing how their money makes a difference every day.

How to get involved

If you’d like to contribute to a microfinance initiative, all you need to do is jump online and find a microfinance loan provider or a non-profit that’s partnered with an FSP. With a little research, you should be able to prepare a list of charities and NGOs that you can work with to facilitate a microfinance loan to an entrepreneur in need.

Be sure to do your due diligence when researching charities, however. You want to make sure that the loan initiative you’re participating in offers more than just a cash injection. The most effective microfinance models provide business resources that support global entrepreneurs in developing the skills they need to grow their profits over the long term.

Just as we’ve been privileged enough to see our own aid initiatives grow across Baw Baw Shire, so too have Australian non-profits experienced monumental results from their microfinance business initiatives. Donors can observe the real-time impact that their funds have provided, whilst still ensuring that they can give charitably in a manner that’s sustainable to themselves and their household. 

Similarly, businesses can bolster their triple bottom line by participating in microfinance initiatives themselves. In this regard, microfinancing as an alternative model to traditional aid provides even more benefits to not only borrowers but also aid providers and their donors. It’s a win-win-win.