Improved financial services are needed most in Africa’s poorest economies and countries emerging from conflict. Microfinance is a critical tool in the fight against poverty and an important part of IFC’s effort to support the development of a vibrant
private sector in the region.” – Thierry Tanoh, IFC Vice President, Sub-Saharan Africa
- What is microfinance?
Micro-finance is defined as a financial service that is provided to low-income or unemployed individuals, or groups who have no other access to traditional banking services. The goal of micro-finance is to give low-income people the opportunity to become self-sufficient by providing a way to borrow money, save money and get insurance.
These financial service providers identify themselves as MFi’s, Micro-finance institutions. The methods used by these institutions commonly include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly
- Why are interest rates higher in micro-finance loans higher than in traditional banking?
Microfinance interest rates are higher than conventional banking due to its labour-intensive method of disbursing loans. Loan officers go in and out visiting clients face to face in villages, rural areas or slums on a regular basis. A far more expensive procedure than customers going independently to bank branches. Although the amount of training that is bundled with the loan has been reduced as lenders improved efficiency by grouping client visits together. Operational costs are still higher than traditional loans.
To give an example, if $150 is spent by the lender to manage a $1500 loan for a year, that 10% operating cost ratio needs to be built into the price—which includes the interest rate plus any fees. If the loans are smaller and you spend $150 to manage a $300 loan, then you’re at 50%.
- Micro-finance vs. micro-credit vs micro-lending? What is the difference?
Micro-finance and micro-credit are two distinct notions, whilst micro-lending is the related term of micro-finance. Micro-lending refers to the lending of small amounts of money per loan as part of a microcredit program.
Microfinance is a much broader concept than microcredit and refers to savings, insurance, loans, money transfers, and other financial products aimed at low-income and unemployed people.
Microcredit refers more to making small loans available to people excluded from financial services, through programs designed specifically to meet their particular needs and circumstances. According to Microfinance Institute Lend With Care ( https://www.lendwithcare.org/info/about_us/about_microfinance) , the characteristic features of microcredit are that:
– Loans are usually relatively short-term, less than twelve months in most instances and often even six months or less, and generally for working capital with immediate regular weekly or monthly repayments – they are also disbursed quickly after approval.
– Loans are usually quite small, to begin with; typically they are in the range of $100-500. As borrowers regularly repay their loans and demonstrate their creditworthiness, they become eligible for larger loans.
The traditional lender’s requirements for physical collateral such as property are usually replaced by a system of collective guarantee (or solidarity) groups whose members are mutually responsible for ensuring that their individual loans are repaid. Alternatively, borrowers may be requested to find one or two personal guarantors – often these are respected local community leaders.