What is Microfinance?

Microfinance is a system of financial services provided to the poor designed to help them escape poverty. The microfinance movement was pioneered in Bangladesh in the 1970s by Muhammad Yunus and the Grameen Bank. Yunus and the Grameen Bank were jointly awarded the Nobel Prize in 2006.

Microfinance continues to expand, mostly in developing nations. It consists of a number of different financial services that traditional banks do not provide to poorer people including microcredit (loans of between 50 to 500 dollars for start up business ventures), saving and insurance services, and sometimes training in financial management.

Microfinance is grounded in the belief that many poor people remain poor due to a lack of credit and other financial services—and, conversely, that small capital injections can enable significant economic and social improvements for borrowers. Microfinance relies on the thriftiness, reliability, and entrepreneurial vision of poor borrowers—qualities that have been demonstrated innumerably.

When operated responsibility, microfinance can fill the gap left by traditional banks, while significantly lowering borrowing costs for small entrepreneurs—in some cases, by a factor of ten or more. Though the amounts of money are small, they can have great impact on people’s lives. A loan of US$100, for example, might allow an unemployed woman to open a roadside food stall, buy raw materials at lower cost, or purchase extra livestock—and those profits, in turn, can be invested to increase the educational opportunities, health, and nutrition of an entire family.