Microfinance Institutions and Organizations

Microfinance institutions (MFIs) provide financial services, involving small amounts of money, to poor clients. Services include savings deposits, loans, payment transfers, insurance, and other financial services.

Microfinance Institution Challenges

Delivering financial services to poor people, especially in rural and undeveloped areas, presents some unique challenges.

High Transaction Costs

High transaction costs have been a major barrier. A for-profit bank must cover operating costs and generate a profit. If a client only has $5 to deposit in a savings account, the bank loses money on that transaction. If that same client with $5 to deposit must pay $0.25 to take a bus to the nearest bank, they lose 5% of their capital going to the bank. As far as loans go, the cost of administering 500 loans of $100 each versus 1 loan of $50,000 is substantial.

No Credit History or Collateral

Traditional banks typically require a credit history and collateral from borrowers seeking a loan. Poor people generally do not have either so are viewed as high-risk clients.

Lack of Access

Many poor people do not have access to mobile banking, nor do they live near a bank or ATM, so just getting to a bank uses precious time and money.

Diverse Financial Needs

There is no one-size-fits-all when it comes to what financial services poor people need and want.

  • Savings - Piggy Bank on Top of Stack of CoinsSavings – some people just want to earn a decent wage at a steady job and have a safe place to keep their savings.
  • Loans – not every borrower is an entrepreneur wanting to start an income-generating activity like raising chickens for eggs to sell, or to build a green microenterprise such as a solar cooker business. Some families need a loan because a sick child needs medicine.
  • Payment Transfers – others need a low-cost way to send money home (remittance) from jobs in the city or overseas.
  • Insurance – a farmer might want insurance to provide a financial safety net in case of crop failure.

Microfinance Institutions (MFI’s) and Organizations

Over several decades, microfinance institutions (MFIs) have been established all over the world. Some are nonprofit and others are for profit. Related organizations have emerged to support MFIs with research, data analysis, best practices, training, advocacy, and policy formation. I selected a few to investigate.

Grameen Bank LogoGrameen Bank – founded during the 1970s in Bangladesh, is possibly the first modern MFI and probably the most well known. Grameen Bank which means “village bank”, began as a small project, grew into a national organization and became a model for microfinance institutions in other countries.

There are some notable differences between Grameen Bank and a conventional bank: Grameen Bank has a stated purpose to help alleviate poverty, is owned by the poor women who use its services, and goes to the people instead of the people going to the bank.

Accion – is a nonprofit organization that helps build MFIs by providing management expertise, connection to commercial banks, development of industry standards, and participation on MFI boards.

Consultative Group to Assist the Poor (CGAP) – is an independent group housed at the World Bank. CGAP provides MFI industry information, develops and promotes standards, and advises governments, MFIs, donors, and investors. One program, the Microfinance Gateway, contains an extensive online library. The Advancing Financial Access for the World’s Poor Annual Report 2012 is full of excellent information and some amazing photographs.

EcoMicro – is a program co-financed by Multilateral Investment Fund (MIF) and Nordic Development Fund (NDF) that works with MFIs in Latin America and the Caribbean to develop green financial projects.

Kiva – is a web-based nonprofit organization that collects money from individual investors and provides loans through an international network of Field Partners (MFIs).

Women’s World Banking Ghana (WWBG) – is an MFI in Ghana affiliated with the Women’s World Banking organization. WWBG services include savings, credit, remittance, and virtual banking.

Zidisha – is a web-based nonprofit organization that directly connects lenders and borrowers and administers the loans themselves.

Imagine and Take Action

For those of us who do have access to financial services, we most likely have checking and savings accounts, an ATM card, at least one credit card, ability to transfer money electronically, insurance, a 401k, IRA, or other retirement account, perhaps a car loan or mortgage, a bank or ATM nearby, and the ability, if we choose, to perform any financial Green Microfinance - Green Tree Growing out of Pile of Coinstransaction on a computer, smartphone, or tablet.

