How to start a microfinance bank

how to start a microfinance bank

Back to Basics

Microfinance: Banking for the Poor

Mufiya Khatoon—a poor, illiterate young woman in rural Bangladesh—used to spend her days begging for a few ounces of rice to feed her children. She desperately wanted a livelihood, but lacked the funds to start a small business, and there was nowhere she could borrow on terms she could afford. That is, until she discovered Grameen Bank, one of the first microfinance institutions (MFIs), which set up shop in rural Bangladesh in the wake of the 1976 famine. In 1979, Grameen made Mufiya a one-year loan of 500 taka (about $22), enough to start a bamboo business. To qualify, she had to form a group with four others in similar circumstances. She paid an interest rate of 20 percent, with repayments of 2 percent of the loan each week. Stiff terms perhaps, but better than the 150 percent interest rate a local money lender would have demanded. Mufiya was able to start her bamboo products business and, one year later, she repaid her loan. She is better off materially and more in control of her own destiny.

Microfinance gave Mufiya—as it did to millions of other poor people with no credit history, collateral, or steady income—access to basic financial services. Half of the world's population, nearly three billion poor people, lack such access. Most mainstream banks have considered the poor high-risk and hard to serve because they often live scattered across remote areas and because the small loans they need are costly to make and maintain. But microfinance, which specializes in providing small loans and other financial services even to the world's most destitute, challenges those traditional assumptions.

In the past three decades, microfinance has mushroomed from Grameen's tiny nonprofit experiment in Bangladesh to a global industry. Grameen Bank and its founder Muhummad

Yunus won the 2006 Nobel Peace Prize for pioneering efforts to provide financial services to the poorest of the poor. Many enthusiasts believe microfinance is an important tool in the effort to end world poverty. Whether they are right is still open to question.

The current landscape

Today, microfinance players include governments, philanthropists, social investors, and commercial banks, such as Citicorp and ING, that are attracted by the potential for profit and corporate social responsibility. Customers can still go to a Grameen-type bank, but they can also go to microfinance credit unions, public sector and commercial banks, and, relatively recently, Islamic banks (which apply Islamic financial principles, such as risk sharing). Besides tiny business loans, MFIs offer deposit, savings, pension, and insurance products. Microinsurance is growing because borrowers need to insure assets such as farming equipment that they purchase with microcredit. In fact, MFIs are as important in providing savings vehicles and transaction services as they are in lending.

Microfinance customers live in both rural and urban areas—the rural poor borrow for cattle fattening, dairy farming, bamboo making, or weaving, whereas the urban poor borrow to become street vendors, rickshaw drivers, or seamstresses. Moreover, microfinance has moved well beyond its roots in developing countries—some MFIs now serve poor people in industrial countries.

Still, reliable data are hard to come by. The number of MFIs operating today is estimated to range anywhere from 300 to 25,000, depending on the definition. The Microfinance Information eXchange (MIX), known as the "Bloomberg" of microfinance, reports on nearly 1,000 microfinance institutions worldwide, nearly half of which are self-sustainable. The number of borrowers is hard to pin down, with estimates ranging from 30 to 500 million. The Washington D.C.–based advocacy group Microcredit Summit Campaign verified more than 64 million worldwide in 2006, up from more than 9 million borrowers in 2000 (see table). Many more millions of poor people have their savings in MFIs.


Category: Payday loans

Similar articles: