Frequently Asked Questions

What is Microfinance?

Developed out a deep sense of social responsibility and the belief that low income individuals deserved the right to financial services, microfinance provides financial services to people formerly ignored by traditional banking institutions. Microfinance originally involved microlending, which was the loan of very small amounts of money to often disadvantaged individuals with little or no collateral. The term microfinance now covers a full range of financial services for individuals, collectives and small business owners. Much of the methodology behind microfinance involves the use of collective savings, group lending and other non-traditional ways of evaluating risk and ensuring that individuals in some of the poorest regions of the world can increase their wealth and provide for their families and communities.
This is also known as financial inclusion and is a truly collective effort by stakeholder and service providers to ensure that low income clients have access to services and products like everyone else.

The Profile of a Microfinance Client

Most candidates for microfinance tend to have a lower income, and while not salaried employees, many are often self-employed in micro-businesses that require finance to expand. Traditionally, these clients have been turned away from larger lenders due to being considered high-risk and not creditworthy. Many microfinance clients run small street stores or are involved in the created of goods for sale, or small scale agriculture and farming. Many clients currently live below the poverty line and the largest sector of microfinance clients is women.
An underserved sector of the population that was never given access to financial services now can take on small loans, often with educational resources and additional training to help improve their businesses and lives. Microfinance services do not just mean banks and lending companies. Mobile operators, credit unions and cooperatives provide services to the poor and help in the overall upliftment of communities around the world.

What Type of Financial Services Are Available?

Just like banking and financial services are tailored to fit the needs and profiles of the super wealthy, so too must the financial services offered to the poorest of the poor. Without a steady income, it becomes even more necessary to tailor products to fit individual needs and financial requirements. A wide range of products and services are made available to ensure growth, however small, is sustainable and improves quality of life. There have been significant studies performed that show that even people living below the poverty line make regular payment on loans, insurance policies and other financial services available to them.
Protecting Clients from Unscrupulous Lenders

There has been a lot of bad press around unscrupulous lenders, and traditionally lower income people pay much, much more for financial services than anyone else. The microfinance industry is no longer in its infancy and with that comes accountability and governance to help protect the clients and provide transparency with all business dealings.
Protective measures in the industry include consumer protection and regulation as well as constant monitoring to ensure that clients are treated with respect and that they understand every aspect of taking a loan. This not only lowers risk for lenders, but also ensures that clients are not taken advantage of by untrustworthy institutions.

Making sure that consumers are not subject to unpredictable lenders or illegal financial practices is another area in which many reputable microfinance organizations are fighting to see change and regulation. This means that clients should not have to pay excessive interest rates on microloans or other financial services products. Regulation, standards and consistency will help in this regard.
Steps toward providing these essential protections are moving forward in the microfinance industry and in the banking industry as a whole. Outreach and education organizations like The Smart Campaign aim to educate and help consumers with finances and how to manage and apply for loans. Institutions that join the Smart Campaign work together to help regulate and manage the industry in the best interests of the consumers they serve.

Interest Rates for Microfinance Loans

It takes a lot longer to process a small loan than it does a large one. The reason for this is the amount of time it takes to verify information and assess a client without a credit history. Often loans are decided, disbursed and collected in person which add to the overall expense of managing a loan. The microfinance industry is always looking for ways to minimize costs through technology, but both adoption and acceptance of technology is slower in poor communities.

How Does Mobile Banking Help?

Perhaps one of the most significant ways that the financial industry has opened up gateways in developing countries has been through the use of mobile networks. Mobile banking has made financial services available even in remote locations. It lowers the cost of banking services and has ensured that people have access to more inclusive financial services than ever before. The ability to transact using a mobile phone means that small vendors do not even have to have credit card processors – everything is done via mobile in seconds.
Has Microfinance Truly Achieved Financial Inclusion?

In many respects the growth of the microfinance industry has been a boon for millions of disadvantaged people around the world. In other respects, there is still some way to go before all microfinance institutions (MFIs) are dedicated to financial inclusion as a social principle rather than just a financial one. MIX Market gives useful data on the financial and social projects undertaken by any of the 2000 participating MFI members. Another useful data source is the State of the Microcredit Summit Campaign Reports published annually.
Do Government’s Help With Financial Inclusion?

Government has an important role to play in both financial inclusion and in regulating the financial industry. Every government needs to balance the need to more financial services to more people with ensuring that consumer rights are being protected. Government also has the ability to expand financial services to more people by working with MFIs to expand infrastructure, logistics and access to more people.