Microfinance institutions give loans to owners of microenterpries around the world.
Microfinance is the business of lending credit and providing other financial services to poor and otherwise disadvantaged people around the world. Many of the beneficiaries in microfinance transactions live in developing countries and receive microloans in order to fund their small businesses.
Elements of Microfinance
Microcredit is the most recognized service under the umbrella of microfinance, but it's not the only one. Financial institutions that deal in microfinance also provide access to savings and checking accounts and insurance products to people who are unable to access such services through ordinary financial institutions.
Microfinance and Poverty
Almost all recipients of microloans are citizens of impoverished nations and usually have an unofficial enterprise, such as raising cattle, baking bread, or making clothes. With the loans they receive from microfinance institutions, they are able to invest in their businesses and secure distribution channels and start making more money on a consistent basis. These clients don't qualify for traditional loans because most of the time they have no collateral and no funds to repay the loan. Microfinance institutions use various methods, including group lending, to ensure repayment. Many of the microenterprise owners are able to start living above the poverty line as a result of using microloans.
Microfinance and Economic Growth
The growth of small enterprises that use microloans leads to overall economic growth in impoverished regions. Recipients of microloans gain a steadier income and are able to buy more products themselves. This increased exchange provides a boost to villages and towns in the developing nations. Microfinance plays especially important role in rural areas, where the opportunity for credit is very limited.
Microfinance and Savings
Many recipients of microfinance services don't have a safe way to save money. They may keep cash around their homes or buy something hoping to sell it later. Needless to say, these savings options are very unsafe and ineffective. Someone can steal their cash or other property, and whatever they hope to sell may be illiquid. One of the functions of microfinance is providing an equal opportunity for everyone to save money. Microfinance institutions help people establish bank accounts and start building their savings.
