Microfinance offers the working poor a chance to escape from the “poverty trap” by providing them with a wide range of financial services, including access to capital.

A brief history of microfinance

Microfinance was developed – in its modern form – during the 1970s in Bangladesh by the Grameen Bank. Dr. Muhammad Yunus, Grameen’s founder, was awarded the Nobel Peace Prize in 2006 for his work to help vulnerable, self-employed women lift themselves out of poverty. Grameen introduced the method of solidarity groups, whose members – generally women – are mutually responsible for each other’s loans.

Since then, microfinance has grown being embraced by many major financial and development institutions as an important tool to fight against extreme poverty. The United Nations and other global actors declared 2005 to be the International Year of Microcredit and initiatives were taken to “build inclusive financial sectors to achieve the Millennium Development Goals”.

An increasing amount of private sector investors have recently taken an interest in this field and started funding microfinance programs and activities. Microfinance has since then grown significantly, and the 2014 edition of the Microfinance Barometer published by Convergences reports that the 1,252 microfinance institutions reporting to the MIX worldwide lent over US $ 81.5 billion to 91.4 million customers in 2012.

The Microfinance “Ladder”

Over the years, microfinance has demonstrated that it can play a pivotal role in helping the working poor break out of economic and social isolation. This “graduation” process, as it is often called, is difficult and slow.

Micro-loans typically ranging from US$ 10 to US$ 3,000 are made available to micro-entrepreneurs to support and expand their income generating activities. Projects financed include farming, livestock rearing and breeding, small trade, handicrafts, services, small restaurants, and many other forms of entrepreneurial activities.

The most successful businesses eventually evolve into more sophisticated small enterprises that employ people outside the owner’s family and produce a broader range of products that are sold in larger geographic areas. MFIs are ideally placed to reduce the “financing gap” that these small and medium enterprises face before reaching a scale more attuned to the mainstream financial markets.

According to the Consultative Group to Assist the Poorest (CGAP), an independent policy and research centre dedicated to advancing financial access for the world’s poor, “Financial services for poor people have proven to be a powerful instrument for reducing poverty, enabling them to build assets, increase incomes, and reduce their vulnerability to economic stress.”