A bank loan is a convenient way to get money to buy a flat, a car or household appliances. In contrast, a microcredit – a small loan – is usually taken out to solve urgent financial problems. Let us understand how banks differ from microfinance organisations.
What is a commercial bank?
A bank is an organisation that provides various financial services to its clients, including loans. clients may be individuals and legal entities
Banks provide the following services:
- cash and settlement services
- execution of instalments
- issuing loans and mortgages
- opening of accounts and deposits
- brokerage instruments;
- investment products.
An important condition is that an organisation can only operate on the basis of a licence.
What are the characteristics of microfinance organisations?
A microfinance organisation is a legal entity registered in a unified register that carries out microfinance activities. They work with a limited number of financial products. For this type of organisation, it is sufficient to obtain a certificate confirming that the MFI operates legally.
There are several types of microfinance organisations, including microfinance companies and microcredit companies. Each of these forms has its own characteristics.
The main service of microfinance organisations is microloans. They are more easily granted than bank loans. Microfinance organisations are more loyal in assessing the borrower’s ability to repay and loans can be granted without visiting the office. MFIs provide both targeted and nontargeted, long-term and short-term loans. Some organisations lend not only to individuals but also to businesses.
Differences between commercial banks and microfinance organisations
The main difference between a bank and a microfinance organisation is its status as a financial and credit organisation. A bank is a large company that offers a wide range of financial services. A bank needs to meet a number of legal requirements and obtain a licence to operate.
Microfinance organisations have far fewer requirements. Microfinance organisations are only interested in a person’s current ability to pay, so it is easier and quicker to obtain a loan from them.
Commercial banks have stricter requirements for borrowers. Before approving a loan application, the bank checks the person’s credit score, takes into account the current credits, salary level and the availability of additional sources of income.
Microfinance organisations often lend money for borrowers even with a bad credit history.
The advantage is that a loan at microfinance organisations is processed quickly, and anyone over the age of 18 can get money. Moreover, the funds can be repaid without paying extra interest: many organisations give new clients their first loans without overpaying.
Microloans are issued on a bank card; you can also borrow in cash, in an e-wallet.
Microfinance organisations often serve clients who have been refused a loan by banks. Due to the high interest rates on loans, microfinance organisations reduce the default risk, which motivates borrowers to repay the debt as soon as possible to avoid large overpayments.