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For Your Business June 21, 2019

Microfinance vs. Macrofinance: What's The Difference?

 

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Microfinance vs. Macrofinance: An Overview

Microfinance and macrofinance represent two types of funding-related activities. The difference lies in their scope. Microfinance is an individual-focused, community-based approach to provide money and/or financial services to money to poor individuals or small businesses who lack access to mainstream or conventional resources. In contrast, macrofinance deals with an economy or an overall social structure. It involves drafting policies, initiating programs like subsidies, or funding and operating multi-year economic development plans and projects that will generate employment or kick-start industry.

A $100 loan to an uneducated slum-dweller enabling her to buy necessary equipment for making ceramics would be an example of microfinance; a government financing the construction of a million-dollar hydropower dam that employs thousands of people would constitute macrofinance.

Microfinance

Microfinance services include microcredit, microsavings, and microinsurance. Microfinance aims to make individuals self-sufficient by offering timely funding, helping them learn skills, and establishing a stable means of livelihood.

Microfinance starts by educating potential borrowers about the basics of how money and credit work, how to budget and manage debt, and how to best utilize cash flows. Then individuals are provided access to capital, at generous terms: lower-than-average interest rates, or the waiving of collateral. Default risk for the lenders is mitigated by pooling borrowers in groups (of, say, five or 10 people); the peer pressure often improves repayment rates. Pooling also builds the individuals' credit rating and enables assistance among group members.

Microfinance starts with a focus on individuals, while macrofinance starts with a focus on the regional or national level.

Macrofinance

Macrofinance aims for economic development more broadly, working on a larger scale to achieve widespread benefits that involve entire populations and multiple entities. For example, a state or province may offer multi-year tax benefits to businesses, which in turn, set up factories or offices in a city or region, which hire local residents and use local suppliers or services. Financing for the endeavor is assisted by banks or through public-private partnerships.

Although it has lost some revenue via the corporate tax breaks, the government benefits overall: the newly employed individuals will earn more (taxable) income, as will nearby businesses (restaurants, etc.); property values will likely increase; other companies might be drawn to the region.

Key Differences

Other major differences between microfinance and macrofinance include:

  • Microfinance institutions (MFI), self-help groups (SHG), and non-governmental organizations (NGO) are the primary funders in the microfinance sector. However, public sector banks, for-profit organizations, and private consumer finance companies are starting to be involved as well. On the other hand, macrofinance involves bigger entities such as governments, local authorities, large corporations, banks, and established businesses.
  • The amount of money involved in macrofinance is significantly larger than that in microfinance initiatives. And the scale of operations varies widely: Microfinancing can provide a $300 loan to a work-for-hire mason to set up his own brick kiln, while macrofinancing for large projects like a dam or road construction offers hundreds of local masons employment for a few years.
  • Microfinancing is usually a continuous ongoing activity without any defined end. A $50 loan available today to a fisherman for buying fishing nets can be extended to $500 tomorrow to help him buy a boat; or, once this fisherman becomes self-reliant and repays his microfinance loan, the money can be moved to another eligible individual. However, macrofinance projects have a definitive time period, such as subsidies offered only for three years or a road-building project to be completed in five years. 
  • Microfinance aims at making individuals self-reliant. Say a Bangladeshi tailor takes a $100 loan to buy a sewing machine. As her tailoring business progresses, she may establish a showroom and even employ a few individuals. On the other hand, macrofinance aims to improve the overall economy. For example, the government offering subsidies on fertilizers to all cotton farmers aims to increase cotton cultivation, build a textile industry, and help everyone economically. 
  • Microfinancing carries the risk of default by individuals, while macrofinancing faces challenges from corruption or non-implementation of efficient policies.
  • Microfinancing offers other social benefits imposed by terms of the loan. For example, the load might stipulate that borrowers save a part of their income for the future or spend no part of the loan on alcohol. Macrofinancing, on the other hand, enables large-scale employment and development of new sectors and businesses but does not guarantee the betterment of an individual.

Key Takeaways

  • Microfinance and macrofinance both deal with funding initiatives; their difference lies in the scope and size of their efforts.
  • Microfinance enables financial self-reliance for individuals, providing them with money and education.
  • Macrofinance deals with broader projects that affect entire societies or communities, aiming to improve economies as a whole.

 

This article was written by Shobhit Seth from Investopedia Stock Analysis and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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