Microfinances

1. What is microfinance?
"Microfinance is the supply of loans, savings, and other basic financial services to the poor." ([|CGAP]) As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term "microfinance" helps to differentiate these services from those which formal banks provide. Why are they small? Someone who doesn't have a lot of money isn't likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – "micro". 

2. What is an MFI?
A microfinance institution (MFI) is an organization that provides microfinance services, ranging from small non-profit organizations to large commercial banks. "Historical context can help explain how specialized MFIs developed over the last few decades. An MFI can be broadly defined as any organization—credit union, down-scaled commercial bank, financial NGO, or credit cooperative—that provides financial services for the poor." ([|CGAP]) "The World Bank estimates that there are now over 7000 microfinance institutions, serving some 16 million poor people in developing countries. The total cash turnover of MFIs world-wide is estimated at US$2.5 billion and the potential for new growth is outstanding." - [|Data Snapshots on Microfinance - The Virtual Library on Microcredit]
 * 1950s and 1970s, governments and donors focused on providing subsidized agricultural credit to small and marginal farmers, in hopes of raising productivity and incomes.
 * 1980s, microenterprise credit concentrated on providing loans to poor women to invest in tiny businesses, enabling them to accumulate assets and raise household income and welfare. These experiments resulted in the emergence of nongovernmental organizations (NGOs) that provided financial services for the poor.
 * 1990s, many of these institutions transformed themselves into formal financial institutions in order to access and on-lend client savings, thus enhancing their outreach.

3. Why don't these people just go to a bank?
"The poor rarely access services through the formal financial sector. They address their need for financial services through a variety of financial relationships, mostly informal." ([|CGAP]) Why is this? For a moment pretend that you are a poor goatherder walking into a bank: Formal financial institutions were not designed to help those who don't already have financial assets – they were designed to help those who do. Imagine trying to get a loan in the United States without any savings, an employer or a credit report. So what do poor people do? "Credit is available from informal commercial and non-commerical money-lenders but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and mutual insurance societies that have a tendency to be erratic and insecure." ([|CGAP])
 * You don't have any money to open a savings account with
 * You don't have any collateral to secure a loan with
 * You don't have a credit record as you have never been formally employed and you've never taken out a loan before
 * You might even be unable to complete the necessary paperwork as you are illiterate.

4. Why don't banks accommodate poor people?
Some do. [|Grameen Bank] in Bangladesh was formed out of a project providing small loans to women in the village of Jobra. [|Bancosol], a commercial bank in Bolivia, is also a bank which provides microfinance services for the poor of Bolivia. However, the majority of formal banks do not provide microfinance products as microfinance is an expensive enterprise – you can make a lot more money on a large loan than a small loan, and you won't make much money holding savings accounts with very little funds in them. Banks can make more money if they only provide financial services to those who already have money. 

Information from [|www.kiva.org], microfinances section.