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What is Microfinance?
Microfinance offers poor people access to basic financial services such as loans, savings, money transfer services and micro insurance. People living in poverty, like everyone else, need a diverse range of financial services to run their businesses, build assets, smooth consumption, and manage risks.
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, rotating savings and credit associations, and other mutual savings societies. But these tend to be erratic and somewhat insecure. Traditionally, banks have not considered poor people to be a viable market.
For some, microfinance is a movement whose objective is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers." Many of those who promote microfinance generally believe that such access will help poor people out of poverty. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.
Who are the clients of Microfinance?
Microfinance clients are often described according to their poverty level - vulnerable non-poor, upper poor, poor, very poor. This can obscure the fact that microfinance clients are a diverse group of people – and require diverse products.
These clients operate small businesses, work on small farms, or work for themselves or others in a variety of businesses – fishing, carpentry, vegetable selling, small shops, transportation, and much more. Some of these microfinance clients are truly entrepreneurs – they enjoy creating and running their own businesses. Others become entrepreneurs by necessity when there are few jobs available in the formal sector.
Serving the very poor and the destitute – those who lack shelter, income, or even sufficient food – is more challenging, and may require ongoing subsidy.
Success in reaching poorer people with microfinance is determined by the mission of a microfinance institution, and its ability to translate that mission into effective products and services.
How do financial services help the poor?
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, and make greater investments in their children’s education. 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 seek out and pay for health care services when needed rather than go without or wait until their health seriously deteriorates.
Poor people with access to savings, credit, insurance, and other financial services are more resilient and better able to cope with the everyday crises they face. Access to credit allows poor people to take advantage of economic opportunities. While increased earnings are by no means automatic, clients have overwhelmingly demonstrated that reliable sources of credit provide a fundamental basis for planning and expanding business activities.
For Further Reading and understanding, the following links can be very helpful: