Microfinance and Micro-Credit.

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Microfinance refers to the providing of basic financial services to the poor, particularly in developing countries. Microfinance first came to prominence in the 1980s, although early experiments in microfinance began over 30 years ago in Bangladesh, Brazil, and a few other countries. Most notably, Mohammad Yunus, founder of Grameen Microfinance and winner of the Nobel Peace Prize in 2006, has helped to propel microfinance into the mainstream. Microcredit is widely regarded as an essential tool for furthering economic development in developing countries and has proven to be one of the most effective and flexible strategies in the fight against global poverty. It is sustainable, and can be implemented upon a massive scale.
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Micro-credit, a key area of microfinance, refers to the making of small loans, usually US $200 or less, to poor persons, usually women, in developing economic areas. These loans are made to help those living in poverty establish or expand self-sustaining businesses. The loans help the poor generate and increase income, providing them with stability for their families, opportunities for education, and protection from externalities. Assisting these entrepreneurs found and grow businesses imparts human dignity and social status, transforming them into producers and participants in their society. Although many factors contribute to global poverty, local moneylenders charge rates of interest upwards of 100% perpetuating the state of poverty for the working poor. Micro-credit offers access to cheaper capital and is powerful instrument for self-empowerment, enabling the poor, especially women, to break the cycle of poverty.
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Micro-credit loans are typically made to individuals who do not have access to formal financial institutions and who are self-employed, often household-based, entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small income-generating activities, such as food processing and petty trade. In urban areas, micro-credit recipients are more diverse, and include shopkeepers, service providers, artisans, and street vendors.
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Microfinance Institutions are entities that provide financial services, including such loans, to the very poor assisting this sector of the population. Most MFIs are non-profit institutions, with many MFIs affiliated with faith-based NGOs. Recently, reflecting a maturing of the microfinance industry, certain MFIs have organized themselves as commercial, for-profit institutions. MFIs, both non-profit and commercial, have proven to engage in micro-credit on a profitable basis. Recent data indicates that the loan default rate for micro-credit loans made in developing countries is slightly higher than 1%, besting loan default rates for the largest domestic financial institutions.
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MFIs currently service nearly 135 million clients worldwide, equating to $34 billion in assets. This level of service manages to meet approximately 10% of global demand for micro-credit. The total annual demand for micro-credit is estimated at $300 billion, with an estimated annual growth grate of 15% to 30%. In this environment, the largest and most sustainable MFIs are growing at a rate of between 30% and 70% per year, and many smaller institutions are growing at a faster rate.
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Traditionally, MFIs have obtained the capital for their lending activities through government grants and private donations. As the microfinance market has grown, these traditional sources of funding have proved to be inadequate to finance the growing demand for micro-credit. Many MFIs now are attempting to obtain capital from financial markets.