Microfinance, also known as microcredit, refers to a banking service tailored for individuals or communities with low income, offering financial access that would otherwise be unavailable to them (Kagan, 2024).

1. Introduction to
Introduction to
MICROFINANCE
MICROFINANCE
Lesson 1

2. DefinitionofMicrofinance
DefinitionofMicrofinance
Microfinance, also known as microcredit, refers to a banking
service tailored for individuals or communities with low
income, offering financial access that would otherwise be
unavailable to them (Kagan, 2024).
Note: It enables individuals to access
small business loans responsibly and
safely, aligning with ethical lending
principles.

3. 18th Century: Microfinance traces its origins back to initiatives like the Irish Loan Fund
system, which aimed to assist impoverished individuals in Ireland.
1970s: Modern microfinance emerged as a means of providing financial services to low-
income individuals and communities, gaining traction worldwide.
1983: Muhammad Yunus established Grameen Bank in Bangladesh, pioneering
microcredit by providing small loans to entrepreneurs, particularly targeting
impoverished individuals.
"16 Decisions": Grameen Bank introduced a set of guidelines known as the "16 Decisions,"
offering clients guidance on improving their lives through various social and health
measures.
2006: Muhammad Yunus and Grameen Bank were jointly awarded the Nobel Peace Prize
for their significant contributions to developing the microfinance system.
Global Expansion: Microfinance expanded beyond Grameen Bank, with numerous
organizations collaborating with institutions such as the World Bank or operating
independently to provide financial services to underserved communities worldwide.
Customized Lending: Some microfinance institutions offer lenders the option to choose
specific borrowers based on criteria like poverty level, geographic location, or the type of
small business they are involved in, allowing for targeted support
Brief History of Microfinance
Brief History of Microfinance
Muhammad Yunus

4. Purpose, Role, and Principle of Microfinance
Purpose, Role, and Principle of Microfinance
Microfinance aims to empower impoverished individuals by providing
them with the opportunity to achieve self-sufficiency in the long term.
The roles of microfinance institutions include providing small loans to low-income
earners, creating employment opportunities, and offering capacity-building initiatives to
borrowers. These capacity-building efforts encompass imparting skills such as financial
management, entrepreneurship, and managerial skills to empower borrowers for long-
term success.
Key actions that governments can take to support microfinance include
maintaining macroeconomic stability, avoiding the imposition of interest-rate caps,
and refraining from distorting the market with unsustainable subsidized or high-
delinquency loan programs.

5. Loan Terms in Microfinance
Loan Terms in Microfinance
It involves interest charges and structured repayment plans,
with some lenders requiring borrowers to save a portion of
their income as insurance against default. Often utilizing a
group lending model, microfinance fosters peer pressure and
mutual support among borrowers, while also providing access
to assistance from peers or loan officers.
Successful repayment builds a positive credit history,
improving future loan accessibility, with a particular focus on
empowering women for broader family stability and
prosperity. Despite serving low-income individuals,
microfinance boasts high repayment rates, highlighting its
effectiveness in fostering financial inclusion and self-
sufficiency.

6. Advantages of Microfinance
Advantages of Microfinance
Institutions (MFIs)
Institutions (MFIs)
Collateral-free Loans: Microfinance provides access to loans without requiring
traditional collateral, enabling individuals without assets to access financial
resources.
1.
Quick Disbursement: Microfinance institutions can disburse loans quickly, making
them suitable for addressing urgent financial needs and emergencies.
2.
Meeting Financial Needs: Microfinance assists individuals in meeting various
financial needs, including starting or expanding businesses, covering educational
expenses, or addressing healthcare costs.
3.
Diverse Loan Portfolio: Microfinance institutions offer an extensive range of loan
products tailored to different purposes, allowing borrowers to choose options that
best suit their requirements.
4.
Promotion of Self-sufficiency and Entrepreneurship: By providing access to capital
and resources, microfinance promotes self-sufficiency and entrepreneurship among
borrowers, empowering them to generate income and improve their livelihoods.
5.
Small Loan Amounts: Microfinance typically offers small loan amounts, making
them accessible to individuals who may not qualify for larger loans from traditional
financial institutions.
6.

7. Challenges of Microfinance
Challenges of Microfinance
Institutions (MFIs)
Institutions (MFIs)
Over-Indebtedness: Borrowers accumulating excessive debt beyond their
repayment capacity, leading to financial strain and default.
1.
Inadequate Investment Validation: Borrowers may lack proper
assessment of investment opportunities, resulting in inefficient use of loan
funds and failure to generate sufficient income for repayment.
2.
Lack of Awareness: Some borrowers may have limited understanding of
financial services, leading to poor financial management and increased risk
of over-indebtedness.
3.
Regulatory Issues: Weak regulatory frameworks or ineffective enforcement
can enable predatory lending practices and inadequate borrower
protection, exacerbating over-indebtedness.
4.
Choice of Appropriate Model: The selection of microfinance models, such
as group lending, may inadvertently contribute to over-borrowing and
over-indebtedness if not tailored to the specific needs and capacities of
borrowers.
5.

8. References
References
Kagan, J. (2024, February 25). Microfinance Definition: Benefits,
History, and How It Works. Investopedia. Retrieved from
https://www.investopedia.com/terms/m/microfinance.asp
CFI Team. (n.d.). Microfinance. Corporate Finance Institute. Retrieved
from https://corporatefinanceinstitute.com/resources/commercial-
lending/microfinance/