About Microfinance

What is microfinance?

Microfinance is about extending financial services to the poorest and most excluded people, people who have little or no access to formal services – no way to borrow or save money safely. Extending financial services to excluded people enables them to build and expand their businesses, make savings, and access insurance for their lives and livelihoods.

A key part of poverty-focused microfinance is the provision of business training alongside financial services. Empowering people to understand basic accounting, profit-and-loss, marketing and business-diversification principles enables them to use their loans and savings much more effectively. Financial literacy and business mentoring are core and constant elements of our partners’ microfinance programmes.

What are the benefits of microfinance?

The benefits of microfinance include increased and more stable income flows into the household. This means that families are better able to meet daily needs like feeding their families, sending their children to school and paying for basic healthcare services (which, unlike in the UK, are not provided free by the State). By enabling people to build up savings and develop regular and diversified sources of income, microfinance enables people to become resilient to financial shocks such as illness, floods or a poor harvest. Besides the obvious benefits of increased, more regular and more secure income, this in turn contributes to the feelings of empowerment and dignity which are so often squeezed out of the most vulnerable communities. ‘Empowerment’ is almost impossible to quantify but you’ll see it on the faces of almost every successful microfinance client you meet as they tell you: ‘Now my children are going to school.’

“Microfinance” covers a multitude of methodologies and motivations… 

Every microfinance institution (MFI) is different. They have different motivations, offer different services, target different kinds of clients and use different methodologies. They may be savings-led or credit-led; they may work only with women, only with certain income-levels or only in certain regions; they may offer financial products alone or they may offer literacy training or health services too. Our partner MFIs each have their own approach to microfinance but they are united by their mission to change lives.

There are plenty of commercial MFIs whose motive is to make a profit and produce dividends for shareholders, and of course there is a valuable space in the marketplace for these. They tend to target SME-level clients rather than entrepreneurs, and often growth at SME-level is a powerful driver of economic development. But many of the criticisms which have beset the microfinance sector in recent years – extortionate interest rates, over-indebtedness, harsh repayment regimes – apply mostly to the commercial element of the microfinance spectrum.

By definition, a poverty-focused MFI which exists to transform clients’ lives will seek to protect clients from over-indebtedness, train them to manage their money sustainably and keep interest rates as low as it feasibly can. Our partners are all poverty-focused MFIs and they work at the truly micro-level where a starting loan may be as small as £25 and clients may be saving just 5p/week. Arcubus believes that serving people at this level meets the greatest needs and can have the greatest social impact – as well as ‘feeding’ the SME level of enterprise over time.

Arcubus does not believe that microfinance is a panacea – it does not work for all people or in all contexts, and more research is needed to help practitioners establish how and why microfinance succeeds and fails. As ever, reality on the ground is worlds apart from academic theory. Why not join an Arcubus Experience trip and make up your own mind about microfinance?