"Today, if you look at financial
systems around the globe, more than half the population of the world
- out of six billion people, more than three billion - do not
qualify to take out a loan from a bank. This is a shame."
- Dr. Muhammad Yunus - Nobel Peace Prize
Dr. Muhammad Yunus is a Muslim Bangladeshi banker and economist. He
is famous for his successful application of the concept of
microcredit, the extension of small loans to entrepreneurs too poor
to qualify for traditional bank loans. Yunus is also the founder of
Grameen Bank. In 2006, Yunus and the bank were jointly awarded the
Nobel Peace Prize, "for their efforts to create economic and social
development from below." He is the author of Banker to the Poor.
Microfinance Definition (from
Microfinance is a term for the practice of providing financial
services, such as microcredit, microsavings or microinsurance to
poor people. By helping them to accumulate usably large sums of
money, this expands their choices and reduces the risks they face.
Suggested by the name, most transactions involve small amounts of
money, frequently less than US$100.
Key Microfinance Principles:
1. Poor people need a variety of financial services, not
just loans. Like everyone else, the poor need a range of
financial services that are convenient, flexible, and affordable.
Depending on circumstances, they want not only loans, but also
savings, insurance, and cash transfer services.
2. Microfinance is a powerful tool to fight poverty. When
poor people have access to financial services, they can earn more,
build their assets, and cushion themselves against external shocks.
Poor households use microfinance to move from everyday survival to
planning for the future: they invest in better nutrition, housing,
health, and education.
3. Microfinance means building financial systems that
serve the poor. In most developing countries, poor people are
the majority of the population, yet they are the least likely to be
served by banks. Microfinance is often seen as a marginal sector—a
“development” activity that donors, governments, or social investors
might care about, but not as part of the country’s mainstream
financial system. However, microfinance will reach the maximum
number of poor clients only when it is integrated into the financial
4. Microfinance can pay for itself, and must do so if it is to
reach very large numbers of poor people. Most poor people cannot
get good financial services that meet their needs because there are
not enough strong institutions that provide such services. Strong
institutions need to charge enough to cover their costs. Cost
recovery is not an end in itself. Rather, it is the only way to
reach scale and impact beyond the limited levels that donors can
fund. A financially sustainable institution can continue and expand
its services over the long term. Achieving sustainability means
lowering transaction costs, offering services that. are more
useful to the clients, and finding new ways to reach more of the
5. Microfinance is about building permanent local financial
institutions. Finance for the poor requires sound domestic
financial institutions that provide services on a permanent basis.
These institutions need to attract domestic savings, recycle those
savings into loans, and provide other services. As local
institutions and capital markets mature, there will be less
dependence on funding from donors and governments, including
government development banks.
6. Microcredit is not always the answer. Microcredit is not the
best tool for everyone or every situation. Destitute and hungry
people with no income or means of repayment need other kinds of
support before they can make good use of loans. In many cases, other
tools will alleviate poverty better—for instance, small grants,
employment and training programs, or infrastructure improvements.
Where possible, such services should be coupled with building
7.Interest rate ceilings hurt poor people by making it harder for
them to get credit. It costs much more to make many small loans
than a few large loans. Unless microlenders can charge interest
rates that are well above average bank loan rates, they cannot cover
their costs. Their growth will be limited by the scarce and
uncertain supply soft money from donors or governments. When
governments regulate interest rates, they usually set them at levels
so low that microcredit cannot cover its costs, so such regulation
should be avoided. At the same time, a microlender should not use
high interest rates to make borrowers cover the cost of its own
8.The role of government is to enable financial services, not to
provide them directly. National governments should set policies
that stimulate financial services for poor people at the same time
as protecting deposits. Governments need to maintain macroeconomic
stability, avoid interest rate caps, and refrain from distorting
markets with subsidized, high-default loan programs that cannot be
sustained. They should also clamp down on corruption and improve the
environment for micro-businesses, including access to markets and
infrastructure. In special cases where other funds are unavailable,
government funding may be warranted for sound and independent
9.Donor funds should complement private capital, not compete with
it. Donors provide grants, loans, and equity for microfinance.
Such support should be temporary. It should be used to build the
capacity of microfinance providers; to develop supporting
infrastructure like rating agencies, credit bureaus, and audit
capacity; and to support experimentation. In some cases, serving
sparse or difficult-to-reach populations can require longer-term
donor support. Donors should try to integrate microfinance with the
rest of the financial system. They should use experts with a track
record of success when designing and implementing projects. They
should set clear performance targets that must be met before funding
is continued. Every project should have a realistic plan for
reaching a point where the donor’s support is no longer needed.
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