Microfinance

Microfinance is a means of providing small loans to members of small groups of recipients who take collective responsibility for their repayment. It is practised in a variety of different forms in many developing countries, including Bolivia, Peru, Mexico, and Costa Rica, Nigeria, Mali, Malawi, Togo, Chile, Bangladesh, India, Indonesia, Malaysia, Nepal, and Sri Lanka; and also in some developed countries, including the United States. Many of its programmes are financed at favourable rates by charitable foundations.

Definition

Broadly defined, the term microfinance is used to any of the ways way in which small-scale finance can be obtained by persons who cannot get it from conventional sources because they cannot provide the necessary collateral, or are not in recognised employment. It is common practice, however, (generally adopted in this article) to use the term to denote the supply of finance to mutually supportive groups, as distinct from arrangements such as credit cooperatives, and rotating savings and credit associations that depend upon savings generated within the group. It is not uncommon, however, for a single group to use several informal ways of providing its members with credit.

The term is usually applied to the provision of credit, and is often referred to as "microcredit", but it is also applicable to the provision of insurance.

Characteristics

The best-known microfinance institution is the Grameen Bank of Bangladesh, which was founded by 2006 Nobel Peace Laureate Dr. Muhammad Yunus. It serves more than seven million clients. The Banco Sol in Bolivia, and Bank Rakyat in Indonesia have noteworthy records as well. Grameen has pioneered new lending mechanisms known as progressive lending or complementary information mechanisms. Inspired by its previous success, in 2001 the Grameen Bank launched a new program they christened the Grameen Generalized System (GSS) or Grameen Bank II. This second-generation is called the Grameen Classic System (GCS) or Grameen Bank I.

The lenders (Micro Finance Institutions or MFI) usually provide basic training in necessary business skills and set up peer support networks. The MFI interest rates range from 18% to 60% per year, well below the rates of local “money lenders,” who regularly charge between 120% and 300%. Many MFI also offer microinsurance packages that include life, health, and property insurance--even rainfall insurance.

Sponsorship and funding

Major international organizations and philanthropies, such as the World Bank, have begun funding in order to speed up the reduction in poverty levels. They appreciate that women in poor countries have little access to funding, and see microfinance as a route to gender empowerment for women in developing countries who face great social, legal, and economic obstacles.