Microfinance describes financial services that target individuals and small businesses that otherwise lack access to banking services. Microfinance covers microcredit i.e. the provision of small loans to people with low income; savings and checking accounts; and payment systems.
Microcredit is not a new concept. Groups have organized themselves for generations pooling resources together in order to save and invest. It was also on these informal structures, Muhammad Yunus, one of the most known persons in microfinance and receiver of the Nobel Peace Prize in 2006, built on when he founded the Grameen Bank in the late 70s in Bangladesh. Microcredit were given to individuals, however, the entire group was jointly held responsible for the loan repayment. *
Critique of microfinance
Microcredit and its effects has since been a disputed topic. Multiple studies have shown that microfinance cannot stand alone as a tool for creating economic development in low income countries. While microcredit is not a panacea for poverty eradication, it is an essential concept for the well being of end users. Without microfinance institutions most people in rural areas would not have any access to saving and checking accounts or small loans for building businesses or making larger payments such as tuition fee. Microfinance can also increase stability during uncertain times by providing people in dire situations an access to a much needed loan. **
The future of microfinance
One of the main points of criticism of microfinance is that not everyone qualify or should qualify for a loan and that it is difficult for the microfinance institutions to make the assessment of whom to provide loans to. Many people have little to no interaction with microfinance institutions. This means that microfinance institutions have limited access to data about these potential customers making it difficult to access their creditworthiness.
Various types of new technology across the world is providing opportunities for savings and transfers. New technology also provides new opportunities in the space of microfinance and serving people that are unbanked. jamiipay is developing a digital platform that allows savings groups to register their savings and loans activities to build a digital record that will make it easier for microfinance institutions and banks to access which customers and groups to provide loans to. In addition, microfinances will gain the advantage of accessing customer data without the need to open branches near the end customer.
* ”Financial Inclusion in Africa: Obstacles and Opportunities”, Demirgüç-Kunt, Klapper, and Oudheusden, The Oxford Handbook of Africa and Economics: Volume 2: Policies and Practices, 2015
** “Community – Level Impacts of Financial Inclusion in Kenya with Particular Focus on Poverty Eradication and Employment Creation”, Matu Mugo and Evelyne Kilonzo, Central Bank of Kenya, 2017