What is Microfinance?

"Microfinance is the supply of loans, savings, and other basic financial services to the poor." (http://cgap.org)
As these financial services usually involve small amounts of money - small loans, small savings, etc. - the term "microfinance" helps to differentiate these services from those which formal banks provide

A small loan in the hands of a diligent microentrepreneur can move a family from dependence on aid to self sustainability, eventually moving the entire family out of poverty. With increased household income, parents can provide healthy food for their children, safe housing, access to medical attention, and an education. This restores the dignity of parents, and provides a hope for a better future for children.

  • 3.3 billion people (half the world’s population) live on less than $2 a day.
  • Over 90% of the economically active poor are self-employed, and nearly all could benefit from microloans to expand business.
  • Microfinance moves people from dependence on aid to self-reliance.
  • 91% of the global microfinance need is unmet. (Currently 154 million microloans of a potential 1.5 billion).
  • The average microloan is $381 with a global repayment rate of 98%. When repaid, the money becomes available to be re-lent to another microentrepreneur.
  • The average microfinance borrower makes returns of 120-800% on a microloan.

 
“Microfinance is one of the key driving mechanisms to meet the Millennium Development Goals, specifically the overarching target of halving extreme poverty and hunger by 2015.“
- Mark Malloch Brown, UN

Why are they small? Someone who doesn't have a lot of money isn't likely to want or be able to take out a $50,000 loan, or be able to open a savings account with an opening balance of $1,000.

It's easy to imagine poor people don't need financial services, but when you think about it they are using these services already, although they might look a little different.

"Poor people save all the time, although mostly in informal ways. They invest in assets such as gold, jewelry, domestic animals, building materials, and things that can be easily exchanged for cash. They may set aside corn from their harvest to sell at a later date. They bury cash in the garden or stash it under the mattress. They participate in informal savings groups where everyone contributes a small amount of cash each day, week, or month, and is successively awarded the pot on a rotating basis. Some of these groups allow members to borrow from the pot as well. The poor also give their money to neighbors to hold or pay local cash collectors to keep it safe.

"However widely used, informal savings mechanisms have serious limitations. It is not possible, for example, to cut a leg off a goat when the family suddenly needs a small amount of cash. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire, thieves, or illness (in the case of livestock).

Informal rotating savings groups tend to be small and rotate limited amounts of money. Moreover, these groups often require rigid amounts of money at set intervals and do not react to changes in their members' ability to save. Perhaps most importantly, the poor are more likely to lose their money through fraud or mismanagement in informal savings arrangements than are depositors in formal financial institutions." (http://cgap.org)

"The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal." (http://cgap.org)