Despite the huge leap in the economy and production achieved by humanity in the recent decades of the twentieth century, poverty remains high on the list of world problems. International reports have indicated that one in every five in the world is living under the poverty line, i.e., less than a dollar a day. Moreover, if this line is lifted slightly, a third of the world’s population would be considered poor, while the wealth of a few hundred billionaires amounts to nearly half the world's total income. Therefore, the fight against poverty and reducing the spread of it is one of the most important battles of development in the world.

Development aiming to improve the financial system promotes economic growth, and there is a strong correlation between the lack of access to financial services and low incomes. Numerous allegations have emerged, claiming that lending may eliminate poverty. On the other hand, 90% of the world's population does not have access to loans from official financial institutions. Here, the idea of microfinance, as a means to eradicate poverty and achieve the development goals of the third millennium by the United Nations, and as a gateway to promote micro-loans sector, grew significantly in most countries of the world, especially in developing ones.


1) What is microfinance?


Microfinance means providing very small loans to poor families, who are unable to obtain these loans from the banking sector, in order to assist them in engaging in productive activities or grow their micro loans.
Sometimes micro-finance is known as the facilitation of various financial services (loans, savings, remittances, and insurance ... etc.) for groups that are unable to obtain these services from the banking sector.

Micro-finance considered an effective tool that:

  • Helps the poor improve their income and standard of living.
  • Provides more work opportunities.
  • Enables more sectors to create employment opportunities at a low investment cost, which makes it the best way to reduce unemployment and fight poverty.
  • Develops the national economy.
  • Upgrades the levels of knowledge through the empowerment of many women and men to complete the various stages of their education.
  • Reduces the maternal mortality ratio.
  • Reduces the mortality rate of children under the age of five.
  • Stops the spread of HIV / AIDS, malaria, and other serious diseases and address them.


2) A historical perspective on microfinance

In the 1970’s , a number of well-known micro-finance institutions, such as the Gramyin Bank in Bangladesh, the Bank of Sol in Bolivia, and the system (unit desa) in the Rakyat Bank in Indonesia, were established. In 1995, the World Bank founded the Consultative Group to Assist the Poorest (CGAP), led by Deputy Director of the World Bank, an Egyptian expert, Dr. Ismail Serageldin. 

In February of 1997, the summit of microfinance was held in Washington. This summit gave the impression that everyone would benefit from micro lending (a win-win situation). The 1990’s was called “the decade of micro-finance.” The United Nations declared 2005 the International Year of Microfinance.  

In 2006, the World Bank and its founder, Dr. Gramyin Muhammad Yunus, won the Nobel Peace Prize. According to the Nobel Committee, micro-finance can help people get rid of poverty, which is a prerequisite to reach lasting and continuous peace. The Nobel Committee said in its reasoning: "Lasting peace cannot be achieved unless large groups of the population are able to break out of poverty. Micro-credit is one such means."

Incidentally, criticisms of the writings of microfinance include the fact they are non-scientific writings, with most writings coming from the microfinance institutions themselves. For example, the statement made by the Nobel Committee included only one reference, which is the Bank Gramyin itself.


3) What are microfinance institutions (MFI)?

They are local financial institutions focusing on providing microfinance services, which include different types of institutions ranging between:

  • Official institutions, such as banks.
  • Semi-official institutions, such as cooperatives and non-governmental organizations and savings banks in villages.
  • Informal institutions, such as savings, credit, and lending.

These institutions access the poor and local low-income areas (according to their coverage area), and provide them with microfinance services, as well as sensitize local communities to illustrate the opportunities to improve their lives with microfinance. Moreover, they provide microcredit and other financial services, such as savings accounts and insurance, and collect weekly loan payments and help customers overcome some of the challenges of life they may face. It also provides many social services, such as basic health care for clients and their children.


4) Who are microfinance clients?

Typical microfinance clients are poor and low-income people, who do not have access to other official financial institutions. 

Microfinance clients are usually self-employed, household-based entrepreneurs. Their projects differ according to their area. For example, rural areas usually have small income-generating projects, such as farming and agricultural projects; whereas, those living in the city engage in other, more diversified, projects, and we find many shopkeepers, craftsmen, street vendors, etc. 

Microfinance clients are those who are poor or those who have no stable income. It is known that obtaining traditional financial services involves a number of requirements and conditions, as well as collateral that need to be met. Most of the time, this works against the poor, meaning the poorer you are, the less money you get to borrow. Also, the poorer you are, the more costly unofficial services are. What is more, non-official arrangements may not meet your financial services needs.

