Microfinance

WHAT IS MICROFINANCE ?

Microfinance is an activity which consists in bringing financial services (both credit and savings products ) to those in the informal economy who do not have access to the classical banking system. Microfinance is a young sector, still developing structurally, and with strongly differentiated activities. Loans may range in size from a few dozen Euros to several thousand, depending on the country and the client (anybody from a street hawker to a local tradesman or a peasant farmer, right up to a quasi-SME). The main operators in the sector are microfinance institutions (MFIs), whose role is precisely to bring these microfinance services to the target populations. The total number of MFIs in the world is estimated by the World Bank at about 12,000.

The sector is extremely varied whether viewed in terms of geographical distribution, size of institution, types of products distributed or legal status (NGO, cooperative, commercial company, sometimes even bank).

Over more than 25 years it has been repeatedly shown that, given a reasonably stable political environment and a market economy, it is possible to create and develop economically viable, financially autonomous MFIs.

Because they provide very small loans, and their operating costs are correspondingly high, MFIs charge interest rates that are high compared with local bank rates. These rates nonetheless remain economically valid for the clients, and substantially lower than those charged by money-lenders, the only available alternative.

The creation of an MFI still requires, in most cases, public sector financial backing to finance part of the start-up loan portfolio, and above all to cover technical assistance costs relating to the development of systems and operating procedures, which is generally sub-contracted to specialist operators.

The wide variety of situations makes any generalisation about microfinance's social impact difficult. It is however generally admitted that the effective and lasting presence of microfinance has, over time, a positive impact on development levels in populations served. The commercial success of MFIs shows that they respond to a real need. As a tool in the struggle against poverty, microfinance nonetheless has its limits. It is only one of the elements necessary for a real reduction in global poverty (education and healthcare being others, to mention only a few).