Overview of Microfinance
Overview of Microfinance
used in many different contexts, it can
sometimes be oversimplified and viewed
in a skewed or narrow perspective. At
its core, microfinance can be viewed as
an innovative segment of the banking
sector to provide financial products and
services, primarily credit, to the poor –
bridging the gap that commercial
banking has not been able to fulfill, and
where philanthropy has not been able to
go beyond pilot approaches to reach
meaningful scale. However,
microfinance itself was conceived with a
different purpose than just providing the
poor with access to capital. Microfinance and microcredit do not provide consumers with loans
to simply increase their consumption; instead, they provide loans for the specific purpose of
creating self-employment for the poor, thereby enabling the poor to build their own
microenterprises and move themselves out of poverty. In short, microfinance is an income
producing tool rather than a consumption aid.
What was simply thought of as just providing poor individuals with access to capital has
revolutionized the development world, proving that loans as small as $50 or $100 in the poorest
countries, and somewhat larger ones in middle-income developing countries, can transform lives.3 Through microfinance, we have witnessed that poor individuals, when given the
opportunity to start their own business, can provide for themselves and their family with basic
necessities and also generate sustainable income. If they can maintain that income, it can lead to
improved living standards, and for some, a means to escape poverty. If individuals achieve
economic freedom, it can lead to a series of improvements—improving the well-being of
families, communities and society-at-large.
The exact benefits that microfinance brings to individuals and society may be difficult to
measure from a technical standpoint, which is why there are relatively few rigorous studies about
impact compared to the reach of microfinance. From studies and research, however, it is
apparent that microfinance is an important catalyst for poverty alleviation. One such study on
two major microfinance institutions, BRAC and Grameen Bank, found that participants who have
continued access to loans have a lower rate of poverty than those without access, 57 percent
compared to 76 percent, respectively.4 Another study, by S.R. Khandker, found that the poverty
levels in villages with microfinance programs have declined more than in villages without these
programs. Among program participants who had been members for six consecutive years,
poverty rates declined by more than 20 percent (about 3 percent per year). Khandker estimated
that more than half of this reduction could be directly attributed to microfinance. He had
calculated that microfinance accounted for 40 percent of the entire reduction of moderate poverty
in rural Bangladesh.5 These studies and numerous others6 indicate that microfinance can improve
overall income, increase decision-making power, and provide general self-empowerment.
From its tremendous success as a poverty alleviation tool, microfinance as an industry has
gained momentum and expanded its scope and reach. The awarding of the Nobel Peace Prize to
Muhammad Yunus and the Grameen Bank will only accelerate its growth. To ensure that the
poor not only have access to credit but other financial services, microcredit has expanded over
the years to include a variety of financial products such as savings, insurance, transfer payments,
and even micro-pensions. Where regulations permit, savings can be a very powerful tool since it
allows the poor to conveniently amass liquid assets that can be used to self-finance education,
health care, or disaster relief while also giving the MFI a source of capital for on-lending.
Microcredit, or what is now more aptly called “microfinance,” attempts to address the multitude
of the poor’s financial needs. With this expansion of purpose, the field itself has increased its
reach. By the end of 2005, according to the Microcredit Summit Campaign, there were over
3,000 MFIs serving over 112 million people worldwide, of which more than 82 million were
among the poorest people in the world (i.e., earning less than $1/day) when they became clients.7
As the sector has evolved to meet the growing demands for its services, it has been
reinventing itself to ensure sustainability at the institutional level. MFIs and the organizations
that support them have taken lessons learned from the banking sector and the business world to
improve efficiency and sustainability. (Perhaps no reinvention has been as dramatic and influential as the launch of Grameen II in 2003, and its rigorous but highly favorable evaluation
by SafeSave.) We have witnessed firsthand MFIs improving their loan disbursement and
collection methods in order to reach more clients faster and better. They are becoming better
trained and better run to meet the growing demands for their services. As the field continues to
evolve in its business model and operations to increase institutional efficiency, it is also critically
important that the field focus on its client success and effectiveness.
Microfinance: A Platform for Social Change
by Marge Magner
March 2007
Grameen Foundation
Overview of Microfinance - To learn more about this author, visit Grameen Foundation's Website.
