Microfinance FAQs and Resources
Microfinance FAQs | Resources

What is Microfinance?
Microfinance is the most powerful tool we have identified to help the very poor, those living below $1 a day, rise above poverty with dignity1.

Most commonly, it involves making small loans to poor women to enable them to start and grow businesses. The additional income from the business helps a poor family to buy food, access basic healthcare, educate their children, save a little and work towards a better future. Many of them, in due course, pull themselves out of poverty.

Microfinance is one of the poverty alleviation mechanisms that the United Nations Millennium Development Project has adopted to meet its goal to eradicate poverty.
Wouldn’t the poor rather have a donation than a loan?
Maintaining human dignity is at the core of microfinance. The poor are poor not because they are lazy or incapable of hard work – they are poor because social and economic conditions make it virtually impossible for them to escape poverty. Most poor people work very hard merely to survive. They are entirely at the mercy of moneylenders who charge usurious interest rates that ensure that the poor keep coming back to them. A microfinance loan enables the poor to reap the benefits of their own hard work, and create a sustainable source of revenue for themselves and their family.

Microfinance borrowers prefer loans to a charitable handout, because they understand that by repaying the loan, they are creating a credit history that will enable them to access larger loans in the future.
What is the demand for Microfinance?
It is estimated that at least 1.5 billion people – or half of the total 3 billion working poor in the world – are in need of micro-loans of some kind2. Microfinance Institutions (MFIs), however, serve just a little over 100 million working poor2. Thus, the potential demand for microfinance is exponentially larger than the population already served by microfinance institutions.
What are Microfinance Institutions (MFIs)?
Microfinance Institutions (MFIs) are institutions that provide small loans to the poor in the area in which they operate. MFIs vary in structure, sophistication, philosophy, size, scope of services and scale of operations. Most MFIs are non-profit organizations, but some MFIs are also for-profit institutions.
Do microfinance institutions (MFIs) provide services other than making microloans?
In addition to making microloans, most MFIs also provide other financial services like insurance, micro-mortgages and savings products. Some MFIs also provide social services like healthcare and education, and most MFIs encourage their borrowers to invest some of their income in providing better education for their children, and improve nutrition and sanitation for themselves and their family.
Why do banks not lend directly to the poor?
Banks typically do not lend without collateral, and the poor do not have access to any collateral acceptable to the bank. Further, since the small size of the loans make the transaction cost of servicing the loan proportionately very high, banks do not want lend directly to the poor. However exceptions to this norm do exist such as the self help group lending program in India, wherein banks lend directly to the poor who borrow as a self help group. To know more about self help groups, visit http://www.edarural.com/documents/SHG-Study/Executive-Summary.pdf
Do MFIs have sufficient access to funds?
Current funding of MFIs is estimated at $17 - $20 billion but an estimated funding of $250-300 billion is required to meet the potential demand3. The problem is further compounded by the fact that most of the donor resources and financing is cornered by larger MFIs, and small and mid-sized MFIs face severe constraints in raising funds.
What does a typical microfinance loan look like?
A typical microfinance loan is small (normally between $30 and $250) and involves a weekly repayment plan. Microfinance loans do not require collateral.

Often, borrowers would have to form groups wherein either the borrowers guarantee each other’s loans, or where the group as a whole also maintains a savings account with the MFI. Some MFIs even require their borrowers to establish a savings pattern before they can receive loans.

Microfinance loans are mainly used by borrowers to start or expand businesses such as buying wholesale goods to sell in markets, making and selling crafts, raising poultry and farming. Profits from these businesses enable borrowers to repay loans, meet their basic needs and improve their daily living conditions.

Repayment of loans and interest from borrowers allows the microfinance institution to make subsequent loans to the working poor, multiplying the value of each dollar in breaking the cycle of poverty.
Why are the majority of microfinance borrowers women?
When Nobel Laureate Prof. Mohammad Yunus started the Grameen movement in the 1970s, he concentrated on lending to women not only because women constituted the poorest of the poor, but because he realized that women were more likely to think of the family needs, and reinvest their profits in improving the quality of life of their family.

Today, the majority of microfinance borrowers (84%)4 are women. In Bangladesh for instance, women have shown to default on loans far less often than men and enjoy a better credit rating than men.

