Microfinance Solution to Poverty

Microfinance is the practice of making loans to extremely poor persons to help them rise from penury through entrepreneurship. That is, one may make a loan of, say, $25 which gives someone the start-up capital necessary to make something small to sell. Microcredit loans are usually either interest-free or carry interest that does not compound. Additionally they offer flexible repayment plans; generally one is asked to pay anything one can so long as one pays something. Microcredit is most common in the developing world.

(Farlex Financial Dictionary)

Microfinance provides poor people with access to basic financial services such as savings, loans, micro insurance and money transfer services. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, manage risks and smooth consumption. Poor people usually address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal moneylenders, but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, credit associations and rotating savings, and other mutual savings societies. But these tend to be erratic and somewhat insecure. Usually, banks have not considered poor people to be a viable market.

Different types of financial services providers for poor people have emerged – non-government organizations (NGOs); state and commercial banks;  community-based development institutions like self-help groups and credit unions;  cooperatives;  telecommunications and wire services; insurance and credit card companies;  post offices; and other points of sale – offering new possibilities.

These providers have increased their product offerings and improved their services and methodologies over time, as poor people proved their ability to repay loans, and their desire to save. In many institutions, there are multiple loan products offering working capital for small businesses, loans for children’s education, larger loans for durable goods and to cover emergencies. Safe, secure deposit services have been particularly well received by poor clients, but in some countries NGO microfinance institutions are not permitted to collect deposits.

Money transfers and remittances are used by many poor people as a safe way to send money home. Banking through mobile phones (mobile banking) makes financial services even more convenient, and safer, and enables greater outreach to more people living in isolated areas. Financial services for poor people have proven to be a powerful instrument for reducing poverty, enabling them to increase incomes, build assets and reduce their vulnerability to economic stress.