Like this article? Share it with your friends
Because the term microfinance is
used in many different contexts, it can
sometimes be oversimplified and viewed
in a skewed or narrow perspective. At
its core, microfinance can be viewed as
an innovative segment of the banking
sector to provide financial products and
services, primarily credit, to the poor –
bridging the gap that commercial
banking has not been able to fulfill, and
where philanthropy has not been able to
go beyond pilot approaches to reach
meaningful scale. However,
microfinance itself was conceived with a
different purpose than just providing the
poor with access to capital. Microfinance and microcredit do not provide consumers with loans
to simply increase their consumption; instead, they provide loans for the specific purpose of
creating self-employment for the poor, thereby enabling the poor to build their own
microenterprises and move themselves out of poverty. In short, microfinance is an income
producing tool rather than a consumption aid.
What was simply thought of as just providing poor individuals with access to capital has
revolutionized the development world, proving that loans as small as $50 or $100 in the poorest
countries, and somewhat larger ones in middle-income developing countries, can transform lives.3 Through microfinance, we have witnessed that poor individuals, when given the
opportunity to start their own business, can provide for themselves and their family with basic
necessities and also generate sustainable income. If they can maintain that income, it can lead to
improved living standards, and for some, a means to escape poverty. If individuals achieve
economic freedom, it can lead to a series of improvements—improving the well-being of
families, communities and society-at-large.
The exact benefits that microfinance brings to individuals and society may be difficult to
measure from a technical standpoint, which is why there are relatively few rigorous studies about
impact compared to the reach of microfinance. From studies and research, however, it is
apparent that microfinance is an important catalyst for poverty alleviation. One such study on
two major microfinance institutions, BRAC and Grameen Bank, found that participants who have
continued access to loans have a lower rate of poverty than those without access, 57 percent
compared to 76 percent, respectively.4 Another study, by S.R. Khandker, found that the poverty
levels in villages with microfinance programs have declined more than in villages without these
programs. Among program participants who had been members for six consecutive years,
poverty rates declined by more than 20 percent (about 3 percent per year). Khandker estimated
that more than half of this reduction could be directly attributed to microfinance. He had
calculated that microfinance accounted for 40 percent of the entire reduction of moderate poverty
in rural Bangladesh.5 These studies and numerous others6 indicate that microfinance can improve
overall income, increase decision-making power, and provide general self-empowerment.
From its tremendous success as a poverty alleviation tool, microfinance as an industry has
gained momentum and expanded its scope and reach. The awarding of the Nobel Peace Prize to
Muhammad Yunus and the Grameen Bank will only accelerate its growth. To ensure that the
poor not only have access to credit but other financial services, microcredit has expanded over
the years to include a variety of financial products such as savings, insurance, transfer payments,
and even micro-pensions. Where regulations permit, savings can be a very powerful tool since it
allows the poor to conveniently amass liquid assets that can be used to self-finance education,
health care, or disaster relief while also giving the MFI a source of capital for on-lending.
Microcredit, or what is now more aptly called “microfinance,” attempts to address the multitude
of the poor’s financial needs. With this expansion of purpose, the field itself has increased its
reach. By the end of 2005, according to the Microcredit Summit Campaign, there were over
3,000 MFIs serving over 112 million people worldwide, of which more than 82 million were
among the poorest people in the world (i.e., earning less than $1/day) when they became clients.7
As the sector has evolved to meet the growing demands for its services, it has been
reinventing itself to ensure sustainability at the institutional level. MFIs and the organizations
that support them have taken lessons learned from the banking sector and the business world to
improve efficiency and sustainability. (Perhaps no reinvention has been as dramatic and influential as the launch of Grameen II in 2003, and its rigorous but highly favorable evaluation
by SafeSave.) We have witnessed firsthand MFIs improving their loan disbursement and
collection methods in order to reach more clients faster and better. They are becoming better
trained and better run to meet the growing demands for their services. As the field continues to
evolve in its business model and operations to increase institutional efficiency, it is also critically
important that the field focus on its client success and effectiveness.
Microfinance: A Platform for Social Change
by Marge Magner
March 2007
Grameen Foundation
Overview of Microfinance - To learn more about this author, visit Grameen Foundation's Website.
Like this article? Share it with your friends
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