Microfinance

Microfinance is a term that is applied to a wide variety of means of supplying small-scale finance to people who are unable to obtain it from conventional sources, including microfinance institutions (MFIs) that require every borrower to be a member of a mutually-supportive group. Microfinance institutions are widely used to alleviate poverty throughout the developing countries and in Europe, the United States and Japan. Some are self-sustaining, but most are dependant upon subsidies or donations.

Definition

The term microfinance has been applied to many of the informal sources of finance that are used by poor people who cannot borrow money from conventional banks. It has also been used to refer specifically to the external supply of finance to mutually supportive groups, as distinct from borrowing by individuals and from group arrangements (such as credit cooperatives, and rotating savings and credit associations ) that use savings that are raised collectively within a group. It is not uncommon, however, for a single group to use several informal ways of providing its members with credit.

The term is usually applied to the provision of credit, and is often referred to as "microcredit", but it is also applicable to the provision of insurance.

Microfinance Institutions (MFIs)

The best-known microfinance institution is the Grameen Bank. It was launched as the Grameen Project in the village of Jobra, Bangladesh in 1976, and was given the legal status of a bank in 1983. Borrowers hold 95 percent of its equity, and the rest is held by the government of Bangladesh. Loans are financed from deposits, without subsidies or contributions from donors. Every borrower must belong to a five-member group and individual borrowing is monitored by the group, but responsibility for repayment rests solely on the individual and is not legally enforceable. Collateral is not required . Loans average $120 and totalled $750 million in 2009. The interest rates charged to borrowers are 20 per cent for income-generating loans, 8 per cent for housing loans and 5 per cent for student loans, and interest-free loans are granted to "struggling members" (beggars). The interest rates paid to depositors range from 8.5 per cent to 12 per cent. The bank has over 8 millon borrowers in Bangladesh, 97 per cent of whom are women. Its Grameen Trust also provides training, funds and technical assistance to replica programmes in other countries. By the end of 2010 it had supported 141 replication partners in 38 countries.

Other MFIs differ widely in size, scope, and source of finance. Some are financial cooperatives, funding their lending from members’ loans and deposits. Others have acted solely as intermediaries that channel funds from donors or from commercial sources. Some have developed from intermediaries into self-sustaining deposit-taking institutions, and some have formed ties with commercial banks. Some have achieved sustainability by serving borrowers that are above the poverty line, but those that have concentrated upon lending to the very poor have tended to remain dependent upon donations. Estimates of the number of borrowers worldwide range from 133 million (2007) to 190 million (2004.

MFIs operate in very nearly every developing country, and also in Europe, the United States, and Japan. There are several sources of information about individual MFIs. The Microfinance Information Exchange lists 1800 MFIs in over 120 countries in Africa, Latin America and The Caribbean, East Asia and the Pacific, the Middle East and North Africa, Eastern Europe and Central Asia, and South Asia. Performance data for more than 1000 MFIs reaching over 85% of known microfinance borrowers are available from the Microfinance Information Exchange and information about interest rates is being collected by the MFI Transparency organisation

Sponsorship and funding

Major international organizations and philanthropies, such as the World Bank, have begun funding in order to speed up the reduction in poverty levels. They appreciate that women in poor countries have little access to funding, and see microfinance as a route to gender empowerment for women in developing countries who face great social, legal, and economic obstacles.