Professional Documents
Culture Documents
"Microfinance is the supply of loans, savings, and other basic financial service
s to the poor." (CGAP)
As the financial services of microfinance usually involve small amounts of money
– small loans, small savings etc. – the term "microfinance" helps to differenti
ate these services from those which formal banks provide.
Why are they small? Someone who doesn't have a lot of money isn't likely to want
to take out a $5,000 loan, or be able to open a savings account with an opening
balance of $1,000. Hence – "micro".
2. What is an MFI?
A microfinance institution (MFI) is an organization that provides microfinance s
ervices, ranging from small non-profit organizations to large commercial banks.
"Historical context can help explain how specialized MFIs developed over the las
t few decades. Between the 1950s and 1970s, governments and donors focused on pr
oviding subsidized agricultural credit to small and marginal farmers, in hopes o
f raising productivity and incomes. During the 1980s, microenterprise credit con
centrated on providing loans to poor women to invest in tiny businesses, enablin
g them to accumulate assets and raise household income and welfare. These experi
ments resulted in the emergence of nongovernmental organizations (NGOs) that pro
vided financial services for the poor. In the 1990s, many of these institutions
transformed themselves into formal financial institutions in order to access and
on-lend client savings, thus enhancing their outreach.
An MFI can be broadly defined as any organization—credit union, down-scaled comm
ercial bank, financial NGO, or credit cooperative—that provides financial servic
es for the poor." (CGAP)
"The World Bank estimates that there are now over 7000 microfinance institutions
, serving some 16 million poor people in developing countries. The total cash tu
rnover of MFIs world-wide is estimated at US$2.5 billion and the potential for n
ew growth is outstanding." - Data Snapshots on Microfinance - The Virtual Librar
y on Microcredit
3. Why would poor people need financial services?
"The great challenge before us is to address the constraints that exclude people
from full participation in the financial sector... Together, we can and must bu
ild inclusive financial sectors that help people improve their lives."
- Kofi Annan, UN Secretary General
It's easy to imagine poor people don't need financial services, but when you thi
nk about it they are using these services already, although they might look a li
ttle 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 harves
t to sell at a later date. They bury cash in the garden or stash it under the ma
ttress. 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 p
ot as well. The poor also give their money to neighbors to hold or pay local cas
h 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 nee
ds a small amount of cash. In-kind savings are subject to fluctuations in commod
ity prices, destruction by insects, fire, thieves, or illness (in the case of li
vestock). Informal rotating savings groups tend to be small and rotate limited a
mounts 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. Per
haps most importantly, the poor are more likely to lose their money through frau
d or mismanagement in informal savings arrangements than are depositors in forma
l financial institutions."- (CGAP)
4. Why don't they just go to a bank?
"The poor rarely access services through the formal financial sector. They addre
ss their need for financial services through a variety of financial relationship
s, mostly informal." (CGAP)
Why is this? For a moment pretend that you are a poor goatherder walking into a
bank:
◦You don't have any money to open a savings account with
◦You don't have any collateral to secure a loan with
◦You don't have a credit record as you have never been formally employed and you
've never taken out a loan before
◦You might even be unable to complete the necessary paperwork as you are illiter
ate.
Formal financial institutions were not designed to help those who don't already
have financial assets – they were designed to help those who do. Imagine trying
to get a loan in the United States without any savings, an employer or a credit
report.
So what do poor people do?
"Credit is available from informal commercial and non-commerical money-lenders b
ut usually at a very high cost to borrowers. Savings services are available thro
ugh 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." (CGAP)
"My own view is that we have to approach extreme poverty a little like the way i
n which a doctor might approach a patient. By that I mean do a diagnosis and und
erstand what is it that is really ailing the particular country, the particular
region. Sometimes its terrible governance and the question is how to improve the
governance and the hope for the kind of change that is needed. In other places
it's the terrible burden of disease that may be addressable by good public healt
h measures. In other places it is to show how to grow more food. In other places
its how to get business going and microfinance has proven to be an incredibly p
owerful tool.
Once the basics are in place, the people are eating and can survive, then microf
inance can play a huge role in helping a poor community find ways through the ma
rket to get new opportunities, to earn new income, to start saving, making inves
tments and start the process of climbing the ladder of economic development in y
our children, in your business or your farm and continuing up the process of imp
roving skills, specialisation, new business ventures and so on. We've learnt tha
t microfinance can be a wonderful tool for that."
- Jeffrey Sachs, The Earth Institute at Columbia University, Director
No. Microfinance is but one strategy battling an immense problem.
"In the last two decades, substantial progress has been made in developing techn
iques to deliver financial services to the poor on a sustainable basis. Most don
or interventions have concentrated on one of these services, microcredit. For mi
crocredit to be appropriate however, the clients must have the capacity to repay
the loan under the terms by which it is provided. Otherwise, clients may not be
able to benefit from credit and risk being pushed into debt problems. This soun
ds obvious, but microcredit is viewed by some as "one size fits all." Instead, m
icrocredit should be carefully evaluated against the alternatives when choosing
the most appropriate intervention tool for a specific situation.
Microcredit may be inappropriate where conditions pose severe challenges to stan
dard microcredit methodologies. Populations that are geographically dispersed or
nomadic may not be suitable microfinance candidates. Microfinance may not be ap
propriate for populations with a high incidence of debilitating illnesses (e.g.,
HIV/AIDS). Dependence on a single economic activity or single agricultural crop
, or reliance on barter rather than cash transactions may pose problems. The pre
sence of hyperinflation, or absence of law and order may stress the ability of m
icrofinance to operate. Microcredit is also much more difficult when laws and re
gulations create significant barriers to the sustainability of microfinance prov
iders (for example, by mandating interest-rate caps).
Examples of Some Alternative Strategies
Grants can be used to help overcome the social isolation, lack of productive ski
lls, and low self-confidence of the extreme poor, and to prepare them for eventu
al use of microcredit. Small grants and other financial entitlements can work we
ll as first steps to "graduate" the poor from vulnerability to economic self-suf
ficiency. A successful example is the BRAC Income Generation for Vulnerable Grou
ps Development program in Bangladesh. This program has graduated more than 660,0
00 destitute women through free food, training, health care, and savings to BRAC
's mainstream microcredit program.
Investments in infrastructure, such as roads, communications, and education, pro
vide a foundation for economic activities. Community-level investments in commer
cial or productive infrastructure (such as market centers or small-scale irrigat
ion schemes) also facilitate business activity.
Employment programs prepare the poor for self-employment. Food-for-work programs
and public works projects fit this model. In many cases, these programs may be
out of reach for cash-strapped local governments but within the purview of donor
s.
Non-financial services range from literacy classes and community development to
market-based business-development services. While non-financial services should
be provided by separate institutional providers, there are clear, complementary
links with the demand for and impact of microcredit. For example, improved acces
s to market opportunities stimulates - and depends on - securing credit to cover
the costs (product design, transport, etc.) of taking advantage of those opport
unities.
Legal and institutional reforms can create incentives for microfinance by improv
ing the operating environment for both microfinance providers and their clients.
For example, streamlining microenterprise registration, abolishing caps on inte
rest rates, loosening regulations governing non-mortgage collateral, strengtheni
ng the judicial system, and reducing the cost and time of property and asset reg
istration can foster a supportive climate for microfinance."