1. What is Microfinance?
Microfinance refers to the provision of financial services to low-income clients, including the self-employed. The term also refers to the practice of sustainably delivering those services.
More broadly, it refers to a movement that envisions “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.”
The Challenge
Traditionally, banks have usually not provided financial services to clients with little or no cash income. Banks must incur substantial costs to managing a client account, regardless of how small the sums of money involved. For example, the total revenue from delivering one hundred loans worth $1,000 each will not differ greatly from the revenue that results from delivering one loan of $100,000. But it takes nearly a hundred times as much work and cost to manage a hundred loans as it does to manage one. A similar equation resists efforts to deliver other financial services to poor people. There is a break-even point in loan and deposit sizes below which banks lose money on each transaction they make. Poor people usually fall below it.
In addition, most poor people have few assets that can be secured by a bank as collateral. As documented extensively by experts, if they happen to own land in the developing world, they may not have effective title to it. This means that the bank will have little recourse against defaulting borrowers.
Although much progress has been made, the problem has not been solved yet, and the overwhelming majority of people who earn less than $1 a day, especially in the rural areas, continue to have no practical access to formal sector finance.
2. Why Microfinance?
Microfinance empowers poor people and especially women with the tools to become agents of change, making sustainable, lasting improvements to the social and economic structure of their lives and communities. Loan funds are recycled, and savings and insurance preserve earnings and provide security, creating a cycle of sustainability and growth, ultimately reducing pressure on the entire community.
3. Micro-Enterprise Quick Facts:
- The U.S. government defines "microenterprise" as a firm of 10 or fewer employees (including unpaid family workers) that is owned and operated by someone who is poor.
- The Microenterprise for Self-Reliance Act, passed by the U.S. Congress in 2000, mandates that half of all USAID microenterprise funds go to the very poor, currently defined as those living on less than $1 a day, or those determined to be in the bottom half of the population living below their country's poverty line.
- The U.S. government strategy for supporting microenterprise development centers on policy and regulatory reforms that support conditions for business development, access to business development services, and delivery of microfinance.
- In Thailand, micro and small enterprises comprise more than 97 percent of all firms in the manufacturing and trade/service sectors. Micro firms generate 71 percent of total employment in the service/trade sector.
In Bangladesh, more than 90 percent of the firms engaged in the $350 million shrimp export business are microbusinesses.
- USAID's average annual funding for microenterprise over the past five years has exceeded $160 million. This support reached more than 3.7 million microentrepreneurs in fiscal year 2002, more that two-thirds of whom are women.
- In South Africa, 87,000 of the 90,000 firms in the construction sector are micro- and small-scale enterprises.
The UN General Assembly designated 2005 as the International Year of Microcredit and has invited governments, the United Nations system, concerned nongovernmental organizations, and others from civil society, the private sector, and the media to join in raising the profile and building the capacity of the microcredit and microfinance sectors.