Microfinance is the supply of loans, savings, and other basic financial
services to the poor. People living in poverty, like everyone else, need
a diverse range of financial instruments to run their businesses, build
assets, stabilize consumption, and shield themselves against risks.
Financial services needed by the poor include working capital loans,
consumer credit, savings, pensions, insurance, and money transfer
services. 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. Credit is available from
informal commercial and non-commercial money-lenders but usually at a
very high cost to borrowers. Savings services are available through a
variety of informal relationships like savings clubs, rotating savings
and credit associations, and mutual insurance societies that have a
tendency to be erratic and insecure.
FAQs on Microfinance
1. What is microfinance?
Microfinance
is the supply of loans, savings and other financial services to the
poor. The term “micro” is in reference to the small amounts typically
involved in the practice. These services are small – “micro” – because a
person who does not have a lot of money most likely will not need a
loan of several thousand dollars. However, a loan of a few hundred
dollars may make a huge difference in their lives, giving them the
ability to purchase livestock for a small farm, a sewing machine to help
make accessories and clothes, or supplies for a small store, for
example.
The
poor throughout the developing world frequently are not part of the
formal employment sector. They may operate small businesses, work on
small farms or work for themselves or others in a variety of businesses.
Many start their own “micro” businesses, or small businesses, out of
necessity, because of the lack of jobs available.
2. What is a microfinance institution?
A microfinance institution (MFI) is an organization that provides microfinance services – loans, savings, maybe even insurance – to the world’s poor. An MFI can operate as a nonprofit such as a non government organization (NGO), credit cooperative, non bank financial institution (NBFI), or even a formal, regulated for profit bank.
MFIs
differ in size and reach; some serve a few thousand clients in their
immediate geographical area, while others serve hundreds of thousands,
even millions, in a large geographical region, through numerous
branches. Many MFIs offer services beyond loans and savings, including
education on business and financial issues and social services focused
on health and children.
3. Why don’t poor people just use traditional banks?
Poor
people in developing countries usually do not qualify for any type of
services from the formal banking sector: they typically have no credit
history, and most are not employed in the formal sector, so there is no
record of employment. Moreover, they are unable to provide collateral.
And in many parts of the world, opening a savings account at a
traditional bank requires a certain amount of money be deposited, and
poor people, although statistically excellent savers, do not have the
large sum of money required to open a savings account.
Yet,
people living in poverty, like everyone else, need access to a diverse
range of financial services to help run a small business, manage risks,
and plan for a more stable future.
4. Why are microcredit interest rates so high?
Like other financial institutions, MFIs charge an interest rate for the loans they give their clients. This is a way for the MFI to be self-sustaining so that it can be a stable, long term provider of finances in its area of operations. A self-sustaining MFI
is critical to the health of the sector and for it to continue to
provide microfinance services to its clients. However, because managing
many small loans costs more money for any institution than managing one
large loan, an MFI typically needs to charge higher interest rates to cover their costs.
5. What are some of the ways that people use their microfinance loans?
The
ways in which people use their loans vary as much as the ways people
earn a living. Some buy livestock; a sewing machine and fabric to make
cloths and accessories; stock for a local store; a tractor or seed and
other farming equipment and supplies. The possibilities are endless as
to what a micro-entrepreneur can do with his or her loan.
6. Are poor people able to repay their loans?
Microfinance
clients have excellent track records for repayment. Repayment rates for
microfinance loans on a global level average about 97 percent.
7. 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 for cash
in the future (domestic animals for instance). After all, they face the
same series of sudden demands that we all face: illness, housing
repairs, school fees, burial fees.
8. Does microfinance really help solve poverty?
Poverty
is a very complicated issue, and many different approaches and tools
are required to address it. Microfinance is one tool that is appropriate
for millions of the working poor to lift themselves out of poverty.
However, microfinance is not the only answer, and in fact is not always
appropriate. For instance for the extreme poor, or those who are sick
and/or unable to work, microfinance may not be an appropriate tool.
Source: http://www.themix.org/about-microfinance/faqs-microfinance