What is microfinance?
Microfinance, also known as microcredit, is a financial service that offers loans, savings and insurance to entrepreneurs and small business owners who don't have access to traditional sources of capital, like banks or investors. The goal of microfinancing is to provide individuals with money to invest in themselves or their business.
"Microfinance focuses on meeting the financial needs of populations that are financially underserved," said Tarsava. "These are individuals who usually lack the credit or resources to secure a loan and are unlikely to get approval from traditional banks. Typically, these consumers are seeking small-denomination loans … to finance the purchase of a specific equipment, or the capital to start a small business."
History of microfinance
While the concept has been used globally for centuries, Bangladesh's Muhammad Yunus is the pioneer of the modern version of microfinance, according to Kiva, a crowdfunding-based microlending organization inspired by Yunus' work. While working at Chittagong University in the 1970s, Yunus began offering small loans to destitute basket weavers. Yunus carried on this mission for nearly a decade before forming the Grameen Bank in 1983 to reach a much wider audience.
Joseph Blatchford, former head of the Peace Corps and a UC Berkeley law student, is also credited with building up modern-day microfinancing efforts. Blatchford founded nonprofit Accion as a volunteer project in 1961, and in 1973, the organization began offering small loans to entrepreneurs in Brazil to see if a one-time influx of money could help lift them out of poverty. The operation was a success: 885 loans helped create or stabilize 1,386 new jobs. Accion expanded the model to 14 other Latin American countries over the next decade.
Microfinancing institutions
Microfinance is available through microfinance institutions, which range from small nonprofit organizations to larger banks. These institutions include for-profit companies, like General Electric Consumer Finance and Citi Microfinance, as well as nonprofit organizations, such as Kiva, Accion and BRAC. They offer small loans and help set up and maintain a savings account, and they assist borrowers in obtaining insurance for a variety of needs, such as death, illness or loss of property.
"Although microfinance is often discussed in the international context, there are several lending institutions in America, that make these types of loans to increase economic opportunity in local communities," said Tarsava. "Many CDFIs (Community Development Financial Institutions) offer microloans to the communities they serve … [with] favorable small-business terms, … and they provide consulting resources and financial education to help increase the likelihood of borrower success."
The downsides of microfinance
According to the data from the World Bank, "the microfinance industry is estimated at $60 to 100 billion, with 200 million clients." However, there is much criticism about the concept.
Microloans are smaller than traditional bank loans, but they have much higher interest rates. Many believe the loans are not enough to start a successful business and only provide basic needs, like food and shelter, which eventually lead to more debt.
"As with any credit, a microloan should be used wisely," said Tarsava. "Without a business plan and proper financial education, even a microloan can lead to unsustainable levels of debt. This is especially true for consumers who already lack credit or have challenging financial situations."
However, there are many ways to ensure timely repayment on the loans. According to Investopedia, many microlenders allow borrowers to work together to repay their loans, helping each other when needed. This holds borrowers more accountable for their repayments, which in turn leads to better credit and sets them off on the right foot.
Microfinance is the provision of financial services to low-income people. It refers to a movement that envisions a world where low-income households have permanent access to high-quality and affordable financial services to finance income-producing activities, build assets, stabilize consumption, and protect against risks. Initially the term was closely associated with microcredit—very small loans to unsalaried borrowers with little or no collateral—but the term has since evolved to include a range of financial products, such as savings, insurance, payments, and remittances.
Microfinance institutions and other financial service providers have worked over the past decades to develop products and delivery methods to meet the diverse financial needs of low-income people. For example, unlike other forms of lending, microcredit loans use methodologies such as group lending and liability, pre-loan savings requirements, and the gradually increase in loan sizes to evaluate clients’ credit worthiness. Microfinance providers today continue to improve their understanding of the financial needs of their target clients and tailor their products and methodologies accordingly.
Financial inclusion :The goal of financial inclusion is to develop financial markets that responsibly serve more people with more products at lower cost. Financially inclusive markets comprise a broad, interconnected ecosystem of market actors and infrastructure delivering financial products safely and efficiently to low-income customers. These market actors may include banks, financial cooperatives, e-money issuers, payment networks, agent networks, insurance providers, microfinance institutions, and more.
Microfinance, also known as microcredit, is a financial service that offers loans, savings and insurance to entrepreneurs and small business owners who don't have access to traditional sources of capital, like banks or investors. The goal of microfinancing is to provide individuals with money to invest in themselves or their business.
"Microfinance focuses on meeting the financial needs of populations that are financially underserved," said Tarsava. "These are individuals who usually lack the credit or resources to secure a loan and are unlikely to get approval from traditional banks. Typically, these consumers are seeking small-denomination loans … to finance the purchase of a specific equipment, or the capital to start a small business."
