NBFIs and Microfinance: Credit Beyond the Traditional Bank
Non-bank financial institutions, or NBFIs, officially do not have a banking license, yet they provide some banking-related services. They are not permitted to take demand deposits from the public. NBFIs erase the middleman's place, allowing a straightforward process that lowers costs, fees and rates. Examples are hedge funds, investment banks, insurance companies, private equity funds, mortgage lenders and money market funds. They have played a significant part in satisfying the credit demands that traditional banks have not met, and also give room for wealth management.
NBFIs tend to be advantageous over traditional banks due to their lower cost and cheaper loans. Traditional banks are more concerned about the large business's welfare, but NBFIs are more worried about small-scale borrowers' interest. Loan facilities by traditional banks are relatively slower. Traditional banks prioritize a customer's credit score, making it difficult for customers with lower credit scores to access finance.
The disadvantages: NBFIs cannot accept demand deposits; they lack deposit insurance facilities; often they have higher charges on late payment and higher fees for processing; and they cannot issue cheques drawn on themselves, since they are not included in the country's settlement and payment system.
Microcredit is a banking system that offers small loans, especially to unemployed persons or those living in poverty who would not qualify for a standard bank loan. This kind of loan is often given to start a small business. Microloans range from as little as $100 to as much as $25,000. A few provide additional services like micro-insurance, checking and savings accounts, and even financial and business education. Just like conventional lenders, micro-financers charge interest on loans and provide a repayment plan.
Its advantages: it is more comfortable to access, since traditional banks rarely extend loans to those with minimal or no assets. It gives autonomy: the entrepreneur may have a perfect business plan but not the fund to start, and the loan can be paid over time off the profits. It gives risk control, since small businesses get enough stable capital to protect them from unforeseen monetary issues. And it empowers women, who over the years did not have the opportunity to take part in economic activities and now get the capital they need to start their business projects.