What is Microfinance?
History and Evolution of Industry
Three Categories of MFIs
In the past two decades, microfinance has emerged as a leading
and effective strategy for poverty reduction. Although it is not a
panacea for poverty, when and where properly harnessed it has
made sustainable contributions through empowering
people, providing them with confidence, self-esteem and the
financial capacity to exercise greater control over their own
What is Microfinance?
Microfinance refers to the provision of financial services and the
management of small amounts of money through a range of
products and a system of intermediary functions that are targeted
at low-income clients.
Microfinance refers to the provision of small loans and other
facilities like savings, insurance, transfer services to poor, lowincome household and micro enterprises.
More than just banking.
• Small loans, typically for working capital
• Informal appraisal of borrowers
• Collateral substitutes and alternatives, such as group guarantee or compulsory
• Access to repeat and larger loans based on repayment performance
• Streamlined loan disbursement and monitoring
• Secure savings products
A brief timeline...
Microfinance has gone through four distinct phases worldwide:
Phase One: The provision of subsidized credit by Governments
starting in the 1950’s when it was assumed that the lack of money
was the ultimate hindrance to the elimination of poverty.
Phase Two: Micro credit mainly through NGOs to the poor in the
1960’s and 1970’s. During this period sustainability and the financial
self–sufficiency of institutions were still not considered important.
Phase Three: Formalization of microfinance institutions (MFIs) began
Phase Four: The commercialization of MFIs has gained importance
with the mainstreaming of microfinance and its institutions into the
Categories of MFIs
There are three types of MFIs:
Informal: These institutions are however
modernising; with some categories developing
their own self regulatory frameworks while
seeking endorsement from Central Banks for
these regulatory frameworks
Examples: susu collectors in Ghana
Semi-formal: These institutions are usually
registered but not licensed or regulated. This
category is also keenly exploring self regulation
Examples: Financial NGOs
Formal: These institutions are
registered, licensed and regulated directly by the
Central Bank or through a Third Party.
Examples: Commercial Banks, Rural and
Community Banks (Apex Bank), Savings and
Loans Companies, and Credit Unions (CUA).
Microfinance and Poverty
The achievement of the Millennium Development Goals (MDGs) as
well as national ones that target poverty reduction, the eradication
of hunger, universal primary education, promoting gender
equality, empowering women, reducing child mortality, improving
maternal health and ensuring environmental sustainability is and
can all be facilitated by microfinance.
The people that are served by microfinance programs are the economically
active poor and woman form a majority of this population.
Historically, women face limited access to credit. Supporting this gender
through microfinance is vital because of the interconnection of financial
power, poverty and women.
Increased economic power for women = stability to women and their children
and the larger local economy.
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• Check your understanding with the Self-Review.