A mobile microloan is a financial product offered via a cell phone. It helps reduce the amount of cash a person has to handle, making it easier for business owners to do their transactions. The mobile money service requires the client to have a sim card, giving them complete control of their finances and making decisions about how to use the money. It can also be very beneficial for remote areas of the world where access to traditional credit is not easy.
Issues
While there are many positives of microfinance, mobile money is not a panacea for poverty. While it is simple and works well, it remains underutilized in many countries. While it may be less widely used than many popular financial access interventions, it is a good way to increase financial inclusion and reduce poverty in a variety of settings. Here are some of the issues associated with mobile money:
Poor working conditions: While most microlenders provide small amounts of money to poor families, there are issues associated with these loans. Often, the companies are not accountable for the conditions of the borrowers. Moreover, many of these loans are made to NGOs or international charities. Hence, there is a risk of a bad credit rating, which discourages many financial institutions and professional investors from participating. However, mobile microloan companies are peer-to-peer lenders.
Challenges
Traditional financial institutions are reluctant to provide microloan services to the student segment of the population due to the lack of data and risk assessment. Furthermore, many students come from rural areas of China and are from families that are low on wealth. They need financial aid to fund their studies. While consumerism has picked up in contemporary China, the student segment still sees big-ticket items as necessities. To meet this need, FinTech startups are offering microloans to college students through mobile phones.
In the Philippines, Fintech disruptors have found ways to meet these needs, including partnering with mobile operators to provide loans. However, these partnerships require a wide range of technical solutions and regulatory frameworks to ensure that everyone’s needs are being met. Traditional financial institutions are notoriously incompatible with mobile operators, and reconciliation of data is often difficult. But, Tala has overcome these challenges by leveraging smartphone data to provide microloans to underserved populations.
Benefits
In Kenya, there are several platforms for mobile microloans. Some of them require only a phone and an M-Pesa account, while others require the client to fill out an online application. The benefits of mobile money are many, but here are just a few of the benefits. 1. Improves credit rating: Mobile loans help people build their credit history. The lenders report loan repayments to the credit bureaus. When a person builds a positive credit history, he or she can qualify for bigger loans in future.
Fast and easy approval: Another advantage of microloans is the fast approval process. They do not require substantial collateral, unlike traditional loans. As a result, they can be a fast way to secure financing. In less than two weeks, the loan is approved. If you’re an eligible applicant, you can get the loan you need. If you don’t have much collateral, you can still get a mobile microloan.
Access to credit in remote areas
While the formal financial system has made strides in recent decades, access to credit in rural areas remains extremely limited. Although new microfinance approaches have sprung up over the past decade, few empirical studies have assessed their reach. This paper presents the results of a survey of rural households and the reach of the most widely used microloan initiative. This study highlights the importance of access to microloan credit in remote areas and the benefits it brings to women.
The project was financed by the Asian Development Bank and IFAD and involves a group of microfinance institutions in the Philippines. The Grameen bank, a microfinance institution, lends money to groups of poor people without collateral or interest. Clients repay their loans in weekly instalments. There are more than 160 Grameen microfinance institutions in the Philippines, each of which offers its own unique financial services. The average repayment rate for a Grameen bank’s microloan clients is 96 percent, significantly higher than the recovery rate of commercial banks in the country.
Leverage of asset-locked lending
An asset-locked microloan offers borrowers the opportunity to borrow money for a small business. The loan amount is usually limited to $50,000. Leverage can have both positive and negative effects. It can reduce productivity and result in agency costs. Nonetheless, it is important to understand the risks and rewards associated with asset-locking. Below are some points to keep in mind when using asset-locking to obtain small business financing.
Financial leverage is a negative effect on labor productivity, as it reduces future investment. Increasing financial leverage is also associated with higher labor costs, which reduces the likelihood of future investment. Moreover, higher labor costs result from monitoring activities and loan collection. To offset the negative impact of financial leverage, MFCs should focus on generating more revenue through the loans they make. However, this strategy may not be feasible for all businesses.
Challenges of scaling
There are many challenges to scaling mobile microloans. First, achieving scale is crucial for competitiveness and resilience. According to Todd Watkins, who studied the MIX dataset for 2015, the average cost of borrowing from a small microfinance institution is 60% higher than that of a large one, with over a million clients. Not only do large MFIs offer better deals, but their profit margins are 2.5 times higher as well. This demonstrates the importance of achieving scale and adapting to changing customer needs.
However, scalability is another matter. Unlike the United States, emerging markets often lack the sophisticated technology needed to serve their population and meet its demand for loans. One such example is Zambia, where many MFIs rely on technology to support operations and stay afloat. As a result, mobile-based technologies present an enormous opportunity for MFIs in the country. There are also many factors to consider when scaling mobile microloans.