When is microfinance NOT an appropiate tool?
Microfinance increasingly refers to a host of financial services—savings, loans, insurance, remittances from abroad, and other products. It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn’t be designed and made useful. But the fact of the matter is, that in most people’s mind, “microfinance” still refers to microcredit.
Microfinance increasingly refers to a host of financial services-savings, loans, insurance, remittances from abroad, and other products. It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn’t be designed and made useful. But the fact of the matter is, that in most people’s mind, “microfinance” still refers to microcredit. Microcredit is only useful in certain situations, and with certain types of clients. As we are finding out, a great number of poor, and especially extremely poor, clients exclude themselves from microcredit as it is currently designed. Extremely poor people who do not have any stable income-such as the very destitute and the homeless-should not be microfinance clients, as they will only be pushed further into debt and poverty by loans that they cannot repay. As currently designed, microcredit requires sustained, regular, and often significant payments from poor families. At some level, the very
Financial services, particularly credit, are not appropriate for all people at all times. For loans that will be used for business purposes, microcredit best serves those who have identified an economic opportunity and can capitalize on it if they have access to a small amount of ready cash. Regardless of how loans are used, MFIs can provide long-term, stable credit access only when clients have both the willingness and ability to meet scheduled loan repayments. Microfinance is particularly inappropriate for the destitute, who may need grants or other public resources to improve their economic situation. Grants are a more efficient way to transfer resources to the destitute than are loans that many will not be unable to repay. Too much risk is placed on the MFI and client, when the only way a client can repay a loan is by starting a successful business. Basic requirements like food, shelter, and employment are often more urgently needed than financial services and should be appropriate
Microfinance increasingly refers to a host of financial servicessavings, loans, insurance, remittances from abroad, and other products. It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn’t be designed and made useful. But the fact of the matter is, that in most people’s mind, “microfinance” still refers to microcredit. Microcredit is only useful in certain situations, and with certain types of clients. As we are finding out, a great number of poor, and especially extremely poor, clients exclude themselves from microcredit as it is currently designed. Extremely poor people who do not have any stable incomesuch as the very destitute and the homelessshould not be microfinance clients, as they will only be pushed further into debt and poverty by loans that they cannot repay. As currently designed, microcredit requires sustained, regular, and often significant payments from poor families. At some level, the very cau
