What is microfinance?
Microfinance is defined as financial services for poor people, who often lack access to tools most of us take for granted – a debit card, a savings account, basic insurance or even a nearby bank branch.
Most of the world’s poorest people struggle to find a job, and many who do, are not paid a living wage. To feed their families, they turn to self-employment in any way they can, whether it be sewing clothes or selling vegetables on the side of the road. Without access to basic financial services, these hardworking “microentrepreneurs” are likely to remain trapped by limited options, borrowing from loan sharks for capital or at risk for theft.
A small loan can buy raw goods in bulk or equipment such as a sewing machine. With new resources, sales grow, and so do profits. Savings can be stored safely in a savings account. Insurance can offset losses due to natural disasters.
Why is microfinance important?
For years, traditional banks have viewed microentrepreneurs as high risk: their loans were too small to justify the time and expense needed to administer them, and the clients lacked collateral and credit history. Since the 1970s, Accion has not only broken these discriminatory boundaries, it has turned this assumption on its head. Accion has proven that the private sector and the poor can have a non-exploitative relationship in which both enjoy powerful benefits. Microfinance provides a set of tools that allows a poor person to work his or her way out of poverty with both dignity and pride.
The real beauty of microfinance is that it is powered by the determination of the human spirit. Microfinance is not top-down development and it is not a handout. This is economic development by the people – not just for them.
What are microfinance institutions (MFIs) and what do they offer?
A microfinance institution is an organization that offers financial services – typically credit, but sometimes also savings, insurance, remittances, business training, etc. – to low-income communities. MFIs can be banks, non-bank financial institutions, non-governmental organizations (NGOs), credit unions or cooperatives.
How high are the interest rates, and how can poor people afford to pay interest?
Interest rates vary greatly throughout the microfinance industry. As a rule of thumb, in order for a microfinance institution to be self-sustaining, rates must be high enough to cover the cost of servicing the loan. In many cases, MFIs charge higher rates than commercial banks because the loan amounts are smaller and the cost of servicing the loans is much greater.
Still, microentrepreneurs can benefit enormously from these services. The improvements they are able to make to their businesses yield returns that are much greater than the cost of acquiring the loan. Therefore, microentrepreneurs are able to repay their loans, with interest, while still increasing profits. The average repayment rate for clients of all Accion partners worldwide is 97 percent.
Do poor people save?
Poor people save all the time, although mostly in informal ways. They typically invest in assets such as jewelry, domestic animals, building materials and things that can be easily exchanged for cash. Access to secure, formal savings services provides a cushion when families need more money for seasonal expenses and in difficult times. Secure savings accounts allow people to reduce their vulnerability and build assets, enabling them to pay for school fees, marriages and births, old age and unexpected expenses from occurrences such as illness or theft.
Should commercial banks be involved?
Absolutely. Donor aid is critical to our pioneering work, but there is not enough of it to help the estimated 2.5 billion people who remain without access to financial services. Working with the private sector and harnessing the power of capital markets is critical to Accion’s vision of building a financially inclusive world with access to economic opportunity for all. Increasingly, commercial partners find that doing good does indeed mean doing well, delivering a ‘double bottom line’ – the successful fusion of business and social returns.
How does donating to Accion help power economic opportunity?
With more than 50 years of experience and a reputation for innovation, Accion is a pioneer in the microfinance movement – but that position is only made possible by philanthropic support. Donor funding provides the seed capital that permits us to enter new and untested markets, where our status as a nonprofit organization allows us to assume significant risk in advance of commercial viability.
In addition to expanding the industry, we provide technical assistance, equity financing and loan guarantees to NGOs and banks alike so that their microfinance programs can become as efficient and stable as possible. Accion is also committed to developing and promoting best practices and high industry standards through the Center for Financial Inclusion, the global Smart Campaign and its global training centers.