The advent of technology and connectivity to places all over the world has resulted in the development and prominence of a new method of finance known as microlending.
Although loans, credits, and banking facilities are at their best in the current age, there are still many restrictions hindering people from using the banks to their fullest. It's not the bank's fault either. After all, credit repayment and risk-benefit ratio are essentials to be considered before every decision for banks to function effectively without collapsing.
So what microcredit or microlending brings to the financial sector? Before we explore the possibilities, here is a brief on microlending.
Microlending or microcredit is the extention of small loans whose value falls below the institutionalized banks' risk-benefit ratio to provide credits and loans. They are typically used to help the business owners, innovators, entrepreneurs, and simply everyone in need of money, especially in third-world countries where banks are yet to mature.
Microlending blesses lenders with lucrative and abnormal interests even more than 30% in popular platforms, but there is a catch. If the loan defaults, there is no way to get the money back. And that's an expected risk; banks term them as risky investments because there are no collaterals involved.
The lender is clarified of the borrowers' intention on where the credits are spent to give lenders options to analyze the risk and determine their worth.
For example, consider two investment options: an entrepreneur with a good credit score but low interest, and a businessman with a poor credit score with high interest. The entrepreneur who seeks funding to work his killer business idea with execution strategies to reach all the way up to the sky of profits is more likely to get the funding than the businessman with a poor record. Not to mention, the lowest interest in microlending is always higher than the highest the banks can offer.
Microlending majorly serves two groups of deserving people: one, poor entrepreneurs of third-world countries; and two, people in developed countries who are not eligible for loans because of poor credit score.
Both the groups are susceptible to get affected by notorious loan sharks who charge unreasonably high interest and take advantage of the borrowers' plight. There are also incidents when the entire family of the borrowers was made to involve in the transactions against their will.
Microlending completely eliminates the need to sign a blood pact with the loan sharks that burn out the fires of entreneurship and rekindles the embers of innovative minds to strive for greater purposes, while enabling the lenders better profits.
How Technology Can Further Improve Microlending?
Jan Sampath is a microlending-based startup leveraging technologies like artificial intelligence, machine learning, and blockchain to build a reliable microlending community.
Microlending platforms are haunted by large overhead costs, hefty fee structure to compensate for the high operating costs, tortoise-speed transaction, centralized structure, and intensified potential for corruption.
If it isn't for Blockchain, it is nigh impossible to deal with.
Blockchain-powered microlending platforms inherit every single advantage of the technology. It greatly reduces the transaction cost making it lucrative for lenders and affordable for borrowers at the same time. It speeds-up transactions and verifications, secures data and protects data integrity, and eliminates the possibilities for corruption.
AI-powered conversational chatbots can guide lenders and borrowers in setting up their profile and tweak them to improve their chances for investments and profits. They can also get all the information about the borrowers and their reason for funds to allow lenders to make better decisions.
For example, if a borrower has a poor credit score even for the microlending platform, the AI can gather the reason for defaults. It can also up the game by checking the legitimacy of the claims.
The AI-enables Microcredit platform can further estimate the risk-benefit ratio of projects to assist lenders with their financial planning.
Machine Learning, with the help of its historical data analysis, can identify the authenticity of the borrowers' claims.
The algorithm can also identify the scamming patterns and warn lenders of fraud way ahead in their journey.
In short, machine Learning adds trustworthiness to the microlending platform with the help of analytics to form an extra layer of security. It simply shouts to the lenders that the platform cares about their money.
Microlending, although being talked about since the 1980s, the idea has started bearing fruits only recently that it could still be considered new.
Fraught with dangers, microcredit or microlending can only be lifted from the dangerous tides of fraudsters with the help of technology.
In fact, it has more room for innovations than any other technology in the financial sector. Augmented reality (AR) and virtual reality (VR) can convey the means of investment effectively. Computer vision can be used to identify and authenticate new signups for borrowing and read facial ques to know integrity.
Yet, these are but pieces of all the ideas startups and businesses can come up with to leverage technology and contribute to the microlending industry.
Vagisha Arora is a full time freelance content writer and marketer with over 5 years of experience. She had completed 2000+ writing projects till date. She is proficient in handling projects in multi niche industries like health, education, lifestyle, fashion, digital marketing and more.