What is microfinance?
Microfinance generally means providing very poor families with very small loans (microcredit) to help them engage in productive activities or grow their businesses. Over time, microfinance has come to include a broader range of services (credit, savings, insurance, etc.) as we have come to realize that individuals who lack access to traditional formal financial institutions require a variety of financial products.
Who are the clients of microfinance?
The typical microfinance clients are low-income persons that do not have access to formal financial institutions. Microfinance clients are typically self-employed, often household-based entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities such as food processing and informal trade. In urban areas, microfinance activities are more diverse and include shopkeepers, service providers, artisans and street vendors. Microfinance clients are poor and vulnerable non-poor who have a relatively stable source of income.
How does microfinance help the poor?
Experience shows that microfinance can help the poor to increase income, build viable businesses, and reduce their vulnerability to external shocks. It can also be a powerful instrument for self-empowerment by enabling the poor, especially women, to become economic agents of change.
Can microfinance be profitable?
Yes it can. Data from the MicroBanking Bulletin reports that 63 of the world's top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies programs might have received, of about 2.5% of total assets. This compares favorably with returns in the commercial banking sector and gives credence to the hope of many that microfinance can be sufficiently attractive to the mainstream banking sector. Many feel that once microfinance becomes mainstreamed, massive growth in the numbers of clients can be achieved.
Others worry that an excessive concern about profit in microfinance will lead MFIs up-market, to serve better off clients who can absorb larger loan amounts. This is the “crowding out” effect. This is a viable concern and one that each MFI must consider.