Definition of microfinance

Definition of microfinance, what is microfinance?

Definition of microfinance:

Historically, microfinance mostly refers to micro-credit. A micro-credit corresponds to a credit of low amount destined to people having little or no income.

What is often lacking in emerging countries are not initiatives to get by, but money necessary to start your company. To respond to the needs of those atypical customers, microfinance institutions have put in place services, financial products and non-financial products that are important tools to combat poverty. In turn, microfinance is a means of reaching autonomy.

Read the Definition of Inclusive Finance

Microfinance is mostly present in emerging countries and in developing countries (namely in Africa and in Latin America).

The entirety of financial services that derive from it have contributed to sensibly improving living conditions of the populations, in particular by increasing the access to the banking system of certain countries. Those services are one of the success factors of Sustainable Development Goals, because they favour and increase entrepreneurship among other things.

What is the origin of microfinance?

Microfinance as we know it today, has been popularised by Muhammad Yunus, winner of the Nobel Peace Prize in 2006. Dr Yunus referred to as the ‘banker of the poor’ has been the founder of the first micro-credit institution, the Grameen Bank in 1976 in Bangladesh. But formally, other bodies had already existed even in Europe. For example we can cite Raiffeisen founded in Switzerland in 1849, the first savings and credit cooperative. Then the ‘Caisse du Crédit Mutuel’ is created in Strasbourg in 1849, strongly inspired by the Swiss model.

Beyond the institutions that have taken on a banking character, informal systems have existed indeed. One of the most known being ‘la tontine’. It is a group of people that regularly meet and that save together in order to then invest in a project or to meet the needs of a saver. Each individual thus benefits from a saving during their lifetime. This will of course have to be refunded within a given period.

What is the difference between Microfinance and Inclusive Finance?

Inclusive Finance goes beyond Micro Finance, which is too often confined too simply to Micro-Credit. To find out more, visit our page dedicated to the definition of inclusive finance.

Read the Definition of Inclusive Finance

The microcredit

Often the first and only product proposed by the MFIs, Micro-Credit has been considerably democratised. Even though vast differences exist between countries,

A Micro-Credit is used on the one hand to finance an activity generating income and on the other hand to improve living conditions of the household (paying school fees, buying furniture, clothes etc.) on the same terms as a consumption credit.

The amounts of microcredit vary greatly depending on the countries, the MFIs and the social economic situation of the country concerned. Microcredits can go from a few Euros to hundreds or thousands of Euros.

If you wish to have a precise view on the Microcredit and on the impact of Microfinance in the world, we invite you to download the 2018 Microfinance Barometer. The Barometer sums up the tendencies of the Microfinance sector worldwide, it gives visibility to the initiatives having a strong social impact and promoting the good practices of the sector.

The credit agent

The credit agent works for a microfinance institution and is the direct link to the client. A trustworthy relationship is essential! The credit agent is a man of ground. He is lead to travel daily with the available means of transport (motor bike, car or by foot) in order to meet the clients. Very often, the entrepreneurs are situated are couple of kilometres ways from the MFIs. It is therefore vital for a credit agent to meet them at their workplace or home.

He has multiple roles. He recuperates the refunds of ongoing credits, proposes new services, grants credits and also helps families to manage their money. In doing so he also plays the role of an educator.




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