THE IDEA BEHIND MICROFINANCE
There is considerable knowledge, drive and ambition among the poor in developing countries. A lack of access to finance, however, is very often a limiting factor preventing them from starting a business. Poor people cannot get loans from the mainstream banking system, as they usually don’t have collateral or a credit history. Even if you own or have the right to ownership of property, the lack of documentation or central registers (which is not uncommon in many poor countries), means conventional financial institutions are unable to use the property as collateral.
Microfinance is the provision of small loans to poor and low-income people, who can use this funding to build and develop businesses and to improve living and housing conditions.
Responsible and sustainable microfinance means borrowers need to have the ability to service and repay their debt. Microfinance is accordingly not directed at the extreme poor. Although collateral sometimes is provided in real estate and other assets, microfinance loans are usually given without collateral. The loans are typically individual loans but can also be given as group loans. The loans are normally short term. The loans are usually granted and monitored at the local level based on personal contact between the borrower and lender. Losses in well-managed microfinance institutions are normally between one and two percent of the loan capital.
Modern day microfinance has developed to encompass much more than just loans. Microfinance institutions typically offer a range of other financial services that improves the lives of the end customers. This includes things like simple payment and transfer services, savings and insurance.
Kolibri Kapital believes microfinance is an efficient way to help improve the lives of the poor because:
- Individuals are given the opportunity to make full use of their own resources and capabilities.
- People are seen as an equal and as independent individuals in charge of their own future rather than as charity work.
- It is not a one-off gift, but long-term support that grows with each individual as their needs change and develop.
- Microfinance improves and strengthens the economic understanding.
- Microfinance creates the foundations for sustainable, bottom-up development.
The role of microfinance is not to replace traditional development aid, but rather a tool for increasing financial inclusion and create the foundations of economic independence and growth.