About Microfinance
What is microfinance?
It could be for a new tool, a machine, or a shop in the marketplace - millions of the world’s poor and low-income people have taken advantage of small loans to improve their lives. Over the past three decades, people have used these loans, known as microcredit, to launch new enterprises, create jobs and help economies to flourish. Poor people have proved time and again that they are able to repay these loans on time. But credit is not the only answer. They might need other basic financial services, such as insurance, a savings account, or the ability to transfer money to a relative living elsewhere. With access to credit and this range of financial tools, collectively known as microfinance, families can invest according to their own priorities - school fees, health care, nutrition or housing. Rather than focusing on day-to-day survival, people can plan for the future.
1x1microcredit seeks to boost microcredits around the world as a way of improving the lives of the people living in poverty.
Who are the clients of microfinance?
The clients of microfinance are generally poor and low-income people. Among them may be female heads of households, pensioners, artisans or small farmers. The client group for a given financial organization depends on that organization’s mission and goals.
How do financial services help poor and low-income people?
Poor people who have access to savings, credit, insurance and other financial services are more resilient and better able to deal with everyday demands. Studies have proved that microfinance helps clients meet basic needs. For example, with access to microinsurance, poor people can cope with sudden expenses associated with serious illness or loss of assets. Merely having access to formal savings accounts has also proved to be an incentive to save. Clients who join and stay in microfinance programmes have better economic conditions than non-clients. A few studies have also shown that over a long period of time, many clients graduate out of poverty.
What is a microfinance institution?
A microfinance institution (MFI) is an organization that provides financial services targeted to the poor. While every MFI is different, all share the common characteristic of providing financial services to a clientele poorer and more vulnerable than traditional bank clients.
How can poor people afford such high interest rates?
Studies conducted in India, Kenya and the Philippines found that the average annual return on investments by microbusinesses ranged from 117 to 847 per cent. These high returns are commonplace among microentrepreneurs, and while the interest rates seem high, they usually represent only a small portion of microentrepreneurs’ total returns. Interest rates charged by informal moneylenders are overwhelmingly higher than those of MFIs. Microcredit interest rates are set with the aim of providing viable, long-term financial services on a large scale, while subsidized interest rates generally benefit only a small number of borrowers for a short period.
1x1microcredit aims to generate more and cheaper capital to people living in poverty.
Do poor people save?
Poor people save all the time, although mostly in informal ways. They invest in assets such as jewellery, domestic animals, building materials and things that can be easily exchanged for cash. Access to secure, formal savings services provides a cushion when families need more money for seasonal expenses and in tough times. Secure savings accounts allow people to guard against unexpected expenses associated with illnesses, build assets, prepare for old age or pay for school fees, marriages and births.
Why is microfinance so important for women?
In a world where most poor people are women, studies have shown that access to financial services has improved the status of women within the family and the community. Women have become more assertive and confident. Furthermore, as a result of microfinance, women own assets, including land and housing, play a stronger role in decision-making, and take on leadership roles in their communities.
When is microcredit NOT appropriate?
Microcredit may be inappropriate where conditions pose severe challenges to loan repayment. For example, populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients. In these cases, grants, infrastructure improvements or education and training programmes are more effective. For microcredit to be appropriate, the clients must have the capacity to repay the loan under the terms by which it is provided.
Definition of basic terms:
Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income clients.
Microcredit is a small amount of money loaned to a client by a bank or other institution. Microcredit can be offered, often without collateral, to an individual or through group lending.
Microsavings are deposit services that allow one to store small amounts of money for future use. Often without minimum balance requirements, savings accounts allow households to save in order to meet unexpected expenses and plan for future investments.
Microinsurance is a system by which people, businesses and other organizations make a payment to share risk. Access to insurance enables entrepreneurs to concentrate more on developing their businesses while mitigating other risks affecting property, health or the ability to work.
To know more, please download the brochure:
Understanding Microcredit and Microfinance, produced by the UN Year of Microfinance (PDF)