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Microfinance could be defined as the supply of basic financial services (such as microloans, micro-insurance and saving schemes) specifically targeted at low-income people. People living in poverty, especially those who are self-employed in small scale economic activities (micro-entrepreneurs), need simple financial instruments to run their businesses, build their assets, and shield themselves against major risks. However, they very rarely can access the formal financial sector, and they are forced to address their needs through informal relationships, e.g. by borrowing credit from money-lenders at usurious costs.
Over the last thirty years, Microfinance Institutions (MFIs) have led the way in developing workable credit methodologies and reaching out to large numbers of poor people. Throughout the 1980s and 1990s, these programs improved upon the original methodologies and changed conventional wisdom about financing the poor. Successful MFIs have shown that the poor do repay their loans and are willing and able to pay commercial interest rates. This allowed many institutions to reach financial sustainability and to expand - quite a rare characteristic among development initiatives.
Social Impact
Financial services for the poor have proven to be a powerful instrument for poverty reduction that enables the poor to build assets, increase incomes, and reduce their vulnerability to economic stress. Rigorous studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs.
By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from every-day survival to planning for the future. Households are able to send more children to school for longer periods. Increased earnings from financial services lead to better nutrition and better living conditions, which translates into a lower incidence of illness. Increased earnings also mean that clients may pay for health care services when needed.
Women’s Role
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Microfinance programs have very often targeted women. By providing access to financial services through women — making them responsible for loans, opening savings accounts in their names — microfinance programs send a strong message to households as well as to communities.
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Many studies have documented how access to financial services has improved the status of women within the family and the community. Women have become more assertive and confident; in regions where women's mobility is strictly regulated, they have become more visible and are better able to negotiate the public sphere. Women own assets, including land and housing, and play a stronger role in decision making and in economic terms, which is also helping in reducing levels of violence against women.
Potential for Growth
Nowadays, Microfinance has proven to be a fast growing, socially responsible and financially sound sector. Some MFIs reach already millions of clients and have become an important part of the financial sector of their countries. However, it is estimated that one billion people still lack access to basic financial services. By end of 2007, it was estimated that only 20% of the target population had been reached and only 10% of the potential microcredit volume had been exploited.
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Microfinance is still far from reaching its potential and this is mainly due to a lack of funding resources. In many cases, MFIs are not authorized to take deposits and do not have access to local capital markets. Governments and private donors have financed the industry, but they have been unable to keep up with the rapid growth of the MFIs’ portfolios. To date, local capital markets have often been unable to believe that MFIs are creditworthy institutions. This has been leaving many MFIs with chronically restricted funding, meaning that many poor micro-entrepreneurs could not access their services.
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MicroVentures Investments S.C.A., SICAR - R.C.S. LUXEMBOURG B 148744 - 18 Rue de l'Eau, L-1449 Luxembourg
Tel: +352 20.880.551 - Fax: +352 27.177.700 info@micro-ventures.com
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