What is Microfinance?

Microfinance is a field that focuses on providing a variety of financial services to the poor. Typically, individuals with very little income experience great difficulty in taking advantage of things like savings opportunities and insurance products. Often, low incomes go hand-in-hand with a lack of collateral and credit, making it difficult for the poor to obtain loans, invest, and enjoy insurance protection. Microfinance seeks to eliminate this problem, providing microinsurance, microloans, and other financial services to low-income people.

Often, microfinance services are aimed at helping people start their own businesses, creating the opportunity for increased income and greater financial independence. For example, a microfinance loan of less than $100 United States Dollars (USD) could help an individual start a business, creating a new income stream for himself and maybe even providing new job opportunities for others. Such a small loan could benefit the borrower in many ways, setting him up to provide food, shelter, and education for his dependents. That microfinance loan could even help the borrower to afford important medicines.

Microfinance is aimed at providing financial services in small amounts. For example, it is possible that a person could benefit greatly from a loan of just $50 USD. A bank would probably be uninterested in granting such a small loan and a low-income person could have great difficulty in securing a loan for a larger amount. In such a case, a needy individual might seek a loan from an unsafe source, accepting incredibly high rates and suffering from unfair lending practices. With help from a microfinance institution, however, the individual could secure a loan at a reasonable rate, without suffering unfortunate consequences.

It is important to note that loans and credit make up only a portion of microfinance services. Microfinance programs also focus on helping low-income individuals to save money and afford insurance. They also aim to help the poor with managing assets and taking advantage of opportunities to realize more income.

Sadly, most of the world’s poor do not have access to microfinance programs. These programs help to meet the needs of only a fraction of the millions of poor people who might benefit from them. Additionally, it is important to realize that microfinance does have critics. Some people argue that microfinance may take away from other programs designed for the poor, such as government-sponsored welfare services. Others question the effectiveness of such programs for alleviating poverty.