A Primer on Microfinance
What is microfinance?
Microfinance refers to those loans, savings, insurance, and other financial services that help the poor help themselves. Because many people in developing countries live on as little as $2 a day and have few or no assets, they are ineligible for financing through conventional means. Microfinancing has helped low-income people start successful businesses.
The idea was developed over three decades ago in Bangladesh. With the "Grameen Project," the Grameen Bank has provided numerous small loans, primarily to women in small groups who were otherwise too poor to qualify for conventional loans.
In recent years, major philanthropic players like the Bill and Melinda Gates Foundation and the Clinton Global Initiative have provided seed money, consulting, and clout to foster microfinancing.
How does it help?
Research shows that poor people who earn regular income and have access to savings, credit, and other financial services are better able to meet everyday needs and to bounce back from having to pay sudden expenses stemming from illnesses, deaths, or other losses.
Whom does it help?
Microfinance clients are poor and low-income people, including small farmers or artisans. Loans as small as $50 can help the working poor to start a business, such as raising livestock and chickens, sewing, or basket weaving.
Microlending institutions tend to focus on providing assistance to women because they are more likely to repay the loans and to use their profits on educational programs for themselves and their children. Studies show that financial assistance through programs such as microfinancing help to elevate women's stature within their families and communities, allowing women to own assets such as land and houses, and take on decision-making and leadership roles.
Internationally, approximately 92 million people have profited from microloans, but 500 million could benefit, according to experts.
How extensive is microcredit within the financial services industry?
According to an annual Microfinance Information Exchange survey, the top 100 Latin American and Caribbean microfinancing institutions had 6 million loans worth a total of $6.6 billion in 15 countries in 2005. The top microlender was Mexico's Caja Popular Mexicana, topping the rankings for the second time in two years. In terms of profitability, Mexico's Compartamos achieved a record 19.6 percent AROA (adjusted return on assets) and 51.2 percent AROE (adjusted return on equity). In addition to a significant increase in microloans, the region also demonstrated major growth in microsavings plans: These microfinancing institutions managed over $3 billion in deposits, an increase of 30 percent from 2004.
Once found only within the philanthropic sector, microfinance now includes major players in the financial services industry. For example, Citigroup recently announced a $100 million investment to 132 microfinance institutions in 39 countries throughout the developing world, and TIAA-CREF announced it had earmarked $100 million for investment in microfinancing projects.
In addition to helping the everyday lives of individuals, microfinancing could one day help foster financial institutions and systems in the developing world, augmenting services and products to include 401(k)'s and credit cards.