what is microfinance 
microfinance also called microcredit is a type of banking service provided to low income individuals or groups who otherwise wouldn t have access to financial services while institutions participating in microfinance most often provide lending microloans can range from as small as 50 to under 50 000 but many banks offer additional services such as checking and savings accounts as well as micro insurance products and some even offer financial and business education 12 the goal of microfinance is to ultimately give impoverished people an opportunity to become self sufficient investopedia laura porterunderstanding microfinancemicrofinance services are provided to unemployed or low income individuals because most people trapped in poverty or who have limited financial resources don t have enough income to do business with traditional financial institutions despite being excluded from banking services however people who live on as little as 2 a day do attempt to save borrow or acquire credit or insurance and they do make payments on their debt thus many poor people typically look to family friends and even loan sharks who often charge exorbitant interest rates for help microfinance allows people to take on reasonable small business loans safely and in a manner that is consistent with ethical lending practices although they exist all around the world the majority of microfinancing operations occur in developing nations such as bangladesh cambodia india afghanistan democratic republic of congo indonesia and ecuador 3 many microfinance institutions sometimes referred to as mfis focus on helping women in particular 56microfinancing organizations support a large number of activities ranging from providing the basics like bank checking and savings accounts to startup capital for small business entrepreneurs and educational programs that teach the principles of investing these programs can focus on such skills as bookkeeping cash flow management and technical or professional skills like accounting unlike typical financing situations in which the lender is primarily concerned with the borrower having enough collateral to cover the loan many microfinance organizations focus on helping entrepreneurs succeed in many instances people seeking help from microfinance organizations are first required to take a basic money management class lessons cover understanding interest rates the concept of cash flow how financing agreements and savings accounts work how to budget and how to manage debt once educated customers may apply for loans just as one would find at a traditional bank a loan officer helps borrowers with applications oversees the lending process and approves loans the typical loan sometimes as little as 100 may not seem like much to some people in the developed world but for many impoverished people this figure often is enough to start or sustain a business or engage in other profitable activities microfinance loan termslike conventional lenders microfinanciers must charge interest on loans and they institute specific repayment plans with payments due at regular intervals some lenders require loan recipients to set aside a part of their income in a savings account which can be used as insurance if the customer defaults if the borrower repays the loan successfully then they have just accrued extra savings empowering women in particular as many microfinance organizations do may lead to more stability and prosperity for families 7because many applicants can t offer collateral microlenders often pool borrowers together as a buffer after receiving loans recipients repay their debts together because the success of the program depends on everyone s contributions this creates a form of peer pressure that can help to ensure repayment for example if an individual is having trouble using their money to start a business that person can seek help from other group members or from the loan officer through repayment loan recipients start to develop a good credit history which allows them to get larger loans in the future although these borrowers often qualify as very poor repayment rates on microloans are often higher than the average repayment rate on more conventional forms of financing for example the grameen bank in bangladesh one of the original microlenders reports an average repayment rate of 98 85history of microfinancemicrofinance isn t a new concept small operations of this type have existed since the 18th century the first occurrence of microlending is attributed to the irish loan fund system introduced by jonathan swift which sought to improve conditions for impoverished irish citizens 9 in its modern form microfinancing became popular on a large scale in the 1970s the first organization to receive attention was the grameen bank started in 1983 by muhammad yunus in bangladesh 10 in addition to providing loans to its clients the grameen bank also suggests that its customers subscribe to its 16 decisions a basic list of ways that the poor can improve their lives 11 the 16 decisions touch upon a wide variety of subjects ranging from a request to stop the practice of issuing dowries upon a couple s marriage to keeping drinking water sanitary in 2006 the nobel peace prize was awarded to both yunus and the grameen bank for their efforts in developing the microfinance system 5there are other microfinance operations around the world some larger organizations work closely with the world bank while other smaller groups operate in different nations some organizations enable lenders to choose exactly who they want to support categorizing borrowers with criteria such as level of poverty geographic region and type of small business benefits of microfinancemillions of people have directly or indirectly benefited from microfinance related operations 12 the consultative group to assist the poor a washington based global nonprofit organization estimates that as of 2021 more than 120 million people had directly benefited from microfinance related operations 13 however these operations are only available to some of the world s poor while an estimated 1 7 billion people lack access to establishing basic financial accounts 14the benefits of microfinance extend beyond the direct effects of giving people a source for capital entrepreneurs who create successful businesses in turn create jobs trade and overall economic improvement within a community the for profit controversyalthough there are countless heartwarming success stories microfinance has sometimes been the target of criticism as microfinance interest rates are generally higher than conventional banks critics have charged that these operations are making money off the poor 15in fact some non profit microlenders have converted to being for profit as they ve grown one of the largest and most controversial is mexico s banco compartamos the bank was started in 1990 as a nonprofit however 10 years later management decided to transform the enterprise into a traditional for profit company in 2007 it went public on the mexican stock exchange and its initial public offering ipo raised more than 400 million 1617like most other microfinance companies compartamos banco makes relatively small loans serves a largely female clientele and pools borrowers into groups 18 the main difference lies in how it uses the funds it nets in interest and repayments like any public company it distributes them to shareholders 19 in contrast nonprofit institutions take a more philanthropic stance toward profits using them to expand the number of people they help or to create more programs in addition to compartamos banco many major financial institutions and other large corporations have launched for profit microfinance departments including citigroup and barclays for example 202122 other companies have created mutual funds that invest primarily in microfinance firms compartamos banco and its for profit peers have been criticized by many including the grandfather of modern microfinance himself yunus the immediate pragmatic fear is that out of a desire to make money large microfinance bankers will charge higher interest rates that may create a debt trap for low income borrowers 20but yunus and others also have a more fundamental concern that the incentive for microcredit should be poverty alleviation not profit by their very nature and their obligation to stockholders these publicly traded firms work against the original mission of microfinance helping the poor above all else in response compartamos and other for profit microfinanciers counter that commercialization allows them to operate more efficiently and to attract more capital by appealing to profit seeking investors by becoming a profitable business their argument goes a microfinance bank is able to extend its reach providing more money and more loans to low income applicants for now though charitable and commercialized microfinanciers do co exist in addition to the divide between the nonprofit and for profit microfinance enterprises other criticisms exist some say that individual microloans of 100 aren t enough money to provide independence rather they keep recipients working in subsistence level trades or just cover basic needs like food and shelter a better approach these critics maintain is to create jobs by constructing new factories and producing new goods they cite the examples of china and india where the development of large industries has led to stable employment and higher wages which in turn has helped millions to emerge from the lowest levels of poverty other critics have said that the presence of interest payments is a burden despite the healthy repayment rates there still are borrowers who can t or don t repay loans because of the failure of their ventures personal catastrophe or other reasons so this added debt can make recipients of microcredit even poorer than when they started 