Microfinance

Microfinance is defined as a type of banking service provided to unemployed and/or low-income individuals or groups who otherwise would have no other access to financial services.

Broadly speaking, microfinance is a category of financial services developed for individual and small companies that do not fit into the standard conventional banking, lending, and related services agenda.

Microfinancing is a small and growing niche. Most people think of microfinancing as financial services such as savings accounts, insurance funds, and credit provided to poor and low-income clients to help them increase their income, thereby improving their standard of living.

Microfinance Explained

There are several institutions offering microfinancing, but it is not mainstream. These various types of institutions include credit unions, commercial banks, NGOs (Non-governmental Organizations), cooperatives, and sectors of government banks.

MFIs can borrow from big banks and investors or issue bonds; take deposits (savings) from clients; and accept equity investments, which are ownership stakes that earn a share of the profits.

Microfinance is essential because it provides resources and access to capital to the financially underserved, such as those who are unable to get checking accounts, lines of credit, or loans from traditional banks.

Microfinance is widely seen as a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.

Additionally, this form of finance is also a way for the poor to manage their finances more effectively and take advantage of economic opportunities while managing the risks.

Of note, banks today simply won't extend loans to those with little to no assets, and generally don't engage in small size loans typically associated with microfinancing.