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Global Education  Global Issues Microfinance
Microfinance
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Facts
- 2005 was the United Nations International Year of Microcredit. There is mounting evidence to show that the availability of financial services for poor households – microfinance – can help achieve the MDGs.
- The experience of microfinance institutions shows that women are a good credit risk, and that they invest their income for the wellbeing of their families. At the same time, they benefit from the higher social status they achieve through being able to provide income.
- Three decades after Muhammed Yunus founded Grameen Bank, about 80 million people in developing countries are served by microfinance institutions. Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize for 2006
- On average only about 26 percent of people around the world have access to formal financial services.
- Nearly three billion poor people in developing countries lack access to the basic financial services needed to help them manage their precarious lives.
- Although microcredit involves the lending of small amounts, the interest rates can be as high as 20% or more. This reflects the relatively high cost of providing a large number of very small loans.
- The field of microfinance is evolving rapidly, with many new investors and new providers of financial services. New technologies promise to reduce transactions costs and increase access to hundreds of millions more people. In order to do that, the industry is developing a better understanding of what poor clients need and want.
Sources:Consultative Group to Assist the Poor
http://www.cgap.org/p/site/c
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Background
What is microfinance?
Microfinance are small, low cost financial services – loans (known as microcredit), savings, insurance and money transfers, available to poor people for whom these services are not generally available. Access to microfinance enables poor families, particularly women, to invest in small businesses, better nutrition, improved living conditions, and the health and education of their children and so climb out of the cycle of poverty.
The beginnings of microfinance
The idea of microfinance was developed as a survival strategy for the poor. Ela Bhatt established the Self-Employed Women's Association (SEWA) in India in 1974, while in 1976 Mohammed Yunus founded the Grameen Bank project in Bangladash. Ela Bhatt's first loan was $1.50 to a woman who sold herbs, while Mohammed Yunus' initial outlay was a total of $27 to forty-two poor people.
How microfinance works
Poor people often live from day to day, and have few reserves for major expenses such as illness, weddings, house repairs or education. They are often unable to save for these expenses, or have been unable to open a bank account that would enable them to build their savings, and therefore need to borrow, frequently at exorbitant rates, to meet these unexpected costs, further worsening their economic situation. Microcredit provides poor people with access to small loans at more manageable interest rates, and can lead to self-sufficiency and poverty alleviation. There are many models of microcredit. A common model is for small groups to form a collective and with a start up grant to provide an initial pool of money, which is augmented with regular savings and interest members pay on their small loans. One or two members take loans to develop small businesses, and, when they have repaid their loan, others are able to draw on the collective fund. They may be supported with business and other training to help make these micro-enterprises successful. The outside support and group pressure leads to a low default on repayments.
Where poor people are able to build their savings, they can often use these savings to meet their needs for lump sums of money, either to meet emergencies or to finance a productive investment. This is less risky than relying on credit, because it doesn't involve going into debt. Saving and borrowing are really different ways of turning small amounts of money into lump sums. Saving involves building a lump sum by first accumulating smaller amounts; borrower is taking the lump sum first and then 'saving' afterwards in the form of loan repayments.
How does microfinance address poverty?
With less interest to repay, more profitable businesses and autonomy, poor people have been able to reduce debt burdens and break the cycle of poverty.
Studies of the impact of microfinance in more than 24 countries have found dramatic improvements in household income levels. These improvements take place mainly through growth in the borrower's business. Access to microfinance allows the borrower to reduce costs with lower interest rates and bulk purchasing of raw materials. Income increases as the number of goods or services offered is expanded and reduced product costs increase sales.
Is it all good news?
Microfinance is not appropriate in all contexts.
For extremely poor people, providing essential infrastructure and basic health and education and reducing other barriers to economic participation may need to take place before microfinance has a role.
Maintaining a sustainable small loans program is costly, and the high interest rates take their toll on borrowers.
Microfinance fosters self-employment, but the self-employed are extremely vulnerable to fluctuations in the marketplace. Literacy and numeracy education, business training and support can be important so that loans can be effectively used.
While women have taken a high percentage of the loans and invested in their households, improving the health and education of their children, this has had a cost. Running a business has added to their workload and changed their role in the family, sometimes putting a strain on their marriage. Moreover, in some cases husbands have used the loans, but expected the women to repay them. It is important to include gender training as part of the microfinance program to address these problems.
Microfinance programs may enable poor people to improve their situation, but they do not eliminate the need for other basic social and infrastructure services. Microfinance can help poor households to reduce their vulnerability to economic shocks, but they do not eliminate such shocks. It helps the poor to take advantage of economic opportunities, but it does not create such opportunities. Microfinance can only ever be one part of a broader process of social and economic development.
Australia's response
Australia’s approach to microfinance and enterprise development focuses on a broad range of measures to help strengthen the financial sectors in partner countries and help them work better for the poor. The approach includes:
- creating an enabling environment by improving financial and business sector regulation
- providing financial literacy training and supporting business skills development, and
- meeting the financing needs of micro, small and medium size enterprises, and the need for poor households to have access to a range of financial services, including deposit facilities.
http://www.ausaid.gov.au/keyaid/growth_microfinance.cfm
The global agenda
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| |  | Consultative Group to Assist the Poor (CGAP)
URL: http://www.cgap.org/
The Consultative Group to Assist the Poor (CGAP) is a consortium of 33 public and private development agencies working together to expand access to financial services for the poor in developing countries. CGAP was created by these aid agencies and industry leaders to help create permanent financial services for the poor on a large scale. CGAP is a resource centre for the entire microfinance industry, where it supports new ideas, innovative products, cutting-edge technology, novel mechanisms for delivering financial services, and concrete solutions to the challenges of expanding microfinance.
| | International Year of Microcredit 2005
URL: http://www.yearofmicrocredit.org/
The United Nations declared the year 2005 to be the Year of Microcredit. It was seen as an important tool for eradicating poverty and hunger. The site features background information, interactive tools and resources on microfinance. The support of UN Agencies and donors, National Committees and microfinance partners around the world are also detailed on the site.
| | Microcredit Summit Campaign
URL: http://www.microcreditsummit.org/
The Microcredit Summit Campaign brings together microcredit practitioners, advocates, educational institutions, donor agencies, international financial institutions, non-governmental organisations and others involved with microcredit to promote best practices in the field, to learn from each other. The website includes information about best practices in microcredit, highlighting four core themes: reaching the poorest, reaching and empowering women, building financially self-sufficient institutions, and ensuring a positive, measurable impact on the lives of clients and their families. It also includes case studies of people who have been helped through micro credit.
| | Microfinance and the Millennium Development Goals
URL: http://www.cgap.org/p/site/c/template.rc/1.26.1306
While the MDGs do not formally sets targets for financial sector access, low-income countries need microfinance to achieve the MDGs. Microfinance underpins the achievement of many MDGs. Access to a range of microfinance services?savings, loans, and money transfers?enables poor families to invest in enterprises, better nutrition, improved living conditions, and the health and education of their children. It is also a powerful catalyst for women?s empowerment.
| | Poverty Reduction (United Nations Development Programme)
URL: http://www.undp.org/community/poverty_CA.htm
Developing countries are working to create their own national poverty eradication strategies based on local needs and priorities. UNDP advocates for these nationally owned solutions and helps ensure their effectiveness. It sponsors innovative pilot projects, including those relying on ICT, to help enhance service delivery; connects countries to global best practices and resources; promotes the role of women in development; and brings together governments, civil society and outside funding bodies to coordinate their efforts.
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