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What is Microfinance?
Microfinance refers to the provision of financial services (such as microloans, savings, insurance, and payment systems) to low-income individuals or small enterprises that typically lack access to traditional banking.
Definition
Microfinance is a financial system designed to offer small-scale financial products to underserved populations, enabling entrepreneurship, income generation, and economic empowerment.
Key Takeaways
- Provides financial access to low-income individuals.
- Includes microloans, savings accounts, and micro-insurance.
- Supports entrepreneurship and poverty reduction.
Understanding Microfinance
Microfinance institutions (MFIs) help people who are excluded from formal banking due to lack of credit history, collateral, or stable income. These services enable individuals to start or expand small businesses, manage risk, and improve financial stability.
Microfinance gained global recognition through models like the Grameen Bank in Bangladesh, which pioneered group lending and social collateral methods.
Microfinance also includes:
- Micro-savings
- Micro-insurance
- Micro-leasing
- Mobile financial services
While microfinance has lifted millions out of poverty, it also faces challenges such as high interest rates, over-indebtedness, and operational sustainability.
Formula (If Applicable)
There is no single formula, but microfinance performance metrics include:
- Portfolio at Risk (PAR): Measures loan defaults.
- Operational Self-Sufficiency (OSS): Revenue ÷ Operating Expenses.
- Repayment Rate: Amount Repaid ÷ Amount Loaned.
Real-World Example
A woman in a rural village receives a P1,000 microloan to start a vegetable stand. Over time, she expands the business, repays the loan, and uses micro-savings to build financial security.
Importance in Business or Economics
Microfinance promotes financial inclusion, stimulates entrepreneurship, and supports local economic development. It contributes to poverty reduction and empowers marginalized communities.
Types or Variations
- Microcredit
- Micro-savings
- Micro-insurance
- Group Lending Models
Related Terms
- Financial Inclusion
- Microloan
- Social Entrepreneurship
Sources and Further Reading
- Grameen Bank
- World Bank – Financial Inclusion
- Investopedia – Microfinance
Quick Reference
- Provides small-scale financial services.
- Helps underserved populations grow businesses.
- Key tool for economic empowerment.
Frequently Asked Questions (FAQs)
Do microfinance loans require collateral?
Often no, many use group lending or social collateral models.
Are interest rates high?
Yes, they can be due to high administrative costs, but vary widely.
Who provides microfinance services?
MFIs, NGOs, cooperatives, and sometimes commercial banks.
