Microfinance. What is it ??


“The microfinance sector is one of the fastest growing multiple bottom-line arenas in the world: an inclusive financial space that brings together social and financial returns within an atmosphere of innovation.” (Microfinance Insights)

“Grameen Bank has reversed the conventional banking wisdom by removing collateral requirement and created a banking system which is based on mutual trust, strict supervision, accountability, participation and creativity. At GB, credit is the entry point and it serves as a catalyst in the overall development process. GB sees credit as an empowering agent, an enabling element in the development of socio-economic conditions of the poor who have been kept outside the banking orbit on the simple ground that they are poor and hence not bankable.

Professor Muhammad Yunus, the founder of Grameen Bank and its Managing Director reasoned that if financial resources can be made available to the poor people at terms and conditions which are appropriate and reasonable, “these millions of small people with their millions of small pursuits can add up to create the biggest development wonder”. This conviction of Professor Yunus had its root in the traditional bank’s structure which has been designed in a way that would never help the poor who constitute the largest segment of the society and the ones who are desperately in need of credit.” (United Nations Educational, Scientific and Cultural Organisation)

“Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and microinsurance. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.

Poor people usually address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal moneylenders, 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 other mutual savings societies. But these tend to be erratic and somewhat insecure. Traditionally, banks have not considered poor people to be a viable market.

Different types of financial services providers for poor people have emerged – non-government organizations (NGOs); cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; telecommunications and wire services; post offices; and other points of sale – offering new possibilities.

These providers have increased their product offerings and improved their methodologies and services over time, as poor people proved their ability to repay loans, and their desire to save. In many institutions, there are multiple loan products providing working capital for small businesses, larger loans for durable goods, loans for children’s education and to cover emergencies. Safe, secure deposit services have been particularly well received by poor clients, but in some countries NGO microfinance institutions are not permitted to collect deposits.

Remittances and money transfers are used by many poor people as a safe way to send money home. Banking through mobile phones (mobile banking) makes financial services even more convenient, and safer, and enables greater outreach to more people living in isolated areas.Financial services for poor people have proven to be a powerful instrument for reducing poverty, enabling them to build assets, increase incomes, and reduce their vulnerability to economic stress.” (CGAP)

You might be asking yourself…

Aren’t poor people too poor to save?

Who Are the Clients of Microfinance?

Does Microfinance Help Poor People?

When Is Microcredit Not the Answer?

Check out the links on the right side of this blog for more resources.

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