Microfinance

Microfinance is a term that is applied to a wide variety of means of supplying small-scale finance to people who are unable to obtain it from conventional sources, including  microfinance institutions (MFIs) that require every borrower to be a member of a mutually-supportive group. Microfinance institutions are widely used to alleviate poverty throughout the developing countries and in Europe, the United States and Japan. Some are self-sustaining, but most are dependant upon subsidies or donations.

Definitions
The term microfinance has been applied  to many  of the informal sources of finance that are used by poor people  who cannot borrow money  from conventional banks. It has also  been used to refer specifically to the  supply of finance by "Microfinance Institutions" (or MFIs) to members of mutually supportive  groups. It is usually associated with institutions that involve the supply of finance from outside a group, as distinct from institutions that use savings that are  raised  within a group  (such as credit cooperatives, and rotating savings and credit associations  ), and  as distinct from organisations that  lend to independant individuals. It is not uncommon, however, for members of a single  group  to use  several informal sources of credit. The term is usually applied to the provision of credit, and is often referred to as "microcredit", but it is also applicable to insurance, money transfers and leasing. The term "Microfinance Investment Vehicle" (MIV) denotes a private entity which acts as an intermediary between investors and microfinance institutions. The term "inclusive finance" has been used to refer to the ideal of a financial system from which the poor are not excluded.

Microfinance Institutions
The best-known microfinance institution  is the Grameen Bank. It was launched as the Grameen Project in the village of Jobra, Bangladesh in 1976, and was given the legal status of a bank in 1983. Borrowers hold 95 percent of its equity, and the rest is held by the government of Bangladesh. Loans are financed from deposits, without subsidies or contributions from donors. Every borrower must belong to a five-member group and  individual borrowing is monitored by the group, but responsibility for repayment  rests solely  on the individual  and is not legally enforceable. Collateral is not required. Loans average $120 and totalled $750 million in 2009. The interest rates charged to borrowers are 20 per cent for income-generating loans, 8 per cent for housing loans and 5 per cent for student loans, and interest-free loans are granted to "struggling members" (beggars). The interest rates paid to depositors range from 8.5 per cent to 12 per cent. The bank has over 8 millon borrowers in Bangladesh, 97 per cent of whom are women. Its Grameen Trust also provides training, funds  and technical assistance  to replica programmes in other countries. By the end of 2010 it had supported 141 replication partners in 38 countries.

Other MFIs differ widely in size, scope, and source of finance. Some are financial cooperatives, funding their lending from members’ loans and deposits. Others have acted solely as intermediaries that channel funds from donors or  from commercial sources. Some have developed from intermediaries into self-sustaining deposit-taking institutions, and some have formed  ties with commercial banks. Some have achieved sustainability by serving borrowers that are above the poverty line, but those that have concentrated upon lending to the very poor have tended to remain dependent upon donations. Estimates of the number of borrowers worldwide range from 133 million (2007) to 190 million (2004.

MFIs operate in very nearly every developing country, and also in Europe , the United States, and Japan. There are several sources of information about individual MFIs. The Microfinance Information Exchange lists 1800 MFIs in over 120  countries in Africa, Latin America and The Caribbean, East Asia and the Pacific, the Middle East and North Africa, Eastern Europe and Central Asia, and South Asia. Performance data for more than 1000 MFIs reaching over 85% of known microfinance borrowers are available from the Microfinance Information Exchange and information about interest rates is being collected by the MFI Transparency organisation

Sponsorship and funding
In February 1997, the first Microcredit Summit  - a meeting of heads of state attended by 3,000 participants from 137 countries - agreed upon  the objective of providing access to microcredit to 100 million of the world’s poorest families by the end of 2005. In July 2003 a meeting of the United Nations General Assembly adopted a programme of action  for the International Year of Microcredit, 2005,  and in 2005 the Microcredit Summit extended its target to 175 million by the end of 2015.

A survey of 150 microfinance donors, investors and microfinance investment vehicles showed their total commitment to have reached $21.3 billion at the end of 2009. Public sector funds predominated, but there was also a substantial private sector contribution. A survey of 78 private-sector microfinance investment vehicles, showed their total investment in the period 2005-2009 as over $6 billion, of which $4.2 billion had been contributed to microfinance projects (the balance of their investors' funds being held in reserve as liquid assets).