Introduction to Microfinance
by David Loris - Waterberry staff
The main idea behind microfinance is that poor people, who can provide no collateral, should have access to some sort of financial services. Microfinance began with microcredit: the provision of small loans (20-50 euros) to very poor families to help them engage in productive and self-sustaining activities. Since the successful initiation of formalised microcredit in the 1980’s a number of other complementary services have popped up around the globe, including microsavings, microinsurance etc…
An effective way to fight poverty
Microfinance has proven to be a very effective development tool because it provides empowerment instead of charity. Typically, microfinance clients are self-employed household entrepreneurs who lack the resources to invest in their business and their future and thus cannot escape the grips of extreme poverty. Here is a typical microfinance success story taken from the United Nations Capital Development Fund:
A UNCDF microfinance project in Bangladesh provided beneficiaries loans of about $30 US. Most of the loans were spent on productive purposes such as rice production, cattle fattening, and small-scale entrepreneurial initiatives. The activities that were financed were essentially carried out by individuals, in their homes or on plots of land. To receive credit, however, a small-scale or landless farmer had to be incorporated in to a group of his/her peers who would agree to jointly accept responsibility for repayment. The project has proven to be highly successful. " One small loan enabled me to improve the livelihood of my entire family" said Anwar Begum, who borrowed enough money to purchase a small cow. In three years she quadrupled her investment by selling both milk and calves from the original cow, and has built a new house for herself.
Banking services at your doorstep
An incredible feature of microfinance is its convenience. Credit officers, usually locals, are hired by the MFI branch office and have the task of going from village to village (or house to house in urban areas) to collect and disburse funds. This is very convenient for clients because they rarely have to travel in order to receive their banking services. Often the credit officer will also organize group meetings at which a variety of activities can take place. This provides an opportunity for the community to give feedback and to exchange knowledge.
Banking services at your doorstep
There are various ways in which credits are granted. The Grameen bank in Bangladesh pioneered group lending in the 80’s, granting loans to small groups of families, rather than individuals. Under this system the Grameen bank achieved near 100% repayment rate, by far surpassing repayment rates at conventional financial institutions. Today, many other credit schemes and financial products have been devised in response to the feedback of the poorest themselves, but the pioneering work of the Grameen bank will always remain a benchmark.
Microfinance is not a solution to all the world’s problems, but seems to be effective in encouraging entrepreneurship, increasing the income of the poorest and helping them to build viable businesses. The United Nations has declared that 2005 is “the year of microfinance”. The sector is booming and there has never been so much attention given to this sector. Furthermore, there seems to be a great deal of opportunity for young professionals…
Further reading / References