Microfinance helps to promote financial inclusion among those with low incomes who lack access to traditional financial institutions.

What is Microfinance?

Microfinance services are intended for low-income individuals with limited financial resources who are unable to access traditional financial institutions.

Almost all microfinance institutions offer loans to their members, and many also offer things like insurance, savings and other services.

The concept of microfinance was pioneered by the founder of Grameen Bank, Muhammad Yunas, who was awarded the Nobel Peace Prize in 2006 for his work.

Grameen Bank: The Roots of Microfinance

The Grameen Bank research project was launched in 1976 in Jobra village in the Chattogram District of Bangladesh. This project was then transformed into a bank in 1983, with an aim of “alleviating poverty and empowering the marginalized poor in Bangladesh through micro-credit.”

  • Unlike with mainstream financial institutions, customers of Grameen Bank don’t have to have collateral to get approved for credit
  • 98% of its borrowers are women, and 2/3 of these women have moved on to better lives through poverty alleviation
  • Grameen Bank is now present in 94% of villages in Bangladesh and has 10.46 million borrower members
  • It offers education loans, new entrepreneurship loans and scholarships to borrower members’ children
  • The bank has a humanitarian program called the Struggle (Beggars) Members Program, which has helped 21,383 people give up begging to become self-sufficient
  • They have a 96.68% recovery rate as of December 2023

Why is Microfinance Important?

“For anyone living in the western world, the role of microfinance can sometimes be difficult to understand. It’s tough to imagine what life would be like without access to even the most basic financial services. When the Five Talents team introduces our supporters to microfinance, we ask them to imagine starting a small business without access to a bank, or to imagine trying to plan for your children’s future without a savings account. For the 1.7 billion people who don’t have a bank account, these situations are a reality”Five Talents

Microfinance can help individuals and small businesses to grow their incomes and become self-sufficient. It promotes financial inclusion and empowers people who, without microfinance, would lack access to traditional financial institutions and banking services. By providing microfinance to small businesses, business development is encouraged with can further improve the economic situation of poverty-stricken areas.

“When provided in a financially sustainable way by a well-managed provider, it [microfinance] stimulates and supports economic activity, helping to alleviate poverty and increase financial inclusion. But if delivered carelessly, or exploitatively, it can also have negative consequences. Its success or failure depends in part on the financial expertise available to providers and their clients” ICAEW

As stated by the ICAEW, microfinance must be handled with care and consideration as there is a risk of worsening the situation for those who are already in tough economic situations.

Supporting Women: The MicroLoan Foundation

The MicroLoan Foundation provides business loans and training to rural women facing poverty in sub-Saharan Africa.

  • They have supported 390,000 female entrepreneurs so far
  • They have a loan repayment rate of 99%
  • Before receiving a loan, women take part in seven training sessions to help them improve their business and financial literacy
  • Their customers are encouraged to build savings to help them when the unexpected takes place, such as crop failure or family illness
  • Their loans must be invested in income generating activities and are repaid over four or six month cycles
  • The MicroLoan Foundation lends to groups of five women, meaning the women are jointly responsible for their loans, essentially acting as guarantors for one another. The women form their own groups before taking out a loan

Overall, microfinance, when handled correctly, has been proven as a great tool to promote financial inclusion worldwide, especially among women.

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