THE MICROFINANCE SOLUTION
Microfinance emerged in the 1970s as social innovators began to offer financial services to the working poor—those who were previously considered “un-bankable” because of their lack of collateral. Once given the opportunity, not only did clients of microfinance providers (usually referred to as microfinance institutions, or MFIs) expand their businesses and increase their incomes, but their high repayment rates demonstrated that the poor are capable of transforming their own lives given the chance. This model of lending disproved all conventional thinking, and microfinance was born. Since then, microfinance has become one of the most sustainable and effective tools in the fight against global poverty.
How Microfinance Works
The most common microfinance product is a microcredit loan—usually less than $100 (depending on the country and loan cycle; microcredit loans in Mexico, for instance, tend to be larger than in India due to regional economic differences). These small loans are enough for hardworking micro-entrepreneurs, usually women, to start or expand small businesses such as weaving baskets, raising chickens, or buying wholesale products to sell in a market. Income from these businesses provides better food, housing, healthcare, and education for entire families. Most importantly, additional income provides hope and opportunity for a better future.
Microcredit loans are not the only microfinance product. The poor, like all of us, need a secure place to save their money and the ability to access insurance for their homes, businesses, and health. Many forward-looking MFIs are now innovating to help meet these needs, creating essential financial products and services that empower the world’s poor to improve their lives.
The global repayment rate for microcredit loans is higher than 95 percent, which allows MFIs to re-lend these funds to even more clients. By giving the world’s poor a hand up, not a handout, microfinance can help break the cycle of poverty in as little as a single generation.
