Here are some FAQs about microfinance. If you have a question that isn’t answered, please be sure to tell us (through the comment form below) and we’ll answer it for you as soon as possible.

What is Microfinance?

In the simplest of word, microfinance is giving loans to the poor. In other word, it is the provision of financial services (such as deposits, loans, payment services, money transfers and insurance) to poor, low-income clients who do not have access to traditional banking services. You can read a more detailed definition of microfinance (including sources and problems) here.

What are Microfinance Institutions?

The definition of the term ‘Microfinance Institutions’ (MFIs) is, parties who provide microfinance services, such as loans, micro deposits and micro insurance.  They may include microfinance banks, non-governmental organizations and even money lenders, so it’s easy to see MFIs come in three forms: formal, semi-formal and informal microfinance providers. You can view a list of microfinance institutes around the world.

What are Microfinance Banks?

The definition of the term ‘Microfinance Bank’ is, any bank that deals purely in the area of microfinance by offering services such as credit, savings, insurance, and money transfers to the poor. The bank’s customers come from low-income groups and are often victims of poverty, therefore the size of the loan is typically $3,000 or less (this obviously varies from country to country). You can see a list of microfinance banks around the world here.

What are Microfinance Enterprises and What is Micro Entrepreneurship?

The definition of the term ‘Microfinance Enterprises’ is, any low-income and small-scale start-up or venture that seeks services related to microfinance. The person running the business is called a micro entrepreneur and he is said to be exploring the field of micro entrepreneurship (enterprising at a very small scale).

What are the Basics of a Microfinance Setup?

The basic microfinance setup involves some sort of a money lender, such as a bank (this is the supply side) who loans money to an individual to start-up and/or run her business (this is the demand side).

The nature of the individual’s businesses is very simple and usually involves making handicrafts or growing crops at a small scale to sell them. The individual will obviously have to return the loan (often with an added interest expense) over time. You can view a complete definition of microfinance here.

What is Group Lending?

Microfinance Providers often use a technique called group lending where they loan money out to individuals in a small social group. This services two purposes:

• Social Collateral: If any member of this group defaults on the loan, no one else in the group may receive the loan again. Thus by enforcing social pressure, each borrower is forced to keep up on his repayments of the loan.This isn’t typical of all MFIs, however.
• Cooperation: If any member of this group faces some sort of hardship related to her business or personal life, others in the group are expected to help that person and repay the loan on his/her behalf. This induced brotherhood encourages the simultaneous growth of the businesses of all members, which ultimately protects the MFI as well.

You may be interested to know about two basic types of group lending.

What is Micro-insurance?

Micro-insurance is a service that protects poor people against certain risks in return for a fee (premium). The service is offered to low-income individuals and businesses (usually called micro entrepreneurs and micro enterprises, respectively) and is characterized by:

• Low insurance premiums – this is a regular fee paid by a client (policy holder) to the insurance firm for the guarantee that the insurance firm will cover the client’s expenses or losses in case they occur (e.g. a cow gets stolen). Micro-insurance needs low premiums to make it affordable to micro-entrepreneurs.
• Low insurance coverage limits – this is the maximum amount of expenses a micro-insurance firm will cover in case of a certain event or over the life of a policy. Any costs beyond the coverage limit must be paid for by the client. For example, if a farmer’s total loss goes up to $200 because his crop field got destroyed as a result of a drought, the micro-insurance firm may only compensate him for half this amount.

You can read more about micro-insurance here.

What is Mobile Banking and How is it Related to Microfinance?

A recent revolution, mobile banking (a component of branchless banking) is the provision of banking services (loans, savings, money transfer, etc.) through mobile phones using the SMS facility or a downloadable mobile money application. Bank branches are still used, but remain in the background, hence, ‘banking beyond branches’ is a better phrase.

This model of microfinance is the opposite of community based microfinance, which is the traditional method of reaching out to the poor through the establishment of microfinance banks in various communities. The collaboration between the financial and telecom sector is an ideal solution for microfinance because ‘there are about 1 billion people across Asia, Africa and Latin America who do not have a bank account but do have a cell phone’ (CNN). You can read more about mobile banking and microfinance here.

As a result, group lending is a popular solution to the high risk MFIs face, one of the many challenges in microfinance.

What is the Bank-Led Model in Mobile Banking?

The bank-led model in mobile banking is composed of a partnership between mobile network operators (MNOs, or telecom companies) and commercial banks/microfinance banks. The bank handles the details of financial services (savings, money transfers, loans, insurance, etc.) and the telecom firm handles the technology elements (i.e. the delivery of these services through mobile phones). Read more about mobile banking technology in microfinance.

This model is the opposite for the non-bank let model, where simple money transfers are handled entirely by the telecom firm, and the bank may only enter the picture as a safe-keeper of excess funds in the system. In this case, telcos may not be permitted to offer loans to the poor, or savings products.

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