The concept of a relatively small amount of money allowing someone else to build a business, fascinated us. This is basically the idea of microfinance and micro loan.
However, since Muhammud Yunus and Grameen Bank won the 2006 Nobel Peace Prize “for their efforts to create economic and social development from below” through microfinance, what started as the revolutionary idea that lauded for changing the world, it has been criticized for not alleviating poverty. That’s why everyone is talking now about nano finance
If “Micro” is Still too Big
Banks issuing microloans often have high interest rates and high transaction costs, both of which can make these loans prohibitive for the lender and the borrower. Moreover, loans of $25-$50 still burden many families, and they fear typical types of financing and loans.
Without doubts, microfinance solutions have helped millions of people globally, but there is still a large group of consumers that cannot be reached because the microfinance itself don’t suit for them. The households that microfinance struggles to reach are typically families who are risk averse and have a fear of formal financing.
Let’s Meet Nanofinance
Around “unbanked” regions, a new wave of concern regarding accessibility has arisen; nanofinance. The existence of nanofinance is needed due to microfinance seems not conducive to the very poor.
This new financing wave started in Asian and Islamic countries, where some microfinance institutions and rural banks have provided loans for the very poor people through what they mention as 'nanofinance'.
As the name implies, the amount of money borrowed by nanofinance provider is small. Nanofinance focuses less on loans to build businesses and more on loans to help families acquire needed supplies and technology. It can meet people needs for emergency hospitalisation, help users with cash flow shortage for their home expenses and if they are a roadside hawker, they might get enough funds to meet their weekly business expenses.
Let’s take India as a case study. Nanofinance institution in India were settled down since 2008 with the goal to help the poorest of the poor women of the society. Women who fall into this category constantly struggle for their daily livelihood. One of the root causes of their helpless situation is the emergency need of small amounts of money. They cannot go to the government, commercial banks or MFIs for their emergency needs.
Nanofinance’s Mission and How Does it Work
Nanofinance is basically a flexible credit process designed to meet the financial needs of customers, such as new business owners. The borrowers do not need to have a steady income, payroll, financial history or collateral. Nanofinance is a new paradigm of microfinance, namely a small financing that operates with simple processing system to the very poor for the emergency needs (for food, healthcare, education, death, wedding, daily livelihood, small trading or very micro enterprises).
So, nanofinance is another concept distinct from microfinance with the aim to address the serious problems of the extremely poverty: it creates community within the community. On one count microfinance constructs the community and on another count breaks it and throws the community into the fold of nanofinance. Others emphasize that nanofinance could reduce the loan shark problem and promote better access to capital that would expand occupational chance of the borrowers*.
It utilizes pay-as-you-go methods and very rarely the loan size overpass 100 USD - however, this number is an approximate figure. Each country may have different level for the amount span of nanofinance.
The Key-Role of FinTechs
People do not have to go through paper work and/or rigid rules and regulations for getting small financing for their emergency needs. In some countries, the loan can be submitted orally and funds can be directly liquid. However, “unbanked” regions of the world benefitted from mobile banking and today nanofinace spread is surfing the FinTech’s wave. Money became easily accessible to individuals.
Let’s take Monix, a Thai digital loan provider under Siam Commercial Bank (SCB), that offers nanofinance loans via a digital lending application called Finnix. Or Vanio, a Philippine-based app which offers users access to small loans starting at $1 up to $5.
In Myanmar, ZigWay claims itself as “fintech social enterprise”, piloting a platform that provides microfinance to low-income families in Myanmar. The company uses a mobile app to offer flexible loans from US$10, “providing a safe alternative to local loan sharks”. The ‘nano loan’ app was built to give underserved populations access to finance that helps them to avoid debt traps. ZigWay uses hi-tech technology, including psychometric testing, to assess creditworthiness so that it can lend to low-income customers who don’t have credit records.
Nano credit is empowering the unbanked
Finally, the nanofinance claims to reach the very poor people; the very micro enterprises that may not have a constant income, monthly, paycheck, or have limited financial history; the very low income groups/individuals that do not meet financial institutions’ borrowing criterion.
However, flexible loan options by themselves aren’t enough. For nanofinance to truly meet the needs of people, payment options must also be flexible. Companies have mitigated this issue by designing service plans that take income uncertainty into account. Nanofinance has the potential to becoming a standalone finance channel.
*Chonlaworn, Piyakorn & Pakanee Pongpirodom. (2015). Can Nano Finance unleash The Grassroots From Loan Shark Problems?. Musari, Khairunnisa. (2016a). Economic Sustainability for Islamic Nanofinance through Sukuk-Waqf Linkage Program (Case Study in Indonesia)
