Microfinance refers to the provision of financial services to people of concern to DRC. These may include individual micro-entrepreneurs as well as groups of entrepreneurs in need of financial capital. Most humanitarian agencies differentiate between ‘micro-credit’ - the provision of credit, and ‘microfinance’, which includes savings, business advice and other financial services, often within a wider framework that also includes training.
Microfinance targets predominantly poor people, who are not eligible to ordinary banking services. However, credit and saving services are predominantly provided to economic active persons that need assistance to build up a sustainable source of income.
While the ideal ‘style’ of microfinance is to establish a sustainable interest-bearing scheme that is able to cover both running costs, including non-repayment losses, and inflation, DRC has successfully implemented various forms of ‘soft’ loans. In these cases and depending on a thorough assessment of skills and opportunities involved in the activity, interests can be lower or non-existing, grace periods can be negotiated, or
loans can even be given in combination with start-up grants.
Although grants and microfinance appear to be closely related to one another, they relate to relatively different approaches to humanitarian work: grants target vulnerable beneficiaries, microfinance is meant for capable and productive beneficiary groups; whereas DRC ’s expectations to the long-term sustainability of grant-financed activities are relatively limited, microfinance is ideally and practically meant to have a lasting impact on the household economy of the beneficiary; while grants are social welfare, microfinance is development.
Unless DRC targets groups of very vulnerable beneficiaries in poor economic environments, grants are more suitable as transitory tools and should ideally be replaced by more sustainable means of income generation. Contrary to what is frequently put forward as ‘best practice’ in microfinance, DRC has successfully implemented both grants and microfinance under the same programme. In that case, clear criteria for grants versus credits are critical, if grants are not to affect negatively clients’ repayment attitudes.
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