Microfinancing 101

Kiva, the world’s leading microfinance organization, defines microfinance as such: Microfinance is a general term to describe financial services to low-income individuals or to those who do not have access to typical banking services.

In today’s socially stratified world, it is becoming increasingly difficult for one born in poverty to lift his or herself out of poverty. A hardworking individual with a spirit of entrepreneurship can do very little without starting capital, yet without any assets they cannot borrow from traditional banks or financial institutions. That’s where microfinancing comes in.

In June of 2004, the G8 (France, Germany, Italy, Japan, the United Kingdom, the United States, Canada, and Russia) endorsed what is known as the Consultative Group to Assist the Poor. The group places a strong emphasis on microfinancing as the future of financial aid for the poor. It lays out the following basic tenets:

1. Poor people need not just loans but also savings, insurance and money transfer services.
2. Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.
3. “Microfinance can pay for itself.” Subsidies from donors and government are scarce and uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.
4. Microfinance means building permanent local institutions.
5. Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system.
6. “The job of government is to enable financial services, not to provide them.”
7. “Donor funds should complement private capital, not compete with it.”
8. “The key bottleneck is the shortage of strong institutions and managers.” Donors should focus on capacity building.
9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.
10. Microfinance institutions should measure and disclose their performance – both financially and socially.

I believe in microfinancing because, in its very basic principals, it makes sense. Microfinancing is a way to end poverty and to lift good, hardworking people out of difficult life situations they were born into. It gives opportunities to those who had none, and all for small loans that are hardly a setback for the donor. I believe that microfinancing will play an important role in the future of the fight against poverty, and I believe that it will change the world for the better.

Read more about microfinance at Kiva and at CGAP.

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