Banks and Microcredit Organizations: Main Features and Pecualiarities

Feb 28, 2019 by Canadia

In addition to banks, there is still a considerable number of financial organizations that are ready to issue credit transactions. In the study of statistical data, it turned out that recently the demand for credit offers of non-bank organizations has increased significantly. Today, it is possible to receive credit funds in credit cooperatives, pawnshops, financial unions and microfinance organizations. It is the latter option that has recently become in great demand among US and European citizens.

All of the above organizations are engaged in processing loans. Their offers have some advantages in comparison with bank crediting, but there are also some disadvantages. Having considered all the pros and cons of the proposals of each non-bank organization, a person most often makes his choice in favor of microfinance centers.

How Do Microfinancaial Organizations Differ from Banks?

Officially, microfinance organizations were recognized just a few years ago. By law, microfinance organizations have the right to enter into transactions in which the amount in one hand will not exceed one million. At the time of the adoption of the law regarding the activities of such institutions for a long time to decide on the need to issue a banking license. As a result, we came to the conclusion that the MFI does not need such a license.

The main difference between microfinance organizations and banking institutions is that they offer different conditions for credit programs, and also treat their credit customers differently. Banks in the field of lending are ready to cooperate with a variety of customers and they all prefer to deal with the processing of credit transactions with large legal entities. Banks consider such borrowers to be more reliable, and the bank gets much more benefits from such transactions.

Microfinance organizations do not have the ability to enter into transactions for very large loan amounts, and they are not very fond of such transactions, since they consider them very risky. Clients of such institutions are usually ordinary citizens or small businesses.

Investing in MFIs

Under current legislation, microfinance organizations cannot open deposit accounts, draw up deposits and thereby attract third-party funds to expand their activities. At the same time, there is no prohibition on attracting investment funds. A person who is considering investing free funds in such an organization should be very careful and remember that it is not obligatory for microfinance organizations to issue a banking license.

Many experts agree that it is best to increase or save funds through deposits in banks because such funds must be insured by these financial institutions. Microfinance organizations are not obliged to insure the funds of investors, and therefore a person who has made such an investment may lose money if the MFI goes bankrupt.