About Microfinance
What is microfinance?
Microfinance is the term used to describe banking or financial services given to poor or low-income clients. It includes services such as the provision of credit, savings, insurance and fund transfers.
Low-income typically refers to those people who live on less than $2 a day, just under 45% of the world’s population. People in low-income areas rarely have access to mainstream financial services.
The role of microfinance
Most people in emerging economies work in the informal sector of urban and rural areas. These micro-entrepreneurs, traders, artisans or farmers are excluded from mainstream economic growth and must rely on themselves to survive.
Most people in emerging economies work in the informal sector of urban and rural areas. These micro-entrepreneurs, traders, artisans or farmers are excluded from mainstream economic growth and must rely on themselves to survive.
Their income often depends exclusively on the success of a small business, but their ventures rarely extend beyond subsistence level, due to a lack of capital or exploitation by loan sharks.
Microfinance can help these micro-entrepreneurs start-up or improve their businesses by providing an important source of capital. With this credit, they can start generating more income for their household, improving their quality of life, and creating new opportunities within their communities.
By helping people to help themselves in this way, microfinance can help emerging economies develop sustainable growth and improve the lives of millions of people.
Microfinance versus other funding
There are other ways of helping alleviate poverty currently being used around the world, each with a number of benefits and limitations, for example:
There are other ways of helping alleviate poverty currently being used around the world, each with a number of benefits and limitations, for example:
- Charitable donations are helping the world’s poor in many areas, but these funds are limited and don’t always stimulate sustainable enterprise.
- International programmes involving non-governmental organisations (NGOs), large commercial business and governments are working to help develop local entrepreneurs and business with great effect. But, these programmes are currently limited in their reach.
Microfinance, therefore, provides an important complement to the above by fostering small-scale businesses globally and promoting economic growth and stability from the bottom up.
Historical performance
Over the past 30 years, specialised financial intermediaries have successfully targeted the microfinance market and developed products and methodologies adapted to its needs and characteristics.
Over the past 30 years, specialised financial intermediaries have successfully targeted the microfinance market and developed products and methodologies adapted to its needs and characteristics.
They have proven that microfinance is a risk-manageable and profitable business; micro-entrepreneurs borrow at market rate and boast a repayment track record that beats that of most commercial banks (97% on average).
Experience has also shown that microfinance is more than just a viable business; it is also a powerful development tool. Even very modest loans generate huge business productivity gains and contribute to both job creation and better family living standards including: adequate nutrition, better health and housing and more education.
The future of microfinance
Microfinance is growing fast, with around 10,000 MFIs world-wide. They vary in terms of size, legal structure and vision, however, three widespread and promising trends accompany the success of this new industry, reinforcing it structurally and setting the path for a long and successful future:
Microfinance is growing fast, with around 10,000 MFIs world-wide. They vary in terms of size, legal structure and vision, however, three widespread and promising trends accompany the success of this new industry, reinforcing it structurally and setting the path for a long and successful future:
- Microfinance institutions are now using commercial funding to reinforce their long-term sustainability; something that is proving to be an essential condition for stability, growth and independence.
- A growing number of talented business professionals are entering the market, providing important financial expertise, and successfully achieving economies of scale, product diversification and profitable growth in this increasingly competitive market.
- Microfinance is maturing into a transparent and regulated industry. Regulators, well-known business auditors and rating agencies are helping build a solid legal, financial and political framework to sustain the growth of the industry.
