Loading the player...

What is 'Microfinance'

Microfinance is a type of banking service that is provided to unemployed or low-income individuals, or groups who otherwise have no other access to financial services. Ultimately, the goal of microfinance is to give low-income people an opportunity to become self-sufficient by providing a way to save money, borrow money and get insurance.

BREAKING DOWN 'Microfinance'

Microfinancing provides options to customers with limited resources to promote participation in productive activities or to support a small business. While institution participating in the area of microfinance are most often associated with lending, some microfinance companies offer additional services, including bank accounts and insurance. Additionally, some institutions provide information in the areas of financial literacy, such as understanding interest rates and managing financial risks.

Microfinancing is not a new concept. Small microcredit operations have existed since the 18th century. The first occurrence of microlending was attributed to the Irish Loan Fund system, introduced by Jonathan Swift, which sought to improve conditions for impoverished Irish citizens.

Microfinance Loan Terms

Like conventional banking operations, microfinance lenders must charge interest on loans, and they institute specific repayment plans with payments due at regular intervals. Not all applicants qualify, depending on the amount of default risk the institution attributes to potential borrowers and the terms of the loans for which the borrowers are applying.

Concerns Regarding the Microfinance Industry’s Practices

While these interest rates are generally lower than those offered by normal banks, some opponents of this concept raise concern that microfinance operations are making profits off of the poor. Not all funds provided through microfinancing are used for productive activities; some may be used for covering needs, such as food and shelter.

Microfinancing Operating Locations

The majority of microfinancing operations occur in developing nations, such as Uganda, Indonesia, Serbia and Honduras. Even though the borrowers often qualify as very poor, repayment rates are often seen to be higher than the average repayment rate on more conventional forms of financing. For example, the microfinancing institution Opportunity International reported repayment rates of approximately 98.9% in 2016.

International Finance Corporation Estimates

The International Finance Corporation (IFC), part of the larger World Bank Group, estimates that more than 130 million people have directly benefited from microfinance-related operations as of 2014. However, it is only available to approximately 20% of the 3 billion people who qualify as part of the world’s poor.

In addition to providing microfinancing options, the IFC has assisted developing nations in the creation or improvement of credit reporting bureaus in 30 nations. It has also advocated for the addition of relevant laws governing financial activities in 33 countries.

RELATED TERMS
  1. Community Investing

    Investments made directly into low-income or disadvantaged communities ...
  2. Social Entrepreneur

    A person who pursues an innovative idea with the potential to ...
  3. Microinsurance

    Insurance products that offer coverage to low-income households. ...
  4. The World Bank

    An international organization dedicated to providing financing, ...
  5. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans — ...
  6. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
Related Articles
  1. Managing Wealth

    An Introduction to Microfinance

    Is microfinance a way to help the poor, or will it just make them poorer?
  2. Small Business

    Microfinance: What It Is And How To Get Involved

    This growing industry is full of opportunities for the socially conscious investor.
  3. Personal Finance

    Microfinance & Macrofinance: What's The Difference?

    What are the key differences between microfinance and macrofinance? Investopedia takes a look.
  4. Insights

    5 Biggest Microfinance Companies (BBRI.JK)

    Here are the five largest and most influential microfinance institutions (MFIs) as of 2016.
  5. Small Business

    Improve Your Karma With Microlending

    Not all businesses are self-sustaining - many rely on microlending in order to survive.
  6. Insights

    Alternative Ways To Invest In Debt

    These five options can provide investors with lucrative investments - but they're not without risk.
  7. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  8. Retirement

    Borrowing From Your Retirement Plan

    Left with no alternative but to take money out from your retirement savings? Here are some guidelines.
  9. Personal Finance

    7 Unconventional Ways Businesses Can Borrow Money

    Find out how your business can get the money it needs - even when the bank says "no".
  10. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
RELATED FAQS
  1. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
  2. Why do banks use the Five Cs of Credit to determine a borrower's credit worthiness?

    Learn the five Cs of credit, why they are important and how banks use them to understand and mitigate risks when making loans ... Read Answer >>
  3. What is the most important "C" in the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
  4. What is the difference between the Five Cs of Credit and credit rating?

    Learn the difference between the five C's of credit and credit rating and how they are used together by banks and finance ... Read Answer >>
  5. Why do high profiting sales mitigate credit risk?

    Learn more about credit risk in loaning to individuals and businesses. Understand how credit risk is determined and the impact ... Read Answer >>
  6. What is the difference between a bank guarantee and a bond?

    Understand what a bank guarantee is and what a bond is, and which one is a debt instrument. Learn the differences between ... Read Answer >>
Trading Center