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- Microfinance is the
provision of financial services to low-income clients or solidarity
lending groups including consumers and the self-employed, who
traditionally lack access to banking and related services.
- Microfinance is a
broad category of services, which includes microcredit. Microcredit
is provision of credit services to poor clients. Although
microcredit is one of the aspects of microfinance, conflation of the
two terms is endemic in public discourse. Critics often attack
microcredit while referring to it indiscriminately as either 'microcredit'
or 'microfinance'.
- Microfinance refers to
a movement that envisions a world in which low-income households
have permanent access to a range of high quality and affordable
financial services offered by a range of retail providers to finance
income-producing activities, build assets, stabilize consumption,
and protect against risks. These services include savings, credit,
insurance, remittances, and payments, and others.
- Typical microfinance
clients are poor and low-income people that do not have access to
other formal financial institutions. Microfinance clients are often
self-employed, household-based entrepreneurs. Their diverse
“microenterprises” include small retail shops, street vending,
artisanal manufacture, and service provision. In rural areas,
microentrepreneurs often have small income-generating activities
such as food processing and trade; some but far from all are
farmers.
- Most MFIs started as
not-for-profit organizations like NGOs (non-governmental
organizations), credit unions and other financial cooperatives, and
state-owned development and postal savings banks. An increasing
number of MFIs are now organized as for-profit entities, often
because it is a requirement to obtaining a license from banking
authorities to offer savings services. For-profit MFIs may be
organized as non-bank financial institutions (NBFIs), commercial
banks that specialize in microfinance, or microfinance departments
of full-service banks.
- Microfinance has been
growing rapidly with $25 billion currently at work in microfinance
loans. It is estimated that the industry needs $250 billion to get
capital to all the poor people who need it. The industry has been
growing rapidly, and concerns have arisen that the rate of capital
flowing into microfinance is a potential risk unless managed well.
- Microfinance must be
useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
"Microfinance can pay for itself."
- Subsidies from donors
and government are scarce and uncertain, and so to reach large
numbers of poor people, microfinance must pay for itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor
people into a country's mainstream financial system.
- In the late 1980s
microfinance institutions developed in the US. They served low
income and marginalized minority communities. By 2007 there were 500
microfinance organizations operating in the US with 200 lending
capital. Microfinance history in Canada took shape through the
development of credit unions. These credit unions provided financial
services to the Canadians who could not get access to traditional
financial means. Two separate branches of credit unions developed in
Canada to serve the financially marginalized segment of the
population.
- The mission of
microfinance institutions is to increase access to credit.
Microfinance institutions serve entrepreneurs who live or work in
low-income neighborhoods, who are unable to receive traditional
financing from banks. Organizations may target new immigrants,
aboriginals, mental health and addiction populations and other
marginalized groups.Microfinance in the U.S. context is defined as
the extension of credit up to $35,000. In
Canada, CRA guidelines restrict microfinance loans to a maximum of
$25,000.
- Microfinance is
particularly inappropriate for the destitute, who may need grants or
other public resources to improve their economic situation. Grants
are a more efficient way to transfer resources to the destitute than
are loans that many will not be unable to repay. Too much risk is
placed on the MFI and client, when the only way a client can repay a
loan is by starting a successful business. Basic requirements like
food, shelter, and employment are often more urgently needed than
financial services and should be appropriately funded by government
and donor subsidies.
- Microfinance’s success
in terms of scale and poverty alleviation has drawn the attention of
financial markets. The recent financial crisis has intensified this
interest, as investors observe microfinance’s resiliency. A study by
Krauss and Walter (2008) found that microfinance institutions (MFIs)
had limited exposure to systemic risk due to low correlation to
international capital markets. They also found MFIs were
significantly less affected by macroeconomic shocks than commercial
banks.
- Microfinance
institutions have long had faith in their profit potential;
investors are starting to respond. By the end of 2007, microfinance
investment vehicles (MIVs) had over US$ 5 billion assets under
management. As of December 2009, there were 91 active MIVs with
total assets of US$ 6.2 billion.
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