First of all, before deciding to start a microfinance bank you need to ask yourself the question; Do you want to start a microfinance company? If YES, here is a complete guide detailed with information on starting a micro finance business with NO money and no experience.
What Is Microfinance?
Microfinance, also known as microcredit, is a type of banking service provided to groups who otherwise would have no other access to financial services and are rather mostly unemployed or low-income individuals.
Microfinance institutions provide services of lending loans. Microloans mostly range from the sum of $100 to $25,000.
Several other microfinance banks give additional services which includes checking and savings accounts and also micro-insurance products. Some also provide financial and business coaching. The goal of microfinance is to majorly give the poor/less privileged persons an opportunity to become self-sufficient.
- Microfinance is a banking service that’s meant to make loan provision for the poor and less privileged persons who wouldn’t have any other access to financial services through loan facilities.
- The service practices an ethical culture of lending consistently. This allows persons to access small business loans safely.
- Developing countries have most of the microfinancing operations. They include Uganda, Nigeria, Indonesia, Serbia and Honduras.
- Same as conventional lenders, so also does microfinance practice the addition of interest on loans and institute specific repayment plans.
- According to the world bank more than 500 million persons have benefited from the microfinance industry.
The microfinance industry is designed to provide loan services for the low-income individuals and the unemployed. This is because those that have limited financial resources don’t have enough resources to do business with traditional financial institutions.
Those who live under $2 a day, also have to save, borrow, acquire credit or insurance and make payment on their debt despite been excluded from banking. Many of them have to seek help from family, friends and loan sharks who usually will charge exorbitant interest rates.
Microfinance solves this problem for them, by making sure that they safely take on good business loans in a consistent ethical manner. They exist all around the world, but most of their services are based in developing nations such as Indonesia, Nigeria, Uganda, Serbia and Honduras. They also have the culture of empowering women as well.
Why Start a Microfinance Company?
In many countries of the world, government regulations are hard to meet up with and monitoring of the financial sector is rigid. Among the regulations are requirements such as expected capitalization, and other processes required to obtain a banking license.
If you’re really passionate to own a bank and can’t meet up with government regulations, then a microfinance bank is good option. The capitalization and license requirements for a microfinance bank is far lower than a standard bank.
It’s very demanding and risky to start up a microfinance bank, but if you’ve strictly followed the steps to start the bank, you most likely can’t run at a loss. It’s important that firstly you’ve the best experience and solid knowledge in the financial industry.
Before venturing into the line of financial services that involves loan giving, you need to have at least studied accountancy or banking and finance.
It’s crucial for you to analyze the existing microfinance banks around your area. Know how many they are, check each of these microfinance institutions, who will be your competition to know their strength and weaknesses.
You will be able to enhance your experience more in your microfinance/loan services institution when you learn the mistakes of your competition, knowing all their weaknesses. This makes you to be able to come up with the best services free from mistakes.
After conducting the required market research and feasibility studies, then it’s right you venture into this industry.
You should consider going through this article, if you’ve been thinking of starting a microfinance bank but haven’t been able to figure out how to.
Is it your wish to start a microfinance bank? If YES, here is the complete guide
Micro money lending/microloans services are small loans given by individuals instead of banks or related financial institutions. These loans are usually issued by an individual or a group whom all it’s members have contributed a portion to the total sum. The micro money/microloan system is within/part of the microfinance industry.
Startups, other small scale businesses and individuals are beneficiaries of the micro money/microloans system and loans are usually $50,000 or less. This system is usually available in the third world countries where traditional financing isn’t available.
On loan maturity, micro lenders are paid back ananan interest on their loans,,, plus prinicipal. As a result of the fact that credit status of these borrowers is mostly quite low and the risk of default high, microloans command above the average market interest rates making them attractive for investors to come in.
According to market statistics, it’s estimated that 74 million men and women are in possession of microloans that sum up to US$38 billion. While the repayment success rate ranges between 95-98 percent, a statistics carried out by Grameen Bank. You will agree with me that this is a pass mark.
It’s no doubt a thriving industry especially in the third world countries like Bangladesh (where it started from), Kenya, South Africa, India etc… where most of the citizens are living below the standard of poverty as defined by UN.
