Financial Inclusion

What Is Microfinance?

microfinance
November 16, 2017

Insufficient access to credit can be a serious impediment for low-income people trying to improve their circumstances. A street vendor who needs a small loan to repair a stand or buy new wares, for example, may be unable to grow her business without access to banking services. Microfinance fills this need by connecting lenders with low-income or unbanked communities who need working capital.

What Is Microfinance?

As its name suggests, microfinance is a category of financial services that deals with small sums of money. While a conventional bank sets minimum loan amounts and minimum deposits, which may be hundreds or thousands of dollars depending on the financial product, microfinance providers may offer loans of as little as $10. They may accept savings deposits of even less. This puts microfinance products within reach of low-income people who don’t qualify for traditional loans or bank accounts.

Often, microfinance organizations are nonprofits whose mission is lending to disadvantaged people for purposes like education, community development, and small business growth. Many programs require loan recipients to work on goals aimed at improving the health and welfare of their community. For example, Grameen Bank requires recipients to take a sixteen-point pledge that includes promises around clean drinking water and mutual aid.

Supporting Causes through Microfinance

Some microfinance organizations support a single cause, while others support causes in multiple categories. Zidisha is an example of an organization that allows lenders to choose individual loans for many different purposes. Some loans further entrepreneurial activities. There’s also a category of loans for education, which can pay for tuition or allow recipients to purchase supplies like calculators.

Kiva is a crowdfunding site that vets requests for funding. If approved, the request is posted to their website for lenders to fund. Kiva requests can cover a wide variety of projects, and often the needed amounts are only a few hundred dollars. It has a unique category specifically for borrowers in conflict zones. These loans go to groups of small business owners in regions like the Democratic Republic of the Congo that are plagued by violence or political instability.

Not all organizations aim to relieve poverty by supporting businesses. Some provide loans to address specific issues that hold whole communities back. For example, WaterCredit focuses on safe water and household sanitation, providing loans for people in developing countries to install a water tap or toilet in their homes. Recipients are then able to save the time they would have spent searching for or transporting water, and they can use that time for work or schooling instead.

Investing in Microfinance

One way to invest in microfinance is to support individual loans through groups like Kiva. Some organizations allow lenders to lend directly to borrowers or to choose a loan to support and fund it through a local partner who administers it.

For institutional investors and those who wish to invest more significant amounts in microfinance, investing in microfinance funds is more effective. Some examples of funds in this space are the responsAbility Global Microfinance Fund and Triodos Microfinance Fund. These funds lend money to microfinance organizations, which in turn offer loans and other financial services to low-income people around the world. Investing in a fund allows investors to support dozens of microfinance organizations through a single investment vehicle.

Flexibility of access—for both borrowers and lenders—represents what is microfinance’s key appeal. Connecting those in need with those who can and want to help is critical for long-term, sustainable financial growth.

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