"I wanted to give money to people like this woman so that they would be free from the moneylenders to sell their product at the price which the markets gave them - which was much higher than what the trader was giving them."
- Muhammad Yunus, 2006 Nobel Peace Prize Winner

What is Microfinance?

Microfinance is a term that describes providing financial services to low-income entrepreneurs, often in the developing world. The provision of small loans to these individuals is called microcredit. Traditional banking services and loans are usually not a viable option for these potential borrowers because they often do not have assets that can be used as collateral and smaller loans are simply not profitable for the banks to maintain.

On the other and of the scale are informal money lenders who usually charge exorbitant rates. According to research done by CGAP (Consultative Group to Assist the Poor) the median rate charged by these lenders was 10-20% per month, with rates of 10-20% per day reported in some countries.* On an annualized basis, 10% per day translates to interest rates of 3650% per year!

Microfinance fills these gaps and enables individuals to have a safe place to store their money thereby providing a cushion against unexpected events. Microcredit opens up new possibilities for these entrepreneurs – very small loans can make a disproportionately large impact. Despite the lack of collateral, microcredit has very high rates of loan repayment – averaging between 95 and 98 percent, which is higher than credit card and student loan debt repayment rates in the United States.

While he did not invent the concept of microcredit, Muhammad Yunus is credited with bringing it to the mainstream through his microfinance organization Grameen Bank in Bangladesh. Yunus was awarded the Nobel Peace Prize in 2006.

* http://www.cgap.org/gm/document-1.9.9534/OP15_rev.pdf