Microfinance is a way to provide small amounts of financing, savings, insurance, and other related financial services to underbanked working 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 the 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.
- 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.
In addition to microloans, microfinance institutions (MFIs) also provide services such as microsavings and microinsurance. Microsavings accounts allow individuals to deposit small amounts of money with a financial institution without minimum balance requirements.
Microinsurance, 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.
1. Pacific Community Ventures
Pacific Community Ventures was founded in 1998 and provides microfinance loans to small businesses in California. Loan amounts range from $10,000 to $20,000 with the goal of creating quality jobs and investments for social good. The company works with businesses, policymakers, and impact investors to achieve its vision for a better community. In addition to making loans to small businesses, Pacific Community Ventures seeks to provide advice and mentorship so that small businesses have a higher degree of success. The company has disbursed $25 billion in loans.
2. CDC Small Business Finance Corp.
Founded in 1978, CDC Small Business Finance Corp. provides small businesses in Arizona, California, and Nevada with capital, loans, and financial services, regardless of the business cycle a company is in. This includes both small startups and established companies. The company has disbursed $20.7 billion in loans and created 269,000 jobs.
3. BRAC USA
One of the oldest existing MFIs is BRAC, founded in 1972 in Bangladesh. BRAC USA is the North American affiliate. BRAC USA 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 USA operates in 11 countries and assists 100 million people. The company has disbursed $2.3 billion in loans.
4. Grameen America Inc.
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. 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.
The global microfinance market is expected to reach a value of $394.8 billion by 2027.
In 2008, Grameen also extended operations to the United States, known as Grameen America. Green America operates in 15 cities with the aim to provide lending, savings programs, financial education, and credit establishment to women. The company assists 133,300 women and has disbursed loans in the amount of $1.75 billion.
Founded in 2005 and headquartered in San Francisco, Kiva 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. Kiva has disbursed over $1.6 billion in loans.