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What is Microfinance?
What is Microfinance & Microcredit? - How does it work? - What is an MFI? - Impact & StatisticsWhat is Microfinance & Microcredit?
Microfinance is the use of financial tools, offered by microfinance institutions (MFIs), to help people turned away from the formal, commercial financial sector. These individuals usually lack the requirements demanded by commercial banks for loan qualification such as traditional collateral, steady employment and a verifiable credit history. Microfinance tools can include loans, also known as microcredit due to their relatively small loan 
amount, housing-programs, savings, insurance, remittances and other financial innovations. Using these tools has successfully enabled extremely impoverished people to engage in self-employed activities that allow them to generate an income and sometimes build savings and exit poverty.
Lending small amounts of money has been in existance for thousands of years but the model of lending money with a manageable interest rate is relatively recent. Before we only had loan sharks - people charging such high daily rates that the borrower could never get out of debt or build any sort of sustainable business activity, thus contributing further to the cycle of poverty. Now we have folks that setup businesses to lend money with the objective of achieving a social & sustainable impact. Donations & grants, a HUGE amount of the US budget, do not always encourage business development & sustainability for a region. It has been proven that if a person can borrow enough money to advance a business enterprise or entrepreneurial idea with an interest rate payback that is less than their profit, they can move forward & pull themselves out of a difficult life situation. Microfinance emerged in the 1970s as social innovators began to offer these financial services to the working poor. With loan opportunities, not only did MFI customers expand their businesses & increase their incomes, but their high repayment rates demonstrated that the poor are capable of transforming their lives given the chance. Since then, microfinance has become one of the most sustainable and effective tools in the fight against global poverty.
The most common microfinance product is a microcredit loan, but fortunately we are seeing more savings products being introduced. These small loans, usually less than $100, are enough for hardworking micro-entrepreneurs to start or expand small business activities such as sewing clothing, 
raising farm animals, or buying wholesale products to sell in a marketplace. Income generated from these businesses provides better food, housing, health care and education for entire families, and most important, income also sparks hope, self-confidence & security within society. Microfinance institutions (MFIs) offer products & services to meet these needs, empowering the world’s poor to improve their own lives.
The global repayment rate for microcredit loans is roughly on average 96%, which allows MFIs to re-lend these funds to even more clients. By giving the world’s poor a hand up, not a handout, microfinance can help break the cycle of poverty in a single generation.
The traditional banking system requires that a borrower have collateral to receive a loan. The world’s poorest people have no such collateral. Many microfinance institutions (MFIs) use social collateral in the form of peer groups to ensure loan repayment. Borrowers take out loans in groups, sometimes of only five to eight individuals. If a borrower defaults on his/her loan, the entire group typically is penalized and sometimes barred altogether from taking further loans. This peer pressure encourages borrowers to be very selective about their peer group members and to repay loans in full and on time, resulting in the high repayment rates sector wide.
Microfinance loan cycles are usually shorter than traditional commercial loans — typically six to 12 months of payments plus interest, due weekly. These shorter loan cycles & weekly payments help the borrowers stay current and prevent them from being overwhelmed by large payments.
Clearly the transaction-intense nature of weekly payment collections, often in rural areas, is more expensive than running a bank branch that provides large loans to economically secure borrowers in a metropolitan area. As a result, MFIs must charge interest rates that might seem high, the average global rate is about 35 percent annually, but needed to cover the costs of administering loans.
Initially, microfinance was mostly provided by Non Governmental Organisations (NGOs) and other development oriented organisations that wanted to provide more than just non-formal education, technical assitance and awareness-raising among their target groups. In recent years we have seen a tendency for these informal credit providers to professionalise and transform themselves into regulated microfinance institutions(MFIs). In some countries, governments have established separate requirements for MFIs so that they can be regulated by the Central Bank. Regulation in many cases means that these MFIs are now allowed to offer savings & deposits services from their clients and perform other financial services that are much needed by microentrepreneurs and their families, such as insurance and emergency loans. Yet still many countries do not allow MFIs to offer savings, hence inhibiting organisational & social growth. The term Microfinance Institution (MFI) is mostly used to refer to all types of formal and semi-formal institutions that offer microfinance services. Some are 100% focused on microfinance, whereas other institutions focus 50% of their offerings on microfinance activities. Hence, microfinance activities could fall within :
Due to the success of microcredit & proven return on investment in many cases it is gaining interest & credibility from the traditional banking sector. Many formal commercial banks have been developing microfinance organisations & initiatives to target products & services to the poor who they once considered unbankable. Although almost everyone in larger development organizations & traditional commercial banks discounted the likelihood of success of microcredit when it began with pilot projects at ACCION and thru Muhammad Yunus in the 1970s, the United Nations ended up declaring 2005 the International Year of Microcredit.
Client stories :
Interesting articles about MF:
New Yorker Microfinance Article, Oct, 2006
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