What is microfinance?
Microfinance is the supply of loans, savings and other financial services to the poor. The term
“micro” is in reference to the small amounts typically involved in the practice. These services are
small – “micro” – because a person who does not have a lot of money most likely will not need a
loan of several thousand rupees. However, such a loan may make a huge difference in their
lives, giving them the ability to purchase livestock for a small farm, a sewing machine to help
make accessories and clothes, or supplies for a small store, for example.
The poor throughout the developing world frequently are not part of the formal employment
sector. They may operate small businesses, work on small farms or work for themselves or
others in a variety of businesses. Many start their own “micro” businesses, or small businesses,
What is a microfinance institution?
A microfinance institution (MFI) is an organization that provides microfinance services – loans,
savings, maybe even insurance – to the world’s poor. An MFI can operate as a nonprofit such
as a non government organization (NGO), credit cooperative, non bank financial institution
(NBFI), or even a formal, regulated for profit bank. MFIs differ in size and reach; some serve a
few thousand clients in their immediate geographical area, while others serve hundreds of
thousands, even millions, in a large geographical region, through numerous branches. Many
MFIs offer services beyond loans and savings, including education on business and financial
issues and social services focused on health and children.
Why don’t poor people just use traditional banks?
Poor people in developing countries usually do not qualify for any type of services from the
formal banking sector: they typically have no credit history, and most are not employed in the
formal sector, so there is no record of employment. Moreover, they are unable to provide
collateral. And in many parts of the world, opening a savings account at a traditional bank
requires a certain amount of money be deposited, and poor people, although statistically
excellent savers, do not have the large sum of money required to open a savings account. Yet,
people living in poverty, like everyone else, need access to a diverse range of financial services
to help run a small business, manage risks, and plan for a more stable future.
Why are microcredit interest rates so high?
Like other financial institutions, MFIs charge an interest rate for the loans they give their clients.
This is a way for the MFI to be self-sustaining so that it can be a stable, long term provider of
finances in its area of operations. A self-sustaining MFI is critical to the health of the sector and
for it to continue to provide microfinance services to its clients. However, because managing
many small loans costs more money for any institution than managing one large loan, an MFI
typically needs to charge higher interest rates to cover their costs.
What are some of the ways that people use their microfinance loans?
The ways in which people use their loans vary as much as the ways people earn a living. Some
buy livestock; a sewing machine and fabric to make cloths and accessories; stock for a local
store; a tractor or seed and other farming equipment and supplies. The possibilities are endless
as to what a micro-entrepreneur can do with his or her loan.
Are poor people able to repay their loans?
Microfinance clients have excellent track records for repayment. Repayment rates for
microfinance loans on a global level average about 97 percent.
Aren’t the poor too poor to save?
The poor already save in ways that we may not consider as “normal” savings - investing in
assets, for example, that can be easily exchanged for cash in the future (domestic animals for
instance). After all, they face the same series of sudden demands that we all face: illness,
housing repairs, school fees, burial fees.
Does microfinance really help solve poverty?
Poverty is a very complicated issue, and many different approaches and tools are required to
address it. Microfinance is one tool that is appropriate for millions of the working poor to lift
themselves out of poverty. However, microfinance is not the only answer, and in fact is not
always appropriate. For instance for the extreme poor, or those who are sick and/or unable to
work, microfinance may not be an appropriate tool.
Why do you only lend to women?
Social development studies have demonstrated that women are better borrowers in terms of
repayment and utilization. They are much more likely to reinvest income into the household, for
How can I get involved?
Microfinance is a growing field as economies become more complex and wealth disparities
become more acute. Depending on your interest and availability you can participate in this
growing industry as a worker or as a donor (where ever applicable).
What is the liability structure for the loans? Is there joint liability?
Refer to Methodology section in our website or click here (http://www.svcl.in/our-
Where else can I find information about Microfinance? Microfinance Gateway - www.microfinancegateway.com Consultative Group to Assist the Poor (CGAP) - www.cgap.org National Bank for Agriculture and Rural Development (NABARD) - http://www.nabard.org Sa Dhan: Association of Community Development Finance Institutions - http://www.sa- South Asian Microfinance Portal - http://www.microfinancesouthasia.net Microfinance Information eXchange (MIX) - http://www.themix.org World Bank - http://www.worldbank.org Microfinance.com - http://www.microfinance.com
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