Microfinance has been hailed as a powerful tool for poverty alleviation, empower low-income populations, promote financial inclusion, particularly in underdeveloped and developing economies.
It provides small loans and financial services to low-income individuals who lack access to traditional banking systems. But due to some limitations of traditional microfinance, soft microfinance can be a more humane and sustainable approach to microfinancing, emphasizing borrower welfare and social impact over profit maximization, designed to accommodate the most vulnerable borrowers, such as the relatively lower- income segments of the poor or those with very limited repayment capacity.
Soft microfinance can be characterized by its humane terms compared to conventional microfinance. It focuses not only on financial returns but also on social and economic development. Key attributes of soft microfinance include:
Key Characteristics of Soft Microfinance:
1. Low or Zero Interest Rates: Unlike traditional microfinance, which often has double-digit interest rates, soft microfinance aims to reduce the financial burden on borrowers by offering loans at lower rates (single digit, only cover operational cost) or no interest rates.
2. Ethical Lending: Soft microfinance aims to create a more equitable financial system that serves the needs of borrowers while promoting social and economic well-being. It adheres to ethical lending practices, ensuring that borrowers are not exploited with excessive interest rates or hidden fees. It will also ensure that provided loans should not be engaged in activities that are deemed socially unacceptable or harmful.
3. Social Impact: The primary goal of soft microfinance is to create positive social and economic change, rather than simply generating profit.
4. Flexibility: Borrowers under soft microfinance schemes may have the option to extend their repayment periods to ensure that their capacity to repay aligns with their income generation and loan amounts to accommodate their unique needs. There may also be extended grace periods before repayments begin, which allows borrowers to generate income before facing repayment obligations.
5. Holistic Support: Beyond financial support, soft microfinance should include components of financial literacy, business training, etc. It’s not just about lending money, but also about enabling borrowers to use the funds effectively. In addition to financial services, borrowers may provide with health, education, asset transfers (such as livestock or seeds), continuous mentorship and other forms of support to help them succeed and recover shock.
6. Focus on Vulnerable Populations: Soft microfinance goes a step further, targeting the ultra-poor people and communities-those who are often excluded even from traditional microfinance due to extreme poverty, lack of assets, or vulnerability. It may design for individuals who are too financially insecure to participate in regular microfinance initiatives and may not have the immediate ability to generate income.
7. Social Collateral: Instead of requiring physical assets or documents, soft microfinance may rely on social collateral, which involves the social network and community ties of the borrower.
Soft microfinance, an important evolution in the field of financial inclusion, might offer a compassionate and human-centered approach to lending. It might play a crucial role in empowering marginalized groups, reducing poverty, and promoting entrepreneurship.
However, for it to reach its full potential, challenges related to sustainability, reach, and dependency on external funding must be addressed. With the right support, soft microfinance can serve as a transformative tool in the global effort to achieve economic equity and financial empowerment for all.
Written by
ATM Ridwanul Haque Development Activist
[email protected]