What is Microfinance?

Microfinance is the supply of loans, savings, and other basic financial services to poor people. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilise consumption, and shield themselves against risks. Financial services needed by poor people include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services.

No access to formal financial sector
The poor rarely access these services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal commercial and non-commercial moneylenders but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and mutual insurance societies that have a tendency to be erratic and insecure.

Providers of financial services to the poor
Providers of financial services to the poor include:

Donor-supported,
Non-profit non-government organisations (NGOs),
Co-operatives;
Community-based development institutions like self-help groups and credit unions;
Commercial and state banks;
Insurance and credit card companies;
Wire services;
Post offices;
And other points of sale.

Developing workable credit methodologies
NGOs and other non-bank financial institutions have led the way in developing workable credit methodologies for the poor and reaching out to large numbers of the poor. Throughout the 1980s and 1990s, these programs improved upon the original methodologies and bucked conventional wisdom about financing the poor. They have shown that the poor repay their loans and are willing and able to pay interest rates that cover the costs of providing the loans.

Benefits for poor people
Poor people, with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With access to microinsurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets.

Microfinance contributes to reach the Millennium goal to cut poverty in half by 2015
Access to credit allows poor people to take advantage of economic opportunities, thus contributing to local economic development and job creation. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated that reliable sources of credit provide a fundamental basis for planning and expanding business activities. Many studies show that clients who join and stay in programs have better economic conditions than non-clients, suggesting that programs contribute to these improvements. A few studies have also shown that over a long period of time many clients do actually graduate out of poverty.

Microfinance programs have generally targeted poor women. By providing access to financial services only through women—making women responsible for loans, ensuring repayment through women, maintaining savings accounts for women, providing insurance coverage through women—microfinance programs send a strong message to households as well as to communities. Many qualitative and quantitative studies have documented how access to financial services has improved the status of women within the family and the community. Women have become more assertive and confident. In regions where women’s mobility is strictly regulated, women have become more visible and are better able to negotiate the public sphere. Women own assets, including land and housing, and play a stronger role in decision making. In some programs that have been active over many years, there are even reports of declining levels of violence against women.

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Last update: 22 October 2004