Microfinance and macrofinance are often confused. Microfinance is an individual-focused, community-based approach to provide financial services to poor individuals who lack access to the mainstream finances. Microfinance services include microcredit, microsavings, and microinsurance. Microfinance aims to make individuals self-sufficient by offering timely funding, helping them learn skills, and establishing a stable means of livelihood. (See related: An Introduction to Microfinance.) Macrofinance deals with the overall economy at the larger regional or national level. It involves drafting policies, initiating programs like subsidies, or funding and operating multi-year development plans with an aim to generate employment. Macrofinance aims for overall economic development more broadly.
A $100 loan to an uneducated slum-dweller enabling her to buy necessary equipment for making and selling paper envelopes would be an example of microfinance; while a government building a million-dollar hydropower dam and employing thousands of people is an example of macrofinance.
How Microfinance Works
Microfinance starts by educating borrowers about the basics of how money and credit work, how to budget and manage debt, and how to best utilize cash flows. Following this, the borrowers are provided access to the capital. Loans are not backed by collateral due to the small amounts and the borrowers' lack of access to collateral. Default risk is mitigated by pooling borrowers in groups (of, say, five or 10 people), which improves repayment rates due to peer pressure. Pooling also builds individual credit rating and enables assistance among group members. (See related: The Who, What And How Of Microfinance.)
How Macrofinance Works
Macrofinance works on a larger scale aimed at widespread benefits involving multiple entities. A state may offer multi-year tax benefits to businesses, which in turn, setup factories employing the local population. The government benefits because there is long-term overall development and because the locally employed population is now paying taxes. Financing is assisted by banks or through public-private partnerships.
Here are other major differences between microfinance and macrofinance:
- Microfinance starts with a focus on individuals, while macrofinance starts with a focus on the regional or national level.
- Microfinance institutions (MFI), self-help groups (SHG), and non-governmental organizations (NGO) are the primary funders in the microfinance sector. However, public sector banks, for-profit organizations, and private consumer finance companies are starting to be involved as well. On the other hand, macrofinance involves bigger entities such as governments, local authorities, large corporations, banks, and established businesses.
- The amount of money involved in macrofinance is significantly larger compared to microfinance initiatives. And the scale of operations vary widely – microfinancing can provide a $300 loan to a daily-wager mason to set up his own brick kiln, while macrofinancing for large projects like a dam or road construction offers hundreds of local masons employment for a few years.
- Microfinancing is usually a continuous ongoing activity without any defined end. A $50 loan available today to a fisherman for buying fishing nets can be extended to $500 tomorrow to help him buy a boat; OR once this fisherman becomes self-reliant and repays his microfinance loan, the money can be moved to another eligible individual. However, macrofinance projects have a definitive time period, such as subsidies offered only for three years or a road-building project to be completed in five years.
- Microfinance aims at making individuals self-reliant. For example, a Bangladeshi tailor may take $100 loan to buy a sewing machine. As his tailoring business progresses, he may establish a showroom and even employ few individuals. On the other hand, macrofinance aims to improve the overall economy. For example, the government offering subsidies on fertilizers to all cotton farmers aims to increase cotton cultivation, build a textile industry, and help everyone economically.
- Microfinancing has the risk of default by individuals, while macrofinancing faces challenges from non-implementation of efficient policies or failed programs.
- Microfinancing offers other social benefits imposed by terms of loan. For example, the load might stipulate that borrowers save a part of their income for the future or spend no part of the loan on alcohol. Macrofinancing, on the other hand, enables large-scale employment and development of new sectors and businesses, but does not guarantee the betterment of an individual.
The Bottom Line
Both microfinance and macrofinance have shown to be effective. While macrofinance initiatives ensure overall economic development at the national or regional levels, microfinance has enabled financial self-reliance for individuals. Both need to be balanced with the right policies and measures to achieve the desired goals.