Microfinance at a Glance

Background

Microfinance is today a diverse sector with numerous players of all sizes, methodologies, organization, performance and legal status. It comprises informal savings groups with not more than 10 members and very large institutions like Grameen Bank in Bangladesh with nearly 7.3 million members. The demand for the services of microfinance institutions (MFIs) is significant, as it is estimated that about 2.5 billion people in the world today do not have access to financial services, including credit, savings, or insurance.

The Consultative Group to Assist the Poor (CGAP) defines microfinance as follows:

"Microfinance is the supply of loans, savings, and other basic financial services to the poor. People living in poverty, like everyone else, need a diverse range of financial instruments to run their businesses, build assets, stabilize consumption, and shield themselves against risks. Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services."

This market is served by MFIs that include providers like non-profit non-government organizations (NGOs), cooperatives, self-help groups, credit unions, commercial and state banks, insurance companies and specialized microfinance institutions.

A loan to a poor person or to a small entrepreneur can make a major difference to the poor person's life and family or to the scale and the profitability of an entrepreneur's business. Often, it is what makes an entrepreneur able to start a business. This encourages and supports a positive cycle of earnings and income, with measurable effects on employment and economic activity in the community. A small loan to an individual or family can also provide cash flow required to meet basic human needs and smooth financial flows in difficult economic environments.

Access to financial services for the poor also positively impacts the national economy in developing countries. Firstly, it creates and sustains employment and economic activity. Secondly, it channels and transfers scarce capital from savers to users, thereby improving the overall resource allocation in the economy. Thirdly, it frequently provides poor and low-income families with the resources they need to rebound from natural disasters, conflicts, and other unanticipated economic and social hardships. Fourthly, it empowers and enables individuals to take control over their own circumstances and to improve their economic and social situation through their own individual efforts.

Additional information about the microfinance industry can be found through the websites indicated on this page. There are, of course, many organizations working in microfinance around the world, but those we have listed will provide a general orientation to the industry.