What is the Impact of Microfinance?

Geri Terzo

The impact of microfinance, which is a form of financing extended to poor individuals and communities in developing countries, is global. It includes the extension of loans, insurance and savings accounts to individuals in developing nations and has influenced women in particular to uncover an entrepreneurial spirit in remote places where just a small amount of money can go an extremely long way. As a result, the rise of microfinance has also impacted communities where families earn the rewards of new businesses, health care and education that otherwise would have evaded them in the areas where they live. Although microfinance does not solve the issue of poverty, it does provide insurance, money and other life enhancements to the poor.

Microfinance may be used to help impoverished families improve their financial, emotional and physical health.
Microfinance may be used to help impoverished families improve their financial, emotional and physical health.

Microfinance programs typically are targeted toward women, but not exclusively. The financial institutions that provide the loans are called microfinance institutions (MFIs) and the scope of financial services includes loans, savings and other basic financial services. The loans are much smaller than would be typical from a traditional bank. Money is directed toward low-income people in developing nations with little or no other access to financing. As a result, the profits earned by the MFIs that lend to the poor are minimal in comparison with traditional banks, but the impact of microfinance reverberates throughout the financial community through the message it sends.

The impact of microfinance is also felt across poverty lines in a positive way, even though this form of lending might never eliminate poverty altogether. Before microfinance came into use, poor communities relied mostly on the practice of informal savings for sustainability, including barter and trade of animals and other agricultural products. This form of economic development was limited by itself until the proliferation of microfinance introduced another level of financial stability to the homes of the poor in developing countries. Borrowers of microfinance loans are not always one-time clients, and they learn the discipline and resourcefulness that come from obtaining financing.

Female entrepreneurs feel the impact of microfinance strongly, because possessing a loan or opening up a savings account promotes a feeling of empowerment and gender equality. In remote places where a woman's presence does not command the same respect that a man does, that perception is improved as a woman gains confidence and knowledge resulting from gaining control of her finances. This empowerment has also reduced the advent of violence in some places, a sure sign of the impact of microfinance.

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