Imagine what it would be like if everyone had access to financial services. Want to take action to help bring financial services to all people and be green? Contribute money to a green MFI or MFI support organization, invest in a microloan for a green microenterprise, or spread the word. Be creative.

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Microfinance – History

The terms microfinance and microcredit came into use during the 1970s and are often credited to Muhammad Yunus, a Bangladeshi economist and the founder of Grameen Bank, an early microfinance institution (MFI).

Ever since the concept of currency was introduced some 2,500 years ago, rich and poor people alike have wanted to earn, save, spend, borrow, loan, transfer, and invest it. Microfinance is a modern term for a concept that has been evolving from the time we began using money.

What is Microfinance?

I began researching microfinance by pulling my Webster’s New World College Dictionary Fourth Edition off the shelf and looking up microfinance. I discovered it does not contain the word microfinance but did find:

  • Micro – small, very small, or on a small scale
  • Finance – the money resources, income, etc. of a nation, organization, or person; the managing or science of managing money matters, credit, etc.; to supply money, credit, or capital to or for; to obtain money, credit or capital for

Next, I searched online. There does not appear to be an “official” definition of microfinance, however, there is some common ground among most definitions:

  • Small – money amounts are small
  • Poor – clients are poor, many are women
  • Lack of Access – clients do not have access to “traditional” banking services.
  • Loans – there is a lot of focus on loaning money (microcredit, microlending), especially to people who want to start or already own a microenterprise or small business.
  • Financial Services – while not universal, in addition to credit, microfinance sometimes includes savings, payment transfers, insurance, and other financial services.

Coins of Various CurrenciesBased on the above findings, a simple definition might be:

Microfinance is the provision of financial services, involving small amounts of money, to poor clients who do not have access to banking services.

A microfinance institution (MFI) is a financial organization that provides microfinance services.

Saving and Borrowing Money before Microfinancing

Before microfinancing came on the scene, poor people borrowed and saved money in a variety of ways. Some of these methods continue to exist today and are used by the millions of people who are still without access to banking or microfinance services. A few examples are listed below.

Moneylenders

Moneylenders have been providing quick access to cash at high interest rates for thousands of years. If the borrower encounters a problem with repaying the loan, moneylenders may or may not be flexible about repayment. High interest rates make it difficult for poor borrowers to pay off loans and get out of debt.

The term “loan shark” refers to a moneylender who charges exorbitantly high interest rates and preys on the poor and people in difficult situations.

Pawnbrokers

Pawnbroking is an old profession. A pawnbroker offers loans to people who secure the loan by bringing in and leaving their personal property as collateral. If the borrower does not repay the loan, plus interest, within the agreed upon timeframe, the pawnbroker may sell the borrower’s personal property to recover the cost of the loan.

Savings Stash

Keeping savings safe and readily available is an age old problem. Stashing money under a mattress, in a strongbox, on one’s person, at a family member’s house, or buried in the yard are methods that have been around for many years. In these scenarios, the money might not necessarily be safe. In addition, because the money is readily available, savers may find it difficult to refuse a family member or friend asking for a loan.

Savings Collectors

Savings collectors collect small savings amounts from a number of people at their homes, workplace, or in the marketplace. For a fee, the collector safeguards the money and returns it to the depositor upon request. Some collectors use the deposits to make small, short-term loans. The saver must rely on the honesty of the collector and their ability to keep the saver’s money safe.

Stacks of Coins with Words Risk and LendRisk

Before the introduction of microfinancing services, poor people had few choices for borrowing and saving money.  The limited options available were often fraught with high cost, risk, and uncertainty.

High transaction costs associated with loaning small amounts of money and administering small deposits contributed to the banking industry’s lack of interest in providing financial services to poor people. In addition, there seems to have been a belief that poor people were unreliable borrowers which negatively influenced potential lenders.

A future post will explore the shift in thinking about banking services for the poor and look at microfinance institutions and organizations.

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