History of microfinance
While the concept has been used globally for centuries, Bangladesh's Muhammad Yunus is the pioneer of the modern version of microfinance, according to Kiva, a crowdfunding-based microlending organization inspired by Yunus' work. While working at Chittagong University in the 1970s, Yunus began offering small loans to destitute basket weavers. Yunus carried on this mission for nearly a decade before forming the Grameen Bank in 1983 to reach a much wider audience.
Joseph Blatchford, former head of the Peace Corps and a UC Berkeley law student, is also credited with building up modern-day microfinancing efforts. Blatchford founded nonprofit Accion as a volunteer project in 1961, and in 1973, the organization began offering small loans to entrepreneurs in Brazil to see if a one-time influx of money could help lift them out of poverty. The operation was a success: 885 loans helped create or stabilize 1,386 new jobs. Accion expanded the model to 14 other Latin American countries over the next decade.
Microfinancing institutions
Microfinance is available through microfinance institutions, which range from small nonprofit organizations to larger banks. These institutions include for-profit companies, like General Electric Consumer Finance and Citi Microfinance, as well as nonprofit organizations, such as Kiva, Accion and BRAC. They offer small loans and help set up and maintain a savings account, and they assist borrowers in obtaining insurance for a variety of needs, such as death, illness or loss of property.
"Although microfinance is often discussed in the international context, there are several lending institutions in America, that make these types of loans to increase economic opportunity in local communities," said Tarsava. "Many CDFIs (Community Development Financial Institutions) offer microloans to the communities they serve … [with] favorable small-business terms, … and they provide consulting resources and financial education to help increase the likelihood of borrower success."
The downsides of microfinance
According to the data from the World Bank, "the microfinance industry is estimated at $60 to 100 billion, with 200 million clients." However, there is much criticism about the concept.
Microloans are smaller than traditional bank loans, but they have much higher interest rates. Many believe the loans are not enough to start a successful business and only provide basic needs, like food and shelter, which eventually lead to more debt.
"As with any credit, a microloan should be used wisely," said Tarsava. "Without a business plan and proper financial education, even a microloan can lead to unsustainable levels of debt. This is especially true for consumers who already lack credit or have challenging financial situations."
However, there are many ways to ensure timely repayment on the loans. According to Investopedia, many microlenders allow borrowers to work together to repay their loans, helping each other when needed. This holds borrowers more accountable for their repayments, which in turn leads to better credit and sets them off on the right foot.
Microfinance is the provision of financial services to low-income people. It refers to a movement that envisions a world where low-income households have permanent access to high-quality and affordable financial services to finance income-producing activities, build assets, stabilize consumption, and protect against risks. Initially the term was closely associated with microcredit—very small loans to unsalaried borrowers with little or no collateral—but the term has since evolved to include a range of financial products, such as savings, insurance, payments, and remittances.
Microfinance institutions and other financial service providers have worked over the past decades to develop products and delivery methods to meet the diverse financial needs of low-income people. For example, unlike other forms of lending, microcredit loans use methodologies such as group lending and liability, pre-loan savings requirements, and the gradually increase in loan sizes to evaluate clients’ credit worthiness. Microfinance providers today continue to improve their understanding of the financial needs of their target clients and tailor their products and methodologies accordingly.
Financial inclusion :The goal of financial inclusion is to develop financial markets that responsibly serve more people with more products at lower cost. Financially inclusive markets comprise a broad, interconnected ecosystem of market actors and infrastructure delivering financial products safely and efficiently to low-income customers. These market actors may include banks, financial cooperatives, e-money issuers, payment networks, agent networks, insurance providers, microfinance institutions, and more.
Financial inclusion efforts today build upon the work of microfinance providers over the last several decades. What began as the provision of loans to poor people for the purpose of building microenterprises has evolved into a global effort to provide poor people with access to a range of financial products and services. Research and experience demonstrate that, in addition to using credit, low-income people save, make payments, use insurance, and make use of a variety of other tools to manage their complex financial lives. Financial inclusion efforts seek to make these and other products available to everyone in a safe, cost effective, and convenient manner.
Who are microfinance clients? show less
Typical microfinance clients have low incomes and are often self-employed in the informal economy, conditions that together typically deny them access to banks and other formal financial institutions. They commonly run small stores or street stalls, create and sell items they make in their homes, and in rural areas, microfinance clients may be small-scale farmers and those who process or trade crops and goods
Who are microfinance clients? show less
Typical microfinance clients have low incomes and are often self-employed in the informal economy, conditions that together typically deny them access to banks and other formal financial institutions. They commonly run small stores or street stalls, create and sell items they make in their homes, and in rural areas, microfinance clients may be small-scale farmers and those who process or trade crops and goods
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