Microfinance is a way to provide small amounts of financing, savings, insurance, and other related financial services to working poor individuals or families, entrepreneurs, and small businesses that do not have access to traditional sources for such financial services. The chief business of most microfinance companies is that of providing small loans, referred to as microloans or microcredit, typically in the range of just a few hundred dollars, to entrepreneurs or working poor in less developed countries. Although some microfinance loans are made at interest rates substantially higher than average loan rates at traditional financial institutions, they provide necessary funding that is designed to help low-income or otherwise disadvantaged earners improve their economic positions.

Key Takeaways

  • Microfinance allows entrepreneurs and small business owners in poor or rural regions to obtain small amounts of financing that would be difficult to obtain otherwise.
  • Targeted primarily to less developed countries, microfinance is hailed as a way to promote economic growth, financial inclusion, and prosperity.
  • Several microfinance institutions have emerged to facilitate and organize this form of lending and provide financial services. Here we look at just 5 standouts.

Microfinance Institutions

In addition to microloans, microfinance institutions (MFIs) also provide services such as microsavings and micro-insurance. Microsavings accounts allow individuals to deposit small amounts of money with a financial institution without minimum balance requirements. Micro-insurance, which ranges from products such as crop insurance all the way to life insurance, offers individuals the ability to obtain small insurance policies with correspondingly small premiums.

Some MFIs are nonprofit organizations, but an increasing trend has been toward the proliferation of profit-seeking MFIs that seek solid returns for investors. Even major banks such as Citigroup Inc. (NYSE: C) have entered the business of microfinancing.

Here are the five largest and most influential MFIs today.

51Give

Founded in 2007 in Beijing, 51Give provides microfinance solution services for other MFIs. The organization offers an e-commerce platform that offers both online and mobile technology designed to connect individuals, companies, organizations and institutions with local MFIs, thus facilitating donations, investments and the delivery of microfinancing services. As of 2020, 51Give's platform was being used by more than 100 charitable organizations.

Bank Raykat Indonesia

Bank Raykat (ticker: BBRI.JK:, DR250), also known as Bank Raykat Indonesia, is the oldest Indonesian bank, founded in 1896 in Jakarta, and has established itself as one the country's largest financial institutions, while operating primarily as a small-scale and microfinance lender, with more than 30 million retail banking clients conducting business with the bank through thousands of branches and rural service posts throughout southeast Asia. Bank Raykat Indonesia is 56.75% government-owned.

BRAC

One of the oldest existing MFIs is BRAC, founded in 1972 in Bangladesh. BRAC provides a broad range of services in the areas of human rights, education, health and economic development, including grants and small business loans, housing assistance and microsavings services. BRAC operates in a dozen developing countries, stretching from Haiti to Myanmar to the Philippines. According to the 2018 annual report, its microfinance loan program had more than $2.3 billion in assets.

Grameen Bank

Grameen Bank, founded in Bangladesh in 1983, holds the distinction of being a Nobel Peace Prize-winning MFI.  It originated as a result of the work of its founder, Muhammad Yunus, whose research pioneered the concept of providing micro-banking services and non-collateralized loans for the poor in order to alleviate poverty. As of 2020, Grameen Bank has more than nine million borrowers and a loan portfolio in excess of $20 billion. In addition to providing microcredit and other banking services, the bank also has a low-cost housing program that won a World Habitat award in 1998. In 2008, Grameen also extended operations to the United States.

Kiva

Founded in 2005 and headquartered in San Francisco, Kiva Microfunds is a nonprofit MFI that operates in the United States and more than 80 other countries worldwide. Kiva's operational method for providing microfinance lending is through establishing a crowdfunding, or peer-to-peer (P2P) lending, platform that allows individuals to lend directly to borrowers in other countries who lack access to traditional financing sources. Kiva provides interest-free financing for small businesses, education and health services such as clean water. As of 2020, Kiva has extended more than $1.4 billion in microloans to 3.5 million borrowers, and has a network of approximately 1.8 million lenders and approximately two million borrowers.