And because credit is needed to move the economy of businesses, individuals and the world forward, the micro money/microloans system will always boom. There’s still room big enough to accommodate entrepreneurs who are interested in opening a micro finance bank.
Having a good experience of how things work in the microfinance industry space plus professionalism is essential. You also need to get the licenses and certifications,s, plus the standard capitalization for you to start a loan services firm, most especially in the United States.
Like I stated earlier, the industry is strictly regulated and monitored by government to guard against practices such as money laundering, any form of financial fraud, and criminality.
Market Research and Feasibility Studies of Microloans Services
Tips from market research and feasibility studies includes:
Demographics and Psychographics
The microloans’ demographic and psychographic comprises of the parties involved or whom need the services of microfinance banks, and these cuts across people, start-ups and small scale businesses that need a planned and arranged daily savings system or loans that can be accessed quickly but can’t meet up with the requirements to access these loans from banks and other standard financial lending institutions.
Defining the demographic for your microfinance bank, means you should make it all encompassing. It should include parties such as startups, small scale business owners, artisans, aspiring entrepreneurs and workers within your area.
Niche Areas You can Specialize In
The microfinance industry doesn’t have niche areas. Loans ranging from $50,000 or less are given to start-ups, small scale businesses and individuals. Microfinance banks also conduct other activities which includes daily savings/contributions.
With the evolution of the internet, microfinance activities have gone online. Microloans can now be accessed by persons even without been physically present at the firm’s office.
Industry Competition Level
The level of competition in the microloans or microfinance banking system isn’t based on the business location as most of them are online today. Many firms compete effectively from any part of the world in this industry.
There are many microfinance firms located in the United States and online. You should be therefore prepared to challenge the stiff competition you will meet in the industry, not only against the microloans and micro finance firms at the physical location where your firm operates but also against all other firms in this industry across the globe especially if you choose to go online.
There are already well established microfinance institutions in this industry that determine the industry’s trends and you should be willing/ready to compete in the with them.
Well Known Brands in the Industry
There are always outstanding brands in every industry that perform better than their competitors, and are the top choice of their customers and the general public. Some of these brands have been well known for been in the industry for a long time, while others are well known for their business practices and their excellent results over the years
Some microfinance banks and loans services firms are listed below;
- ASA – Bangladesh
- Bandhan (Society and NBFC) – India
- Banco do Nordeste – Brazil
- Fundación Mundial de la Mujer Bucaramanga – Colombia
- FONDEP Micro-Crédit – Morocco
- Amhara Credit and Savings Institution – Ethiopia
- Banco Compartamos, S.A., Institución de Banca Múltiple – Mexico
- Association Al Amana for the Promotion of Micro-Enterprises – Morocco
- Fundación Mundo Mujer Popayán – Colombia
- Consumer Credit Union ‘Economic Partnership’ – Russia
- Fondation Banque Populaire pour le Micro-Credit – Morocco
- Jagorani Chakra Foundation – Bangladesh
- Grameen Bank – Bangladesh
- Microcredit Foundation of India – India
- EKI – Bosnia and Herzegovina
- Saadhana Microfin Society – India
- Opportunity Fund
- Accion New Mexico
- CDC Small Business Finance Corp.
You have to ensure that your feasibility studies and market research is right before venturing into doing business in the micro finance banking sector. The micro finance business isn’t for the unserious or inconsistent persons/organizations. It’s for serious businesses and for the professionals who are successful in experience gathering and have the expertise to run such business.
As an entrepreneur you should also know that you will have to learn some new dynamic parts of the business everyday even when you’re a professional.
You have to apply caution always in order to avoid been swindled. It involves you having sufficient capital (that you must have probably pulled from potential investors). This will be quite easier for an already wealthy individual.
You may also consider getting capital from your family and friends. This capital may be in the range of tens of thousands of dollars, depending on the scale of which you want to start from.
It might not necessarily take long to make your business start turning up a profit if you have the right economic and cost analysis.
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Franchise vs Starting a Micro Finance Bank from Scratch
It may likely bring you more gain to buy the franchise of a successful micro finance bank against starting from scratch. Despite the expenses involve in buying the franchise of a micro finance bank, it will pay you more in the long run.
If you truly want to build your brand according to your model, core values and ethics, then you may probably need to start from the scratch.
With due diligence, the fact is that it will pay you more to start from the scratch. You will have the opportunity to carry out market survey and feasibility studies when you start from scratch.
