What is Microfinance
The term Microfinance is a rather new one in banking and financial circles
. Its been around formally for 30-some-years which makes it a relative newcomer. What it refers to is a particular sector of the financial services arena which serves the poor and poverty level consumers. These are the consumers who traditionally have had virtually no access to banking and financial products.
The main reason why these consumers havent had any real access to banks and banking products is that they seemed to offer the banks no real market for profit. They lack the qualifications for the usual loans or even normal savings and checking accounts, plus they carry with them a higher than normal risk for repayment. So from the conventional banking perspective, there was no money in this customer segment.
But in the mid 1970s in Bangladesh, it was discovered that even tiny sums of money (by Western standards) could make a significant difference in the lives of the chronically poor and the microfinance model began to take hold. Institutions began to form that worked from this model. And they grew and prospered in a market segment that banks had ignored.
In a nutshell, the model works because it changes the traditional model. In the first place, most of these micro loans are made to women because it was determined that women were more likely to use the money for the greater good of their family than men were. Secondly, the loans are made not to individuals but rather to groups of people that share some commonality like they live in the same village or they have complimentary business areas. These two factors have worked to promote a successful paradigm. It works because the individuals are like-minded and have a real stake in each others success. And that causes them to work together, support each other, and succeed together. When they succeed, the microfinance model succeeds.
Since the 1970s the model has grown. Its expanding into other areas of traditional banking like savings accounts, checking accounts, and even money transfers. Microfinance has turned out to be one success story in the fight to end poverty.
What is Microfinance
By: Roger Hardin
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