Microfinance is the provision of financial services: loans, saving and insurances schemes that are specially implemented to meet the needs of poor households that are traditionally outside of the financial system usually due to low incomes and a general lack of collateral. Microfinance institutions (MFIs) which provide the services often include rural banks, local cooperatives and NGOs (non-governmental organizations). To date, UNCTAD-the United Nations Conference on Trade and Development- calculates that around 7,000 MFIs exist worldwide offering microcredit opportunities to more than 20 million people.1
MFIs often provide a targeted group of poor people a small amount of credit at low, affordable interest rates (often substantially subsidized by the institution) that can then be used by the individual to engage in some productive activity with the goal of improving the quality of their lives and their families lives in the long term. Or else, the credit can also be used to meet more immediate needs such as medicine and food.
The success of the microcredit programs can however, be limited by a lack of social capital, dispersed populations, dependence on a sole economic activity (such as a single agricultural crop), reliance on barter rather than cash transactions as well as the possibility of future crises (such as hyperinflation and civil violence).2
Studies3 demonstrate that the impact of the MFIs increases when they are specially focused on providing credit to women. UNDP-the United Nations Development Program- 1995 Human Development Report indicated that 70% of the 1,300 million people who live on less than a dollar per day are women. This is often the result of women?s limited access to education and resources like land and credit. In addition, the women as a whole tend to spend more of their earnings on the family as opposed to men. Therefore by targeting loans to women, the money is more likely to have a greater impact on the family?s living standard in the long term.
One of the most famous MFIs is the Grameen Bank of Bangladesh. Through Grameen, credit is granted through a system that is based on mutual trust, responsibility and participation of an individual in a five member group (the unique manner in which Grameen bank disperses the loans) formed by the low income individuals seeking to undertake loans from the bank.
The founder of Grameen bank, economist Muhammad Yunus, formulated the idea for the microcredit bank during the undertaking of a research project in 1976. The project aimed to promote banking services targeted towards the rural poor of Bangladesh. Among the objectives of the initiative were to generate self-employment opportunities in a population with high unemployment rates and to discourage the exploitation of the poor by money lenders who in poor communities, are often the only viable alternative for poor individuals seeking loans. Yunnus? project, during the period 1976-1983 proved a success and with the sponsorship of the national central bank and support of various commercial banks, the Grameen Bank Project was transformed into the Grameen bank by government legislation in October 1983. Today, with more than 3.7 million borrowers (96% of which are women), Grameen is Bangladesh?s biggest rural bank. In the last fifteen years the experience of the Grameen Bank has been applied in over 70 countries.
The Grameen Bank has demonstrated that microcredit is an effective instrument for the alleviation of poverty. The evolution of similar initiatives has lead to the widespread use of microcredit instruments within other programs, such as in programs for local development, community organization, various training activities as well as saving schemes for the poor.
Another pioneering institution in the field of microfinance is ACCION International, a non-profit organization based in Boston, United States, that has been granting microcredit since 1973. Intially the program was aimed solely at reducing unemployment and poverty with the United States and has since branched out to the developing world. At the moment ACCION has microfinance programs in 15 Latin American countries, 5 African countries and 33 US based localities, and has benefited a total of 3,2 million people as of 2003.
Unlike many other microcredit institutions, ACCION believes that microcredit must be financially sustainable. This includes finding alternative means of funds other than reliance on private donations and government aid which they believe are not sustainable in the long run. ACCION designs its programs with the aim that the programs will become self-sufficient in a three to five year term. Based on the idea that a commercial bank can be oriented towards the poor while at the same time, be lucrative, ACCION has contributed to the creation of commercial microfinancial institutions like BancoSol in Bolivia, Mibanco in Peru, SogeSol in Haiti, Banco Solidario in Ecuador and Financiera Compartamos in Mexico.
Another good example of a financial services provider for poor families is the International Foundation for Community Assistance (FINCA), that initiated its activities in 1984. This institution grants microcredit mainly to women.
FINCA became famous because of its launch of the Village Banking method. The village banks are credit and saving organizations of between 10 and 50 members, generally mothers, who jointly manage a microcredit, saving and mutual support system. The group?s members administer the system and guarantee each other?s loans. The FINCA?s Village Banking method has been implemented in more than 32 countries worldwide."