Possible Challenges You May Encounter
One of the major challenges you will face if you decide to start your own micro money/micro finance firm today is the well established competition such as micro finance banks, microloans firms, and other related financial lending institutions like banks, mortgage banks, and payday loan services who offer same services that you intend to offer. The best way to avoid the challenges is to draw up a unique model for your market operations.
Other threats that you may likely face includes unfavorable government policies, the arrival of a new competitior within your area of operation and global economic downturn. These are threats that you can’t do anything about except been optimistic that things will turn out good for you.
Best Legal Entity to Use for a Microfinance Business
The legal entity for your micro finance or micro loans services system will determine how far your business can grow. You can either choose the option of a general partnership or limited liability company(LLC) for your micro finance bank.
When starting up with a moderate startup capital, general partnership will be the ideal business structure for your micro finance/microloans services firms. But limited liability firms are preferred for good obvious reasons
If you plan is to build your micro finance business to a large scale that has both corporate and individual clients from anywhere in the United States for example or in other countries, then a general partnership wouldn’t be a good idea for your business. You should choose a Limited Liability Company, (LLC).
You will be protected from personal liability when you choose an LLC for your micro finance firm. It is only the money that you invested into the limited liability company that will be at risk, if anything happens to go wrong.
Limited liability companies are more flexible and simpler to operate and you don’t need a board of directors, shareholders meetings or other managerial formalities
There are some factors that you should consider before choosing a legal entity (either LLC or general partnership) for your micro finance bank. These includes, ease of transferability, personal liability, investors’ expectation and of course taxes and admission of new owners.
You can choose to start as a limited liability company and later convert it to a ‘C’ corporation or an ‘S’ corporation especially when you have plans to go public.
But starting as a limited liability company and then transferring to ‘C’ or ‘S’ corporation may make your firm to incur great tax responsibilities and it’s better to register as a ‘C’ corporation. But it’s best you consult your lawyer to put you through the process properly.
Catchy Business Name ideas for a Micro Finance Bank
It’s expected that you must be creative when choosing a name for your business. This is because, names of a business represents a brand and the way people perceive that brand.
There are some catchy names you may choose from if you’re considering starting your micro finance bank. These include
• Max Micro Finance Bank, LLC
• Rose Life Micro Finance Bank, Inc.
• Cash Vibe Micro Finance Bank, LLC
• Achievers Micro Finance Bank, Inc.
• Premium Micro Finance Bank, LLC
• Forte Micro Finance Banks, LLC
• Trust Micro Finance Bank, LLC
• Saint Micro Finance Bank, Inc.
• Global Micro Finance Bank, Inc.
• Good Share Micro Finance Bank, Inc.
• Sharon Micro Finance Bank, Inc.
• Great Hills Micro Finance Bank, Inc.
In most part of the world, most especially in the United States, if you don’t have some of the basic insurance policy covers that are required in the industry that you want to operate from, you can’t operate a business.
It’s important to create a budget for insurance policy covers and also consult an insurance broker to guide you in choosing the best and most appropriate insurance policies for your micro finance bank.
You should consider purchasing some of these insurance policy covers, if you want to start your micro finance bank in the United States of America.
• General insurance
• Risk Insurance
• Credit insurance
• Deposit insurance
• Financial reinsurance
• Lenders mortgage insurance
• Health insurance
• Liability insurance
• Workers compensation
• Overhead expense disability insurance
• Business owner’s policy group insurance
• Payment protection insurance
Make sure you employ an insurance broker to guide you in choosing the right insurance policy covers in your state.
Intellectual Property Protection/Trademark
You may mostly not have any need to file for intellectual property protection/trademark, when considering to start your own micro finance/microloans firm. The reason is because the nature of the business makes it possible for you to run your business successfully without having any cause to challenge anyone in court for illegally using your firm’s intellectual properties.
Is a Professional Certification Needed to Run a Micro Finance Company?
This is one of the main reasons micro finance banks stand out. You should work towards acquiring all the needed certifications in your area of specialization if you want to make great impact in the micro finance banking services industry.
