What is Microfinance?
“Microfinance” is often defined as financial services for poor and low-income clients. In practice, the term is often used more narrowly to refer to loans and other services from providers that identify themselves as “microfinance institutions” (MFIs). These institutions commonly tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. More broadly, microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, an
To most, microfinance means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their tiny businesses. Over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.) as we have come to realize that the poor and the very poor who lack access to traditional formal financial institutions require a variety of financial products.
Microfinance is a simple but powerful tool that enables the poor to pull themselves out of poverty. Most commonly, it involves making small loans to the working poor in developing countries. These loans are usually less than $200 and are made by local organizations called microfinance institutions. The loans are used by the working poor to establish or expand small businesses that generate additional income for the family. This extra income allows a poor family to buy food, access healthcare, educate their children, put aside savings and lay the foundation for a better future. Microfinance has emerged as an effective poverty alleviation tool because it is based on the fundamental principle that human beings are motivated to do whatever it takes to make themselves as well off as possible. Consider the story of Puja Patel, a single mother who lives with her four children in a village in India. With a $50 loan, she bought a sewing machine. She made clothes, sold them for a profit, and rep
Geoff Davis, founder and CEO of Unitus, explains the meaning of microfinance and the huge potential and impact the field has. He goes on to discuss the difference between microfinance and micro credit. He reveals that microfinance has a huge growth opportunity as it is potentially a five billion dollar market and is currently about a one billion dollar market.
Microfinance is a broad term used to refer to the provision of financial services for people living in poverty. These services can include credit, insurance, and a place to deposit savings. Though often undervalued by those living in areas with ready access to capital and savings, these services can make the difference between economic opportunity and crushing poverty.
