WHAT IS MICROFINANCE?
Microfinance is a type of banking service offered to people who normally have no access to finance. People excluded from regular banking services are farmers, the poor, and often women. Microfinance has sometimes been called ‚financial inclusion.‘ However, this is a contentious term because there is still much debate about how accessible microfinance is for people.
The main service associated with microfinance is lending. Microfinance institutions (MFIs) give micro loans to clients, who invest these loans in their small businesses or on other entrepreneurial ventures. Clients should then repay the loan, with interest, after an agreed time period, usually within a month. MFIs often give financial and business education to new customers before they provide their loans. For this reason, microfinance is a broader concept than just micro lending, because it also refers to job training for entrepreneurs.
ORIGIN OF MICROFINANCE
Muhammad Yunus is a Bangladeshi businessman and the founding father of microfinance. In 1976, he set up Grameen Bank to help the poor in his own country. Yunus believes that it is better to give loans rather than charity to lift people out of poverty. This is because loans encourage risk taking. If people receive money that they have to pay back in the future, then they are more likely to invest that money in something productive. As a consequence, they should become richer than they were before, so long as the returns from their investment are bigger than the debt from the loan.
For Yunus, the poor can be just as entrepreneurial and creative as everyone else. Poverty does not exist because the poor are lazy or uncreative, but because they do not have enough resources. This belief underpins microfinance.
Microfinance institutions now exist across the world. There are plenty of MFIs in sub-Saharan Africa. They provide services in the cities and the countryside. Many of them take inspiration from Yunus’s Grameen Bank.
AIM OF MICROFINANCE
The main goal of microfinance is to give everyone a chance to become economically self-sufficient. This refers to people having enough income and savings to live a good and healthy life. By this definition, many people around the world today are not self-sufficient. On its own, microfinance does not pretend to be the answer to this problem. But it is hoped that by encouraging people’s entrepreneurial spirit, microfinance can go a long way to making sure that everyone reaches their economic potential in the future.