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Overview of Microfinance

overview of microfinance

Because the term microfinance is

used in many different contexts, it can

sometimes be oversimplified and viewed

in a skewed or narrow perspective. At

its core, microfinance can be viewed as

an innovative segment of the banking

sector to provide financial products and

services, primarily credit, to the poor –

bridging the gap that commercial

banking has not been able to fulfill, and

where philanthropy has not been able to

go beyond pilot approaches to reach

meaningful scale. However,

microfinance itself was conceived with a

different purpose than just providing the

poor with access to capital. Microfinance and microcredit do not provide consumers with loans

to simply increase their consumption; instead, they provide loans for the specific purpose of

creating self-employment for the poor, thereby enabling the poor to build their own

microenterprises and move themselves out of poverty. In short, microfinance is an income

producing tool rather than a consumption aid.

What was simply thought of as just providing poor individuals with access to capital has

revolutionized the development world, proving that loans as small as $50 or $100 in the poorest

countries, and somewhat larger ones in middle-income developing countries, can transform lives.3 Through microfinance, we have witnessed that poor individuals, when given the

opportunity to start their own business, can provide for themselves and their family with basic

necessities and also generate sustainable income. If they can maintain that income, it can lead to

improved living standards, and for some, a means to escape poverty. If individuals achieve

economic freedom, it can lead to a series of improvements—improving the well-being of

families, communities and society-at-large.

The exact benefits that microfinance brings to individuals and society may be difficult to

measure from a technical standpoint, which is why there are relatively few rigorous studies about

impact compared to the reach of microfinance. From studies and research, however, it is

apparent that microfinance is an important catalyst for poverty alleviation. One such study on

two major microfinance institutions, BRAC and Grameen Bank, found that participants who have

continued access to loans have a lower rate of poverty than those without access, 57 percent

compared to 76 percent, respectively.4 Another study, by S.R. Khandker, found that the poverty

levels in villages with microfinance programs have declined more than in villages without these

programs. Among program participants who had been members for six consecutive years,

poverty rates declined by

more than 20 percent (about 3 percent per year). Khandker estimated

that more than half of this reduction could be directly attributed to microfinance. He had

calculated that microfinance accounted for 40 percent of the entire reduction of moderate poverty

in rural Bangladesh.5 These studies and numerous others6 indicate that microfinance can improve

overall income, increase decision-making power, and provide general self-empowerment.

From its tremendous success as a poverty alleviation tool, microfinance as an industry has

gained momentum and expanded its scope and reach. The awarding of the Nobel Peace Prize to

Muhammad Yunus and the Grameen Bank will only accelerate its growth. To ensure that the

poor not only have access to credit but other financial services, microcredit has expanded over

the years to include a variety of financial products such as savings, insurance, transfer payments,

and even micro-pensions. Where regulations permit, savings can be a very powerful tool since it

allows the poor to conveniently amass liquid assets that can be used to self-finance education,

health care, or disaster relief while also giving the MFI a source of capital for on-lending.

Microcredit, or what is now more aptly called “microfinance,” attempts to address the multitude

of the poor’s financial needs. With this expansion of purpose, the field itself has increased its

reach. By the end of 2005, according to the Microcredit Summit Campaign, there were over

3,000 MFIs serving over 112 million people worldwide, of which more than 82 million were

among the poorest people in the world (i.e. earning less than $1/day) when they became clients.7

As the sector has evolved to meet the growing demands for its services, it has been

reinventing itself to ensure sustainability at the institutional level. MFIs and the organizations

that support them have taken lessons learned from the banking sector and the business world to

improve efficiency and sustainability. (Perhaps no reinvention has been as dramatic and influential as the launch of Grameen II in 2003, and its rigorous but highly favorable evaluation

by SafeSave.) We have witnessed firsthand MFIs improving their loan disbursement and

collection methods in order to reach more clients faster and better. They are becoming better

trained and better run to meet the growing demands for their services. As the field continues to

evolve in its business model and operations to increase institutional efficiency, it is also critically

important that the field focus on its client success and effectiveness.

Microfinance: A Platform for Social Change

Category: Payday loans

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