What is it and how to get involved

In 2007, the microfinance market served more than 33 million borrowers and 48 million savers. Statistics provided by Unitus, an organization dedicated to the fight against poverty in the world, show that 80% of the potential market has not yet been reached. What impact will the global growth of this market have on you?

TUTORIAL: Financial concepts

What is microfinance?
The term “microcredit“describes the range of financial products (such as microcredits, microeconomics and microinsurance products) that microfinance institutions (MFIs) offer to their clients. Microfinance began in the 1970s when social entrepreneurs began to lend money on a large scale to the working poor. An individual who has gained worldwide recognition for his work in microfinance is the professor Muhammad Yunus with who Grameen Bank, won the Nobel Peace Prize in 2006. Yunas and the Grameen Bank have demonstrated that the poor have the capacity to lift themselves out of poverty. Yunus also demonstrated that loans to the working poor, if properly structured, refund rates. His work has caught the attention of social engineers and for-profit investors. (Find out more in The who, what and how of microfinance.)

Historically, the goal of microfinance has been poverty reduction. For many years, microfinance had this overarching social purpose, and so traditional MFIs were made up only of non-governmental organizations (NGOs), microfinance banks, and public sector banks. More recently, the market has changed. For example, some not-for-profit MFIs are transforming into for-profit institutions to increase their strength, sustainability, and market reach. They are joined in the microfinance market by consumer finance companies such as GE Finance and Citi Finance. Mainstream retailers, like Wal-Mart, Elektra, and Tesco, are starting to emerge as consumers lenders and a few are getting into microfinance. Although most MFIs still view poverty reduction as the primary goal, selling more products to more consumers is the primary motivation for many new entrants.

Microfinance products and services
The following products and services are currently offered by MFIs:

  • Microcredits: Microcredits (also called microcredit) are low value loans; most loans are less than $ 100. These loans are generally granted to finance entrepreneurs who run microenterprises in developing countries. Examples of microenterprises include basketry, sewing, street vendors, and poultry farming. The world average interest rate on micro-loans is around 35%. While this may seem high, it is far lower than other available alternatives (such as informal local money lenders). Additionally, MFIs should charge interest rates that cover the higher costs associated with processing labor-intensive microcredit transactions. (Read more about microfinance in Microfinance: philanthropy by industry.)
  • Microeconomics: Micro-savings accounts allow individuals to store small amounts of money for future use without the minimum balance conditions. Like traditional savings accounts in developed countries, micro-savings accounts are used by the saver for the necessities of life such as weddings, funerals and supplementary retirement income.
  • Micro-Insurance: People living in developing countries have more risks and uncertainties in their lives. For example, there is more direct exposure to natural disasters, such as mudslides, and more health risks, such as communicable diseases. Microinsurance, like its non-micro counterpart, pools risks and helps provide risk management. But unlike its traditional counterpart, microinsurance allows insurance policies that have very low premiums and policy amounts. Examples of microinsurance policies include crop insurance and policies that cover overdue micro-loan balances in the event of the death of a borrower. Due to the administrative burden expense ratios, microinsurance is more effective for MFIs when bonuses are collected with repayments of microloans. (For more on the importance of insurance, see Fifteen insurance policies you don’t need and Five Insurance Policies Everyone Should Have.)

What does microfinance mean to you?
The development and growth of the microfinance market does not only affect those who engage in or consider microfinance services. Here’s how it can affect you:

  • As an investor: Focused on return institutional investors are now making microfinance-related investments. In addition, the main rating agencies rate microfinance transactions. For example, Morgan Stanley issued a microfinance-backed bond, which contained slices and was assessed “AA” by S&P. (For more on debt rating, please see: What is a business credit score?) This shows that microfinance is starting to offer investment opportunities to all investors. The Micro Banking Bulletin reports that 63 of the world’s largest MFIs have a average yield (after adjustment for inflation and after removing subsidies programs received) of approximately 2.5% of total assets. Local and regional banks are generally the first to integrate microfinance investments into their portfolios, while large international banks currently prefer to provide financing to other banks, MFIs or NGOs. As mentioned earlier, even consumer finance companies can be exposed to microfinance activities. As an investor, you may want to check whether the companies in which you invest are exposed to microfinance and, if so, whether the risk-return characteristics of these activities are of interest to you. Visit the MIX market for current information on the supply, demand and facilitation of capital in the microfinance market.
  • As a finance professional: Microfinance requires highly specialized financial knowledge as well as a unique combination of skills, such as knowledge of social sciences, local languages ​​and customs. New careers are emerging to meet these unique demands. For finance professionals, this means that new careers are opening up for those with this unique combination of skills and experience. In addition, traditional professional roles are fading because microfinance brings together professionals with varied backgrounds to work in collaborative teams. For example, development professionals (such as those who have worked for the Asian Development Bank or other development agencies) can now work side by side with venture capitalist. You will find a wide range of career opportunities in microfinance at Microfinance Gateway.
  • Personally : Some believe that we are living in a time when poverty could be eradicated. Studies support this belief. According to the Virtual Microcredit Library, over an eight-year period, among the poorest in Bangladesh without any credit service, only 4% rose above the poverty line. But among individuals and families benefiting from microcredit from an MFI, more than 48% have passed the poverty line. What eradicating poverty means to you as an individual largely depends on your personal philosophy. You might welcome it as a key achievement in human history. You might also celebrate the possibility that we can all buy and sell to each other. Individuals looking to be part of this poverty eradication phenomenon can now lend money to a micro-entrepreneur in another part of the world through the non-profit online service. Kiva.

Capital and expertise are increasingly flowing into microfinance. Increased competition can be observed among MFIs. As they continue to develop their internal operating capabilities, more of the potential 80% of the market will be served. Key players such as rating agencies and institutional investors are also entering the market, signaling that a real market is developing. Although microfinance has been around since the 1970s, it is now much more relevant to investors, finance professionals and individuals. Specifically, you may wish to examine your portfolio, career opportunities, or personal philosophy to determine the impact the microfinance phenomenon has on you. (For more on this topic, see Using social finance to create a better world.)

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