A relatively new branch of financial services, microfinance aims to promote self-sufficiency and economic development among people who don't have access to the traditional financial sector. They do this primarily by extending small loans without the strict requirements of traditional lenders. Recipients are usually the poor and "unbanked," but they also include people who are not poor but who lack the credit standing to borrow money to start or grow a business.
Access to Capital
When people can't tap into the mainstream financial services system for capital to start a business, they're forced to turn to "informal" sources -- relatives, friends and even black-market lenders, or "loan sharks." Such sources are often unreliable, and they can also be expensive, charging potentially ruinous interest rates that can strangle a new business before it can get established. By lending money to such people, microfinance institutions provide access to capital.
Entrepreneurship and Self-Sufficiency
Underprivileged people may have potentially profitable business ideas, but they cannot put them into action because they lack sufficient capital for start-up costs. "Microcredit" loans give clients just enough money to get their idea off the ground so they can begin turning a profit. They can then pay off their micro loan and continue to gain income from their venture indefinitely.
Improved Standards of Living
Microcredit ultimately aims to give impoverished people enough financial stability to move from simply surviving to accruing savings. This gives them a certain amount of protection from sudden financial problems. Savings also allow for educational investment, improved nutrition, better living conditions and reduced illness. Microinsurance, another segment of the microfinance sector, provides people the ability to pay for health care when needed, so they can receive treatment for health conditions before they become grave and more costly to treat.
Women's Economic Advancement
Women make up a large proportion of microfinance beneficiaries. Traditionally, women (especially those in underdeveloped countries) have been unable to readily participate in economic activity. Microfinance provides women with the financial backing they need to start business ventures and actively participate in the economy. The aim is to improve their status and make them more active in decision-making, thus encouraging gender equality. According to the international Consultative Group to Assist the Poor, microfinance institutions have even reported a decline in violence against women in areas targeted by microfinance programs.
Microfinance lenders hope to improve not just the lives of their direct clients, but also the health of their clients' communities. New business ventures can provide jobs, thereby increasing income among community members and improving their overall well-being.
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