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What is Microfinance?

Microfinance generally refers to the provision of basic financial services such as loans, saving accounts and insurances for low-income but economical active people. In most instances the term microfinance refers to the provision of small loans (=micro credits) for micro-entrepreneurs.

The UN believes microfinance to play a central role in the battle against poverty and proclaimed the year 2005 as the “International Year of Microcredit”.

The idea of microfinance, however, is not new but can be traced back to the principle of self-help and solidarity which was devised by savings banks and cooperative banking groups (e.g. Raiffeisen) 150 years ago.

In the 70s Muhammad Yunus, professor of economics, began to hand out small loans in his home country Bangladesh. He founded the Grameen Bank in 1983 which today is active in over 70,000 villages in Bangladesh. The Grameen Bank employs 25,000 people and has 7.4 m borrowers, 97 % of which are women. Muhammad Yunus was awarded the 2006 Nobel Peace Prize. His concept is employed in 60 developing countries today.

„All that is necessary to save the poor from poverty is to create a functioning environment. Once the poor can unleash their energy and creativity poverty will vanish quickly”. (Muhammad Yunus, professor of economics, Grameen Bank, Lecture at the Nobel Peace Prize award, Oslo, 10 December 2006)

Why Microfinance?

Around two thirds of the world population is cut off from the conventional financial market. Low-income people typically have no collateral and therefore no chance to take out a loan, to save money or to invest for the future. Women especially are often considered as not credit-worthy by banks.

The purchase of a small plot of land, a sewing machine or a market stand for example would help many people to put their ideas into practice and to escape poverty. Often, the only alternative are local moneylenders, so called “loan sharks”, who charge extortionate interest rates of up to several hundred percent a month.

This is where microfinance comes into its own. Thanks to a regulated access to money microfinance offers three characteristics:

  • security,
  • economic growth,
  • the opportunity, to take one´s future into one´s own hands.