|1. What is microfinance?
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.
Microcredit came to prominence in the 1980s, although early experiments
date back 30 years in Bangladesh, Brazil and a few other countries.
The important difference of microcredit was that it avoided the
pitfalls of an earlier generation of targeted development lending,
by insisting on repayment, by charging interest rates that could
cover the costs of credit delivery, and by focusing on client groups
whose alternative source of credit was the informal sector.
Emphasis shifted from rapid disbursement of subsidized loans to
prop up targeted sectors towards the building up of local, sustainable
institutions to serve the poor. Microcredit has largely been a private
(non-profit) sector initiative that avoided becoming overtly political,
and as a consequence, has outperformed virtually all other forms
of development lending
Traditionally microfinance was focused on providing a very standardized
credit product. The poor, just like anyone else, need a diverse
range of financial instruments to be able to build assets, stabilize
consumption and protect themselves against risks. Thus, we see a
broadening of the concept of microfinance--- our current challenge
is to find efficient and reliable ways of providing a richer menu
of microfinance products.The typical microfinance clients are low-income
persons that do not have access to formal financial institutions.
Microfinance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and
others who are engaged in small income-generating activities such
as food processing and petty trade. In urban areas, microfinance
activities are more diverse and include shopkeepers, service providers,
artisans, street vendors, etc. Microfinance clients are poor and
vulnerable non-poor who have a relatively stable source of income.
2. Who are the clients of microfinance?
Access to conventional formal financial institutions, for many
reasons, is inversely related to income: the poorer you are, the
less likely that you have access. On the other hand, the chances
are that, the poorer you are, the more expensive or onerous informal
financial arrangements. Moreover, informal arrangements may not
suitably meet certain financial service needs or may exclude you
anyway. Individuals in this excluded and under-served market segment
are the clients of microfinance.
As we broaden the notion of the types of services microfinance
encompasses, the potential market of microfinance clients also expands.
For instance, microcredit might have a far more limited market scope
than say a more diversified range of financial services which includes
various types of savings products, payment and remittance services,
and various insurance products. For example, many very poor farmers
may not really wish to borrow, but rather, would like a safer place
to save the proceeds from their harvest as these are consumed over
several months by the requirements of daily living.
3. How does microfinance help the poor?
Experience shows that microfinance can help the poor to increase
income, build viable businesses, and reduce their vulnerability
to external shocks. It can also be a powerful instrument for self-empowerment
by enabling the poor, especially women, to become economic agents
Poverty is multi-dimensional. By providing access to financial
services, microfinance plays an important role in the fight against
the many aspects of poverty. For instance, income generation from
a business helps not only the business activity expand but also
contributes to household income and its attendant benefits on food
security, children's education, etc. Moreover, for women who, in
many contexts, are secluded from public space, transacting with
formal institutions can also build confidence and empowerment.
Recent research has revealed the extent to which individuals around
the poverty line are vulnerable to shocks such as illness of a wage
earner, weather, theft, or other such events. These shocks produce
a huge claim on the limited financial resources of the family unit,
and, absent effective financial services, can drive a family so
much deeper into poverty that it can
4. When is microfinance NOT an appropriate tool?
Microfinance increasingly refers to a host of financial services
- savings, loans, insurance, remittances from abroad, and other
products. It's 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.
5. Why do MFIs charge such high interest rates to poor people?
Providing financial services to poor people is pretty expensive,
especially in relation to the size of the transactions involved.
This is one of the most important reasons why banks don't make small
6. Aren't the poor too poor to save?
The poor already save in ways that we may not consider as "normal"
savings - investing in assets, for example, that can be easily exchanged
to cash in the future (gold jewelry, domestic animals, building
materials, etc.). After all, they face the same series of sudden
demands for cash we all face illness, school fees, need to expand
the dwelling, and burial.
7. What is a Microfinance Institution (MFI)?
Quite simply, a microfinance institution is an organization that
offers financial services to the very poor. Most MFIs are non-governmental
organizations committed to assisting some sector of the low income
8. Can microfinance be profitable?
Yes it can. Data from the MicroBanking Bulletin reports that 63
of the world's top MFIs had an average rate of return of about 2.5%
of total assets, after adjusting for inflation and after taking
out subsidies programs might have received.
9. What is the government?s role in supporting microfinance?
Governments have a complicated role when it comes to microfinance.
Until recently, governments generally felt that it was their responsibility
to generate 'development finance', including credit programs for
10. What is the role of the financial regulator in supporting
the development of microfinance?
Many feel that the most important role of a financial regulator
in supporting the development of microfinance is to create an alternative
institutional type that allows sound financial NGOs, credit unions,
and other community-based intermediaries to obtain a license to
offer deposit services to the general public and obtain funds through
apex organizations. In a few countries, this may be an appropriate
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