Microfinance Basics

What is microfinance?

Microfinance can be defined simply as financial services geared to those who have traditionally been excluded from banking services. For oikocredit, it is also a tool in the global fight against poverty.

Through microfinance institutions (MFIs), individuals, usually women, are able to access financial services such as loans, saving products, insurance, and other products. These services are aimed to assist in achieving economic self-sufficiency and financial independence.

Microfinance products

Typically, MFIs are focused on providing small loans, or microcredit, as their primary service to clients. Unlike formal bank loans, these microloans are of small amounts that do not require collateral.

Repayment terms are usually designed to match a client’s cash-flow, so that the client may repay in small and frequent amounts over a long period of time. Interest rates charged to borrowers are designed to cover the administrative costs of the MFIs, which are much higher than those of more traditional banks.

For example, many MFIs work with clients in rural areas that are geographically cut off from formal banking. To reach these clients, loan officers must spend hours traveling on rough and often dangerous roads.

But microloans are only one piece of the puzzle. Microfinance more broadly encompasses all types of financial services, such as savings and insurance, and sometimes includes non-financial services such as healthcare and educational programs.

By offering more diverse products and services, MFIs are able to tackle the different problems attendant on poverty.

Who needs microfinance?

Microfinance is generally geared toward the working poor - people who already have a source of income. These self-employed working poor have a diverse range of microenterprises, including small retail shops and artisanal production.

In rural areas, these income generating activities include food processing and trade, but by far most rural people are involved in farming. Borrowers are also typically women, who use their loans to reinvest in their businesses and have proven to be the most reliable borrowers for microfinance institutions.

They are also more likely to use their businesses’ profits to invest in the health and education of their families, especially their children. By taking loans to expand these micro-enterprises, borrowers help both their own families and their communities and in doing so begin to break the cycle of poverty for families and communities worldwide.