What is microfinance?

This seems like the most obvious place to start my blog named "The Vast World of Microfinance". Microfinance is giving permanent access to a full range of financial services from savings, loans, and money transfers to the poor. This was mainly developed because many conventional banks do not allow the poor to use any of their services because they do not own anything to use as collateral for loans or have enough money to start a savings account. Before microfinance took off in the 1970s the poor were mainly using loansharks and local collectors for their financial services needs. These local players would charge huge interest rates and fee for their services. These informal relationships put many of the people involved at risk of losing all of their money or being exploited. That is why it is vitally important for formal organizations and companies offer these financial services to the people that desperately need it.

But microfinance is not a new concept. There have been local funds and cooperatives that date back to the 1700s. The Irish Loan Fund system was one of the earliest signs of banking for the poor rural people of Ireland. It started off very slowly but by 1894 it had over 300 funds across Ireland and their main purpose was to give small loans at a low interest rate for short periods of time (Global Envision). Throughout history there were many more examples of these funds created mostly by the rural and urban poor. By the late 1800s there were many examples of microfinance in all over the world from Europe to Asia. One of the most prominent microfinance institution during that time was the Indonesian People's Credit Banks that had close to 9000 units across all parts of Indonesia. Microfinance has a rich history and it has evolved over the centuries into the buzz word in the present.

Many times microcredit is taken as the same thing as microfinance. Microcredit is just a part of microfinance but in my opinion the most important part. Many microfinance banks start from microcredit and process of lending small amounts of money to the poor. In fact that is how the modern version of microfinance began in many parts of the world in the 1970s. Around the 1970s a few countries had experimental programs to try to use microcredit to help people get out of poverty. The three main projects that paved the road in the 1970s were ACCION International, SEWA Bank, and the Grameen Bank. The projects were based in Nicaragua, India, and Bangladesh respectively. Let us take a deeper look into one of the best known projects, the Grameen Bank in my following post. Till then please keep checking back.