Microfinance

Microfinance is a means of providing small loans to members of small groups of recipients who take collective responsibility for their repayment. It is practised in a variety of different forms in many developing countries, including Bolivia, Peru, Mexico, and Costa Rica, Nigeria, Mali, Malawi, Togo, Chile, Bangladesh, India, Indonesia, Malaysia, Nepal, and Sri Lanka; and also in some developed countries, including the United States. Many of its programmes are financed at favourable rates by charitable foundations.

Definition

The term microfinance has been applied to many of the informal sources of finance that are used by 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 Bank Project in the village of Jobra, Bangladesh in 1976, and was given formal legal status in 1983. Borrowers hold 95 percent of the total equity of the bank, and the remainder 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 . 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, 97 per cent of whom are women.

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.