Key facts about microfinance

/ Source: Reuters

Bangladeshi economist Muhammad Yunus and the Grameen Bank he founded won the 2006 Nobel Peace Prize on Friday for grassroots efforts to lift millions out of poverty.

Here are some key facts about microfinance, the system Yunus pioneered which has been copied in more than 100 countries.

What is microfinance?
Microfinance is the supply of loans, savings, insurance and other basic financial services to low-income households and microenterprises, often in emerging economies, where people do not normally have access to normal bank loans. Most microfinance credit is provided without collateral and loans are small, usually less than $100.

How does it works?
Since no collateral is collected from borrowers, microfinance programs are sustained by joint liability. Peer groups of less than a dozen clients guarantee each other’s loans and a default by one could result in the entire group being penalized. Repayment rates exceed 95 percent.

Borrowers and lenders
Microfinance is provided by non-governmental organizations (NGOs), cooperatives, non-bank financial intermediaries, and commercial banks. More than 10,000 microfinance institutions are in existence with a loan portfolio exceeding $7 billion. Most of them are very small, with a client base of less than 2,500.

Some 100 million people access microfinance services globally. Clients are typically self-employed and with a relatively stable source of income. While most borrowers are women, studies indicate that many loans awarded to women and paid back by them are in fact used by men.

Interest rates and profitability
The average global rate of interest for microfinance credit is 35 percent, substantially higher than the traditional banking system. This is because of the higher cost of administering loans resulting from the disadvantage of small scale and weekly loan repayment cycles. Average return on assets, at over two percent, is comparable to that of many commercial banks.

Studies have shown that microfinance serves as a powerful poverty-alleviation tool, increasing income, protecting against risk and empowering women.

Demand for microfinance services is estimated to reach nearly 600 million people by 2010, but lack of capital means only about a third of them can be served.

Most microfinance institutions are very small and lack the infrastructure and human resources needed to make them sustainable.

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