microfinance – definition, sources and problems « microfinance hub

8/8/2019 Microfinance Definition, Sources and Problems Microfinance Hub

1/8

Microfinance Hub

HomeChallenges

Technology

Economic and Social Angle

Services

Others Resources

Upcoming Posts

Type text to search here...

Home > Articles > Microfinance Definition, Sources and Problems

Microfinance Definition, Sources and Problems

January 31, 2010 FehmeenLeave a commentGo to comments

Bono once put an interesting twist to an old adage: Give a man a fish and hell eat

for a day. Give a woman microcredit, she, her husband, her children and her

extended family will eat for a lifetime. The simple quote sums up the power of

microfinance, to develop entire societies in a bottom-up manner instead of just the

top-down manner traditionally employed by the commercial sector.

What is Microfinance?

According to Forbes, microfinance is probably the best known means of helping

small business owners in developing countries move out of poverty. As the name

suggests, microfinance is the field of offering financial services to people on a small


2/8

(micro) scale, such as businesses with low or moderate incomes. The definition foraccording to The Asian Development Bank (ADB) is any financial service targetedtoward the poor, such as:

deposits

finance schemes or micro loans up to $3,000payment servicesmoney transfersinsurance to poor and low-income households and their micro-enterprises

Microfinance Institutions (MFIs) provide micro services through a variety of lendingmodels, while Micro Entrepreneurs use these services. The theory is that if the poorhave access to these services, their financial lives will be more stable, predictable

and secure, allowing them to plan and improve their livelihoods through education,healthcare and empowerment.

In other words, microfinance converts poverty into an economic opportunity thatevades the idea of exploitation.

What are the Sources of Microfinance?

Microfinance providers come in various forms which can be broadly grouped asfollows:

Formal Microfinance Institutions rural/microfinance/village banks,commercial banks, telecom firms, and cooperatives (see examples)Semi-formal Microfinance Institutions nongovernmental organizations (seeexamples)Informal Microfinance Sources money lenders and shopkeepers

This list was taken from ADBs website.

Problems Faced by Microfinance

Despite good intentions, microfinance still has several hurdles to face:

perceived high risk of lending to the poortechnology-related hurdles, such as the high costs involved in smalltransactions for microfinance providers (Read about technology-related

solutions)lack of awareness about sources of funds for microfinance providers to passon to the poorthe poors inability to offer marketable collateral for loans to MFIs


3/8

Share this: 0 Print Facebook Digg Email

Press This StumbleUpon Reddit

difficulty in measuring the social performance of MFIs (Read about tools to

help measure the social impact of microfinance)

mixing of charity with business by microfinance providers (this is an issue of

poor governance)

high interest rates for microcredit

lack of customized solutions/ microfinance models for the poor

inappropriate targeting of poor households by microfinance programs

lack of microfinance training for MFIs

poor distribution system of MFIs, i.e. a need to spread out into rural areas

lack of information about microfinance investment opportunities (Possible

solution through AppLab)

poor institutional viability of microfinance ventures

dual mission of MFIs to be financially sustainable as well as development

oriented

These problems can be grouped according to whether theyre caused by MFIs or

caused by micro entrepreneurs. You can read about them in greater detail at these

links.

Just like any other new venture, microfinance too faces obstacles that will eventually

be ironed out as governments alter their priorities, and as the commercial sector

understands the economic viability of the development sector, considering the

relative immunity of the microfinance sector to the global financial meltdown.Already, a few encouraging trends have emerged in the microfinance sector.

As Kofi Annan once put it, microfinance not only recognizes the needs of the poor,

it also empowers them and taps into their remarkable reservoir of energy and

knowledge. In short, microfinance has tremendous potential, its time is now and is

here to stay.

You can read other articles about microfinance theory and practice here.Please remember to leave a comment. I would love to hear your views.

Home Page5HE3WYKXU4WN

Comments (2)Trackbacks (0)Leave a commentTrackback

1.


4/8

Alhaji Cherno Ceesay

July 16, 2010 at 10:35 am | #1

Reply | Quote

Succint overview of the subject matter a d quite helpful to understanding the

concept.

Fehmeen

July 16, 2010 at 4:32 pm | #2

Reply | Quote

Thank you!

1. No trackbacks yet.

Name (required)

E-mail (required)

Website

Subscribe to comments feed

Submit Comment

Notify me of follow-up comments via email.

Notify me of site updates

Microfinance Technology ASP Model Applied

RSS feed

Google

Youdao

Xian Guo

Zhua Xia

My Yahoo!

newsgator

Bloglines


5/8

iNezha

Twitter

Thanks for stopping by! Be sure to check the Upcoming Posts

section and suggest more ideas for this online library. Thank you!

Post Subscription Options

Enter your email address to subscribe to this blog and receive notifications of new

posts by email.

E-mail Subscription

See

Articles

Books

Case Studies

Company ProfilesCountry Profile

FAQs

Humor in Microfinance

Presentations

Videos

Recent Posts

Debate: Commercialization of Microfinance Part II Arguments For and

Against It

Debate: Commercialization of Microfinance Part I Arguments For

and Against It

ContSummary of Social Performance Measures for Microfinance

Institutions by SPTF: Part II

Summary of Social Performance Measures for Microfinance Institutions by

SPTF: Part I

Book Review: Why microfinance doesnt work by Milford Bateman

Wokai.Org: The Non-Profit Peer-to-Peer Microcredit Platform for China

Seeding Out Poverty Seeds for Development

Evolution of Microfinance


6/8

Top Posts

10 Determinants of Interest Rates in Microfinance

Funding Sources for Microfinance Institutions (Financing Options)Microfinance - Important Role in Economic Growth

Microfinance - Definition, Sources and Problems

Microfinance Problems - 9 Challenges for Microfinance Providers (Part I)

Tag Cloud

Accion USABook ReviewBranchless BankingCGAPChallenges in Microfinanceclimate

changeCorporate GovernanceCorporate social responsibilityDefining MicrofinanceDevelopmentEconomy and Microfinanceglobal warmingGrameenGrameen BankGrameen FoundationGreen

IndiaInterest RatesKenyaLoan DefaultmicrocreditMicrofinanceMicrofinanceBanksMicrofinance ChallengesMicrofinance InstitutesMicrofinance StatisticsMicrosavingsMobile

BankingMuhammad YunusMultiple BorrowingPakistanPovertyPoverty AlleviationRiskServices in MicrofinanceSmall BusinessSocialSocial Performance Measurement in Microfinance

Social Performance Task ForceSolar PowerSucceeding in Mobile BankingTechnology in

MicrofinanceTransparency PricingTrends in MicrofinanceUganda

SocialVibe


7/8

Blogroll

Center for Financial Inclusion

Commonwealth Enterprises

Design for Development

Global DashboardKiva Stories from the Field

MAKE WEALTH HISTORY

Pro-Mujer Blog

Radical Frontiers

The inside world of INITIALS

US Microfinance: ACCION Chicago

Veritas Venture Capital for micro finance in Africa

Archives

Select Month


8/8

Blog Stats

26,492 hits

NetworkedBlogs

Blog:Microfinance Hub

Topics:Poverty,Microfinance

Follow my blog

Globe of Blogs

TopWordPress

Copyright 2010 Microfinance Hub

Blog at WordPress.com. Theme: INove by NeoEase.

microfinance – definition, sources and problems « microfinance hub

Documents