Microfinance is the term for the broad range of financial services provided to individuals or groups who otherwise would not have access to them. Its ultimate goal is to give people living in poverty or the socially marginalised an opportunity to become self-sufficient and lift themselves out of poverty.
Microfinance targets people with low, informal, or infrequent income who are considered too ‘high-risk’ for conventional financial service providers. These people are often the poorest and most marginalised in society and they suffer the most from financial exclusion. The World Bank has identified financial inclusion as a key enabler for reducing poverty. Microfinance institutions have a vital role in extending this inclusion to the people who need it the most.
Microfinance institutions provide basic financial services such as saving and credit accounts, provide access to insurance, as well provide access to small loans called microloans or microcredit. Many institutions also offer education and training in financial management, crucial skills in achieving financial inclusion. Microfinance can help people lift themselves out of poverty, not just by assisting them in meeting their basic needs or increasing their income, but by also giving the most vulnerable access to protection against the risks that exacerbate poverty.
Poverty is about more than a lack of income, therefore it is crucial that microfinance institutions assess their social as well as their fiscal impact. Simply providing more money without corresponding improved social outcomes can contribute to a cycle of debt and dependency, extending and exacerbating poverty rather than alleviating it. Microfinance institutions must remain focused on poverty and meeting the needs of the people, they service over their own financial gains.
Government and Multilateral Publications
- World Bank 'UFA2020 Overview: Universal Financial Access by 2020' (2018)
- UN Africa Renewal 'Microfinance: Good for the poor?' (2015)
- The Conversation 'How Microfinance Reduces Gender Inequality in Developing Countries' (2017)
- 'Financial Development and Poverty Reduction in Developing Countries: New Evidence from Banks and Microfinance Institutions' (2016)
- SPTF 'The Universal Standards for Social Performance Management Implementation Guide' (2014)
- SPTF 'An Introduction to Social Performance'
- GCAP 'Access for All: Building Inclusive Financial Systems' (2006)
- Trócaire 'Micro-Finance - Literature Review' (2005)