When is microfinance NOT an appropiate tool? FAQ

Microfinance increasingly refers to a host of financial services—savings, loans, insurance, remittances from abroad, and other products. It is hard to imagine that there would be any family in the world today for which some type of formal financial service couldn't be designed and made useful. But the fact of the matter is, that in most people's mind, "microfinance" still refers to microcredit.

Microcredit is only useful in certain situations, and with certain types of clients. As we are finding out, a great number of poor, and especially extremely poor, clients exclude themselves from microcredit as it is currently designed. Extremely poor people who do not have any stable income—such as the very destitute and the homeless—should not be microfinance clients, as they will only be pushed further into debt and poverty by loans that they cannot repay. As currently designed, microcredit requires sustained, regular, and often significant payments from poor families. At some level, the very cause of poverty is the lack of a sustained, regular, and significant income. Even though a family may have a significant income for extended periods, it may also face months of no income, thereby reducing its ability to enter into the type of commitment demanded today by most MFIs. Some people are just too poor, or have incomes that are too undependable to enter into today's loan products. These extremely poor people at the bottom percentiles of those living below the poverty line need safety net programs that can help them with basic needs; some of these are working to incorporate plans to help “graduate” recipients to microfinance programs.

Often times governments and aid agencies wish to use microfinance as a tool to compensate for some other social problem such as flooding, relocation of refugees from civil strife, recent graduates from vocational training, and redundant workers who have been laid off. Since microcredit has been sold as a poverty reduction tool, it is often expected to respond to these situations where whole classes of individuals have been “made poor”. Microcredit programs directed at these types of situations rarely work. Credit requires a 98% “hit” rate to be successful. This means that 98% of recent vocational school graduates or returning refugees would need to be successful in establishing a microenterprise for repayment rates to be high enough to allow for a program's overall sustainability. This is simply unrealistic. Running a program with substantial default rates undermines the very notion of credit and destroys credit discipline among those who could repay promptly but who look foolish given that many do not.

Microcredit serves best those who have identified an economic opportunity and who are in a position to capitalize on that opportunity if they are provided with a small amount of ready cash. Thus, those poor who work in stable or growing economies, who have demonstrated an ability to undertake the proposed activities in an entrepreneurial manner, and who have demonstrated a commitment to repay their debts (instead of feeling that the credit represents some form of social re-vindication), are the best candidates for microcredit. The universe of potential clients expands exponentially however, once we take into account the broader concept of “microfinance”.

To learn more about this author, visit Microfinance Gateway's Website.

Like this article? Share it with your friends

E-Mail | Print | More

Related Articles
Increasing Microfinance’s Reach with Integrated Services
	The destitute—individuals at the very bottom of the socioeconomic scale—are still outside the current scope of most microfinance institutions.
IV Module I Key Principles for an African Model of Microfinance
	African microfinance is as diverse as the continent itself. An array of approaches have been used, ranging from traditional kinship networks and Revolving Savings and Credit Associations (ROSCAs) to NGOs and devel...
Enhancing Microfinance Efficacy through Integrated Services
	Most microfinance organizations serve what we define as the extreme and the moderate poor.
Central Bank of Nigeria (CBN) Approves Conversion of Community Bank into Microfinance Institution (MFI)
	The Central Bank of Nigeria (CBN) has approved the conversion of the Olabisi Onabanjo University Community Bank Limited into a microfinance bank. The community bank has operated on the campus of Olabisi Onabanjo Uni...
Conclusion - Microfinance: A Platform for Social Change
	We firmly believe that an integrated approach to servicing clients can enhance microfinance’s effectiveness as a poverty alleviation tool.

---

Related Forum Posts
	Any suggestion about Good free SEO tools?
	Business Planning Tool
	Re: Google Trends for SEO
	Keyword Suggestions
	Google Trends for SEO
	Financial model linking capitalization stages
	Forum Siganature Creator
	Re: If its a website, you have got to have . . .