Been certified validates your competency and shows that you’re no doubt highly skilled, up-to-date in the competitive market and committed to your career. If you want to run your own micro finance bank, these are some of the vital certification you can work towards;
Certification validates your competency and shows that you are highly skilled, committed to your career, and up-to-date in the competitive market. These are some of the certifications you can work towards achieving if you want to run your own micro finance bank;
- Micro-Lending License
- Certificate in Microfinance Banking Operations
Note that without acquiring professional certifications and business licenses, you can’t successfully operate a micro finance/microloans firms in the United States and in most countries of the world even if you’ve sufficient experience and background in the industry.
Legal Documents You Need to Run a Micro Finance Bank
Some of the legal documents you are expected to have in place if you want to legally run your own micro finance bank in the United States of America includes;
- Certificate of Incorporation
- Business License and Certification/Micro Finance Banking License
- Business Plan
- Non – disclosure Agreement
- Operating Agreement for LLCs
- Insurance Policy
- Consulting contract documents
- Apostille (for those who intend operating beyond the United States of America)
- Company Bylaws
- Insurance Policy
- Memorandum of Understanding (MoU)
Financing Your Microfinance Bank
Starting a micro finance/microloans firm can be cost effective. This is aside from the required capitalization and funds sourced from investors.
Securing a standard office in a good business district, equipping the office and paying your employees are part of what will consume a better part of your startup capital.
One of the major factors to consider when financing any business is to write a good business plan. When you’ve a workable and good business plan document in place, you’ve to go through the pain of convincing your bank, investors and your friends to invest in your business.
When sourcing for startup capital, some options that you can explore include;
- Raising money from personal savings and sale of personal stocks and properties
- Raising money from investors and business partners
- Selling of shares to interested investors
- Applying for loan from your bank
- Pitching your business idea and applying for business grants and seed funding from donor organizations and angel investors
- Source for soft loans from your family members and your friends.
Choosing a Suitable Location
You will need to have your micro finance/microloans firm in a good location because just like other related financial services it requires you to meet physically with your clients.
You may want to choose a location that is prone to both human and vehicular traffic and a location that is at the epicenter of a business district mostly if you want to attend to lots of clients
Make sure you’ve conducted good feasibility studies and market survey before choosing a location for your micro finance bank. There may be the possibility that similar industries just closed shop in the location you want to open yours.
That’s why it’s good to gather enough facts and data before make up your mind on the location that you want to start your own finance bank. These are important factors you should consider before choosing a location;
- Location demography
- Micro finance banks services’ demand in the location
- Business activities and the purchase power in the location
- Accessibility and road network of the location
- The number of micro finance banks and micro money lending ventures in the location
- Local laws and regulations in the community/state
- Traffic, parking and security
Details of Technical & Manpower
There isn’t any special technology for the operation of this business type apart for customized micro finance banking software, social media management software applications and other financial related software apps.
But you will definitely need equipments such as computers/laptops, internet facility, telephone, fax machine and office furniture (chairs, tables and shelves). You can get the fairly used of these items mostly from organizations that are auctioning their office furniture, computers and equipment.
You should consider the option of leasing a facility for your office, if you have sufficient capital for it. You would also need to properly consider your finance before making the decision as regards the number of employees that you are expected to start the business with.
Mostly, you will need a Chief Executive Officer or President of your company (you’re in the right position to occupy this role), an Admin and Human Resource Manager, Head of Operations, Risk Manager, Operations Staff, Accountant, Business Development Executive/Marketing Executive, Loan Officers, Debt Collectors and Customer Service Officer.
Lastly you will also require a minimum of 10 to 20 important staff to effectively operate a standard medium scale micro finance bank. You may not have the financial resources when starting out to have and maintain all the professionals to work with you, which is the reason why you should collaborate/partner with someone with enough financial resources.
Micro finance institutions are very complex to set up most especially when you’re running it on a large scale.
You’ve got to make sure you do your homework thoroughly which is why this article clearly describes in clear details all that you need to do to achieve the goal of properly setting up a micro finance or microloans institution.
Finally, make sure you have proper legal counsel through out the process of the company’s setup.
What lessons have you learnt and what isn’t clear to you from the article above?
Thank you for reading at WealthOnPoint
I’m the cofounder of WealthOnPoint. Business has always been where my interest lies. If you have any business, finance or investment related issue, feel free to contact WealthOnPoint via email [email protected]
Our team is more than happy to help you out.