What is Micro Finance?

According to the United Nation’s definition of Micro-Finance:

the provision of small-scale financial services such as savings, credit and other basic financial services to poor and low-income people. The term “microfinance institution” now refers to a wide range of organizations dedicated to providing these services and includes non-governmental organizations, credit unions, co-operatives, private commercial banks, non-bank financial institutions and parts of State-owned banks.

Microfinance institutions operate at different levels of the economy. Some are tiny village banks while others are commercial institutions with millions of dollars under management. Co-operatives are also important sources of financial services to low income people who wish to pool their resources. One example of a co-operative financial instrument is the Village Bank.

Village bank

A village bank may operate in a very remote region of the world. Very often, such village banks are co-operatives focused on providing very specific services to their membership. Alternatively, it may be a not-for-profit group focused on providing financial services to solidarity groups (see below). These types of organizations often depend on grants from outside supporters and may never become financially sustainable without such grants. Clients may benefit from loans as small as US$5 to buy supplies for a street vending operation.

Often, village banks work with teams of clients who form solidarity groups. Members of such teams commit to back up each other’s loans. That’s often the only collateral available — the promise of the solidarity group to pay back a loan if one member of the group defaults on his/her obligations. Very often, clients of microfinance are women because they play incredibly important roles in rural economies.