Microfinance is when financial services are targeted towards poor people. Is is a strategy for poverty reduction, which have been increasing in global popularity through the last 25 years, partly because there has been some apparently successful microfinance institutions, capable of sustaining outreach while at the time being financial sustainable.
Microfinance is one way of making financial systems more inclusive. Other ways are through deepening the existing commercial financial sector or through government programs.
Microfinance institutions (MFI’s) are usually different from ordinary banks. When lending money to clients, they do not request collateral. Instead they use other techniques to get the high repayment rates (at 95-99%), which are widespread in the industry. This is for example the case with SKS in India , which in 2005 had a loan portfolio worth $11m (66 mill kr.) with 110.000 borrowers in one of the poorest regions of India.
The techniques are for expamle giving loans to groups, using high frequent repayment schemes or simply visiting the clients often. The bank staff commenly travel a long way to visit their customers, for example by bike.
As seen in the figure, the number of microfinance clients has been on the rise since 1970.
The source for these numbers is the Microcredit Summit Campaign.
Naturally, microfinance is no panacea. In many cases it will not be a useful instrument for poverty reduction and it is not suitable for helping some of the most vulnerable groups like the elderly, the children af the disabled. Sometimes – when it is not done wisely – it simply puts people into debt that they cannot pay back. Especially because of the recent popularity with international donor agencies, which tends to glorify certain development strategies, it is important to pay attention to the negative sides of microfinance.