Introduction to Microfinance

Microfinance is the provision of financial services to the unbanked. This can include access to credit and savings services as well as more advanced products such as micro-insurance and money transfer services. Traditional banks have been unwilling to provide these services to the unsalaried and those working in the informal sectors. This is where microfinance institutions (MFIs) have stepped in.

Microfinance is centuries old, but arose in its modern form in the 1970s when Mohammed Yunus, an economics professor in Bangladesh, began providing very small loans to poor Bangladeshi women living in rural areas. These women used their loans to expand their businesses, often by buying more stock or employing an additional staff member. The provision of working capital to people with no alternative sources of finance enabled many of these women to raise themselves out of poverty.

Traditional microfinance has worked predominantly with the group lending methodology, as the poor frequently do not have the hard collateral required in a traditional credit model. Rather than relying upon collateral to guarantee their loans, MFIs call for people to group together and guarantee each others' loans in order to minimize the risk. This has proved to be effective.

This simple idea has since mushroomed into a huge industry serving millions of people around the world. When managed well, microfinance loans to the poor are repaid more reliably than traditional banking loans to those with larger incomes.

Despite the success of microfinance, the majority of people in the developing world still do not have access to formal financial services. Microfinance faces a number of challenges. Costs are too high and a large proportion of MFIs have struggled to reach out into the rural areas, instead focusing on the major towns.

This is where we at Musoni feel we can make a real difference. Our improved efficiency allows us to make a large cut in the cost of our loan products while our use of mobile technology enables us to leapfrog the common barrier of weak infrastructure.

More information about microfinance can be found at www.cgap.org.