Women also benefit more greatly from microfinance services. As they become wage earners and start managing loans and savings, their status in the family and the community improves, and they are able to assert themselves more. Further, after meeting the basic needs of their family, women start investing their earnings in education, healthcare and nutritious food, thereby making it more likely that future generations will break free from the cycle of poverty.
What is the typical process of making a loan to a poor entrepreneur by the MFI?
Making loans to poor entrepreneurs is an extremely lengthy, elaborate and people intensive process. The stages it goes through typically include5:

Village Selection:
The branch manager of the MFI does a village survey and thereafter selects certain villages where there is scope for promotion of groups. A number of village meetings are conducted in the selected villages.

Group Formation and Training:
After a number of meetings, one or more groups are formed. Each MFI has its own norm for the number of members in a group. A number of MFIs have a norm of 5 members per group. Each group usually has two leaders. On forming a group, the MFI field officer commences training of the group members and the group leaders. On completion of the training, a Group Recognition Test (GRT) is held. As part of the GRT there are visits to the residences of the members. The field officer’s supervisor may also be involved in the GRT. The members are tested on MFI principles taught during the training.

Appraisal, Documentation and Disbursement:
On successful completion of GRT, the field officer at the next group meeting brings the prepared documents and members sign them. The cost of stamp paper, revenue stamp, photograph, copies of documents if applicable is shared by group members. At the next meeting disbursement of the loan takes place. In some MFIs all members receive the loan amount simultaneously after documentation while in others some members receive it initially and other members after two weeks.

Monitoring and collection:
The field worker after disbursement makes loan utilization checks (usually one or more depending on the MFI norms). The loans are usually for a period of 50 to 55 weeks with weekly collections. Hence the groups meet every week.
What is the typical day of a MFI field officer?
Supporting poor entrepreneurs is very hard work as can be seen from a typical schedule of a MFI field officer5.

6.30 a.m.Report at the branch office/ Collect cash for disbursement if needed
6.30 a.m. to 7.00 a.m.Travel to the field
7.00 a.m. to 9.00 a.m.Group Meetings one after the other each lasting about half an hour each
9.00 a.m. to 9.30 a.m.Breakfast
9.30 a.m. to 10.00 a.m.Travel back to office
10.00 a.m. to 1.00 p.m.Bank work/ Administrative work like filling up registers/ vouchers/ Reporting to Branch head
1.00 p.m. to 3.00 p.m.Lunch Break
3.00 p.m. to 4.00 p.m.Administrative work
4.00 p.m. to 4.30 p.m.Travel to the field
4.30 p.m. to 7.00 p.m.Village meetings for motivation for group formation/ Group Training for newly formed groups
7.00 p.m. to 7.30 p.m.Travel back to branch office
7.30 p.m. to 8.30 p.m.Planning for next day
Why do some Partners post group loans?
Group loans are a powerful innovation in microfinance, because they are less expensive for Partners to manage in terms of time and resources. In a group, MFIs can leverage the local knowledge of individuals to select good borrowers; disburse many loans at once; collect repayments in a group; and more easily follow up on delinquent loans, as group members have an incentive to work with each other to ensure on-time repayment. By using these efficient aspects of group lending, MFIs can issue more loans in smaller amounts to the poorest.
How does a group loan work?
In a group loan, each member of the group receives an individual loan but is part of a group of individuals bound by a 'group guarantee' (sometimes called 'joint liability'). Under this arrangement, each member of the group supports one another and is responsible for paying back the loans of their fellow group members if someone is delinquent or defaults.

  1. Muhammad Yunus, Founder and Managing Director, Grameen Bank Fazle Abed, Founder and Chairman, BRAC, http://www.microcreditsummit.org/enews/2004-06_nytimes.html
  2. Gonzalez and Rosenberg (2006), “The state of Microfinance” and CGAP occasional paper #8 (2004)
  3. http://www.seepnetwork.org/files/4702_file_Optimising_Capital_Supply_in_Support_of_Microfinance_Industry_Growth.pdf
  4. http://www.microcreditsummit.org/pubs/reports/socr/2006.htm
  5. Transaction Costs in Group Micro Credit in India: Case Studies of Three Micro Finance Institutions, Savita Shankar, Institute for Financial Management and Research, Centre for Micro Finance, Working Paper Series, August 2006
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