Hard data on the poverty status of clients is limited, but tends to suggest most microfinance clients fall near the poverty line, both above and below. Households in the poorest 10% of the population are not traditional microcredit clients, because they lack stable cash flow to repay loans. Most clients below the poverty line are in the upper half of the poor. It is clear, however, that some MFIs can serve clients at the higher end of the bottom half. Women often comprise the majority of clients.

Over the past decade, a few MFIs have started developing a range of products to meet the needs of other clients, including pensioners and salaried workers. Although little is known about the universe of potential clients, the number of households without effective access to financial services is enormous.


5)  Does microfinance help the poor?

Experience shows that microfinance can help poor people increase their income for the construction of ongoing projects and reduce their vulnerability to external shocks. It can be a powerful tool for self-empowerment by empowering the poor, especially women, and they become economic factors to change multidimensional poverty by providing access to financial services. 

Microfinance plays an important role in the fight against the many manifestations of poverty. For example, the income from a project not only helps expand the project activity, but also helps the family income and their access to food security, and education of children, etc. For women that are marginalized and deprived of their rightful place, dealing with official financial institutions can build self-esteem. 

Recent research has shown the vulnerability of people around the poverty line often results in a shock of pressure and great demands on the limited financial resources of a family, and the absence of quality financial services can lead to a family falling into extreme poverty that will take years to get out.


6)  When is microcredit unsuitable?

Microcredit may be unsuitable in circumstances where repaying a loan is an extreme challenge. For example, populations that are geographically dispersed or have a high incidence of disease may not be suitable microfinance clients. In these cases, grants, infrastructure improvements, or education and training programs are more effective. For microcredit to be appropriate, the clients must be able to repay the loan under the terms by which it is provided.


7) What is the difference between microfinance and microcredit?

There are two main differences between them. Microcredit refers to providing very small loans for unsalaried borrowers with little or no collateral that a not usually accepted by official financial services as they lack collateral or jobs. 

Currently, consumer credit provided to salaried workers, based on automated credit scoring is usually not included in the definition of microcredit, although this may change. Microfinance typically refers to microcredit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. As for microfinance, it provides the poor that are economically active with a group of financial and non-financial services, such as microcredit, savings, insurance, financial transfers, payables, training, consultations, etc. Poor people are like any others; they need a wide range of financial and non-financial services in order to build their assets and protect themselves from danger.


8) How do savings services help poor people?

Savings have been called the “forgotten half of microfinance.” Most poor people now use informal mechanisms to save, because they lack access to good formal deposit services. They may tuck cash under the mattress, buy animals or jewelry that can be sold off later, or stockpile inventory or building materials. These savings methods tend to be risky; cash can be stolen, animals can get sick, and neighbors can run off. Often they are illiquid as well; one cannot sell just the cow’s leg when one needs a small amount of cash. Poor people want secure, convenient deposit services that allow for small balances and easy access to funds. MFIs that offer good savings services usually attract far more savers than borrowers.


9) What are the most prominent microfinance institutions (MFI)?

Grameen Bank (GB) Bangladesh

Bank Rakyat Indonesia – Unit Desa (banque de village) – (BRI-UD) Indonesia

BancoSol (Banco Solidario) Bolivia

Fundación WWB-Colombia (FWWWB Cali) Colombia

ASA (Association of Social Progress) Bangladesh

Polli Karma Shahayak (Fondation pour l'emploi rural) Bangladesh

Fondation Réseau Covelo Honduras

Cambodian Association of local agencies for economic development ,Cambodia


10) What is the role of technology in the support of microfinance?

Technology provides an unparalleled opportunity to improve the lives of people in the world's poorest countries.

The Grameen Technology Center (GTC) creates innovative and sustainable solutions that introduce new efficient and innovative ways to reach out to international communities for development and microfinance. It began in 2001 and was based in Seattle, Washington. It is worth mentioning that the motivation for the establishment of the (GTC) was the early successes of the Grameen Phone, established by Professor Muhammad Yunus in Bangladesh. The (GTC) also focuses on the following technological aspects:

1) Assist micro-finance institutions to work more efficiently and effectively.

2) To provide poor communities with information on agriculture, health care, market information, and other services.

3) Create small business opportunities for the poor.

4) Link remote communities.

With the guidance of the advisory board of technology, Grameen Foundation has had a significant impact on communities around the world through the transfer and renewal of developed technology of the private sector and putting them to work for the financing of small enterprises and local communities for International Development.

“The individual poor person is an isolated island by himself and herself, but IT can end that isolation overnight.”

Professor Muhammad Yunus