What is microfinance?

Microfinance refers to a range of financial services for low-income individuals that includes loans, savings, microinsurance and money transfer services. The word “micro” refers to the small amounts microfinance institutions provide to the people.

How can microfinance help the poor?

Microfinance can help reduce poverty. Microfinance can help improve the lives of individuals by providing financial resources for business activities, thus creating a new income stream for them and their families. Microfinance, through its small loans can help the poor improve their household practices, have better nutrition and healthcare, have better access to education for their children, develop their saving mechanisms and protect them from external shocks. Microfinance can help empower women by providing them with the capital to take advantage of business opportunities, thus giving them the chance to be financially independent.

Why do people need financial services?

Both the poor and the rich need financial services. Financial services are needed for the development and creation of businesses. As a result, people earn higher income and provide more job opportunities to others. People avail of financial services to acquire or develop assets such as land, houses and vehicles, to bridge cash flow gap, to protect them from the loss of money or property and to plan for a more stable future.

Why do the poor go to microfinance institutions instead of traditional banks?

Traditional banks do not accommodate poor people. Poor people are not employed in the formal sector so they do not have employment records. They do not have credit history and savings accounts, requisites of traditional banks in granting loan. Traditional banks require collateral in which the poor could not provide. On the other hand, microfinance institutions use non-traditional methodology like group lending to guarantee the loan.  Unlike traditional banks, microfinance institutions offer financial services to low income, impoverished communities.