What is microfinance?

Sometimes called "banking for the poor", microfinance is an amazingly simple approach that has been proven to empower very poor people around the world to pull themselves out of poverty. Relying on their traditional skills and entrepreneurial instincts, very poor people, mostly women, use small loans (usually less than US$200), other financial services, and support from local organizations called microfinance institutions (MFIs) to start, establish, sustain, or expand very small, self-supporting businesses. A key to microfinance is the recycling of loan dollars. As each loan is repaid—usually within six months to a year—the money is recycled as another loan, thus multiplying the value of each dollar in defeating global poverty, and changing lives and communities. (Source - Grameen Foundation)  

What do local microfinance institutions (MFIs) do?

These front line organizations reach out to the very poor and deliver microfinance services to local clients daily. They educate local communities about the opportunity to improve their lives with microfinance; make microloans and provide other financial services such as savings accounts and insurance; collect weekly loan payments; and assist clients in solving some of the life challenges they may face. Many also provide social services, such as basic health care for clients and their children.

MFIs differ in size and reach: some serve a few thousand clients in their immediate area, while others serve hundreds of thousands of very poor people through hundreds of branches covering large regions. Grameen Bank of Bangladesh, which was founded by 2006 Nobel Peace Laureate Dr. Muhammad Yunus, is the world’s largest and most successful MFI. It serves more than seven million clients. (Source - Grameen Foundation)  

Where do MFIs get the money for loans?

Grameen Foundation provides funding for MFIs through direct loans, grants, loan guarantees and other innovative financing techniques. Other funding comes from individuals, philanthropists, foundations, and governments and international institutions such as the World Bank. MFIs also borrow funds from traditional banks to loan to their clients. In addition, the interest paid by clients on microfinance loans goes back into the program to cover costs and fund more loans. (Source - Grameen Foundation)  

Why is this different from other loan programs?

Unlike other loan programs, clients are not required to provide collateral to receive loans. This allows people who would not qualify for loans at traditional financial institutions to receive credit. MFIs are also very client-friendly; most usually go to their clients to provide loans and receive payments, rather than requiring their clients to come to them. A few of them also use focal centers where clients gather to conduct financial transactions and receive other social services. The peer support system practiced by many microfinance programs is another unique feature. When clients gather weekly at "center meetings" to make loan payments, or informally in smaller support groups, they share successes and discuss ideas for solving business and personal problems. Maybe most importantly, they empower each other to stay on the path out of poverty. This mutual support strengthens their resolve.

In addition, MFI staff members share vital information and resources to improve their clients' well being. This might include bringing in local nurses to provide health and nutrition counseling, or providing help with literacy. (Source - Grameen Foundation)   

What is the difference between microcredit and microfinance?

Microcredit refers specifically to loans and the credit needs of clients, while microfinance covers a broader range of financial services that create a wider range of opportunities for success. Examples of these additional financial services include savings, insurance, housing loans and remittance transfers. The local MFI might also offer microfinance plus activities such as entrepreneurial and life skills training, and advice on topics such as health and nutrition, sanitation, improving living conditions, and the importance of educating children. (Source - Grameen Foundation)  

Can very poor people actually start and run a successful business?

Absolutely. Many poor people have skills that can quickly become an income producing activity. With small sums of money, they are able to purchase the inventory, supplies and tools needed to start or expand microbusinesses that range from weaving, sewing, grinding grain, reselling produce, and growing and selling vegetables, to catching and selling fishing, wholesaling dried fish, raising chickens to sell eggs, and breeding livestock. We also help the rural poor start technology microbusinesses, such as selling cell phone time to other villagers, which also provides valuable means of communications and access to vital information.

These small ventures can grow into vibrant community businesses. One microentrepreneur in the Philippines dried fish caught by her husband and sold them to local markets. The demand grew quickly and she then hired her neighbors to help. Now, nearly 20 neighbors earn an income from her family fish business, and her entire community is benefiting. (Source - Grameen Foundation)  

Do very poor people repay their loans?

Yes, microfinance clients are excellent credit risks. The repayment rate is between 95 and 98 percent. In fact, it is higher than the repayment rate of student loans and credit card debts in the United States. They value the opportunity to improve their lives. (Source - Grameen Foundation)   

Do people really get out of poverty?

Microfinance is not a silver bullet. It will not defeat global poverty by itself. But, it is an important part of the solution. Microfinance provides a stable and sustainable source of income that enables clients to climb steadily out of poverty, while providing better living conditions and opportunities for their families. For some, that progress means moving from a house made of mud to one made of wood. For others, it means better nutrition and the money to finally send their children to school. A 1998 World Bank study showed that, in Bangladesh, Grameen Bank’s clients were escaping poverty at the rate of 10,000 per month. (Source - Grameen Foundation)   

What is microinsurance?

Microinsurance is a term increasingly used to refer to insurance characterized by low premium and low caps or low coverage limits, sold as part of atypical risk-pooling and marketing arrangements, and designed to service low-income people and businesses not served by typical social or commercial insurance schemes.