What Is Microfinance?

• Microfinance is a financial system that gives very small loans to the working poor in developing countries to allow them to improve their businesses without having to pay unmanageable interest rates. The loans are generally less than $200 and are accompanied by support and education for the recipient. People who receive the loans use the money to establish or expand businesses that create income for their families to feed, house, educate and provide health care for their children. They can also put aside money for a better future.
  
  

History of Microfinance Banks

• Back in 1974, Yunus funded his microfinance efforts with $27 that he loaned to 42 people in Jorba. They not only paid back his loans, but they also took significant steps to improve their lives and secure a better future. When his success became known, many organizations began to provide small loans to the poor in developing countries. In the beginning, loan money came from private donations and government grants, but as news of their success grew, so did interest in microfinance as an investment. Today, major banks such as Deutsche Bank and Citigroup offer products and services that allow investors to share in the profits of microfinance banking, reports MicroPlace.
  
  

How Microfinance Works

• Microfinance organizations seek out motivated small businesses that could benefit from the additional training and support that the organizations provide along with the loan. These business owners work hard to repay their loans and take great pride in doing so. Many of these small businesses are run by women, about 84 percent of whom get increased status from their renewed successes as providers for their families. Loans are small and suitable to the business being supported, and interest rates are below those found in ordinary financial channels in these countries.
  
  

Profitability of Microfinance Banks

• In some countries, governments compel banks to provide microfinance loans to tiny businesses and agricultural enterprises. Increasingly, innovative and socially conscious banking institutions are entering the microfinance market on their own because of the growth opportunities. Not only are recipients highly motivated to repay the loans, but their success also spurs others to seek loans, increasing the client base and bringing returns on these loans that provide favorable profit margins, according to the United Nations Capital Development Fund.
  
  

Where Microfinance Banks Do Business

• Microfinance institutions can be found in Bangladesh, Indonesia, India, Pakistan, East Timor, Yemen, the Philippines, Saudi Arabia, Peru, Honduras, Mexico, Haiti, El Salvador, Nigeria, Uganda, Ghana, Rwanda, Morocco, Ethiopia and Egypt.