We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Are Microfinance Institutions?

By Eugene P.
Updated: May 17, 2024
Views: 4,300
References
Share

Microfinance institutions are banks, financial companies or organizations that focus on providing credit and other financial services to people who traditionally do not have access to it. The services provided range from small loans to savings accounts to grants for improvements to the local infrastructure. The primary recipients of the services of microfinance institutions are women and poor families from countries that are underdeveloped. Although interest rates for some of the loans can be exceptionally high, the rate of repayment among recipients is equally high. The loans that are given allow families and individuals to start businesses, buy food and establish workable credit.

One of the benefits of microfinance institutions is that they must be regulated in the countries where they operate. This means they are required to be a valid financial institution, non-governmental organization (NGO) or other licensed group. This helps to prevent those seeking the loans from usury practices. It also ties those getting the microfinance services to real banks so they can establish usable credit.

A successful aspect of microfinance institutions is the granting of small loans known as microcredit. Microcredit is assessed on a per-person basis and can give the small edge needed to raise a family out of poverty. The loans carry a high interest rate, but the default rate is exceptionally low.

The microcredit loans allow their recipients to start businesses and make a profit, buy food so they can continue to work, or invest money in other financial instruments. Once the loan is paid back, most institutions will grant a slightly larger loan, if desired. The loans can eventually be used to fund schools or build wells for clean drinking water, increasing the overall quality of life in an area.

Not all regions have equal access to microfinance institutions, though. An assessment of an area might result in there being too few resources, people or infrastructure to make repaying the loans possible. This is a decision that each institution makes based on its expected returns and the plans of the residents in the area.

Large commercial banks have entered into the microfinance market and could offer a solution. By employing their network of physical locations and relationships with entrepreneurs, the larger commercial institutions could help in bringing microfinancing to even more distant markets. The microfinance industry has proven to be profitable, gaining it commercial interest.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Link to Sources

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-are-microfinance-institutions.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.