Based on work by Eoin Wrenn for Trócaire, 2005
What Is Microfinance?
Microfinance, according to Otero (1999, p.8) is “the provision of financial services to low-income poor
and very poor self-employed people”. These financial services according to Ledgerwood (1999)
generally include savings and credit but can also include other financial services such as insurance and
payment services. Schreiner and Colombet (2001, p.339) define microfinance as “the attempt to
improve access to small deposits and small loans for poor households neglected by banks.” Therefore,
microfinance involves the provision of financial services such as savings, loans and insurance to poor
people living in both urban and rural settings who are unable to obtain such services from the formal
1. Microfinance and microcredit.
In the literature, the terms microcredit and microfinance are often used interchangeably, but it is
important to highlight the difference between them because both terms are often confused. Sinha
(1998, p.2) states “microcredit refers to small loans, whereas microfinance is appropriate where NGOs
supplement the loans with other financial services (savings, insurance, etc)”. Therefore
microcredit is a component of microfinance in that it involves providing credit to the poor, but
microfinance also involves additional non-credit financial services such as savings, insurance, pensions
and payment services (Okiocredit, 2005).
2. The History of Microfinance
Microcredit and microfinance are relatively new terms in the field of development,
first coming to
prominence in the 1970s, according to Robinson (2001) and Otero (1999).
Prior to then, from the
1950s through to the 1970s, the provision of financial services by donors or governments was mainly in
the form of subsidised rural credit programmes. These often resulted in high loan defaults, high loses
and an inability to reach poor rural households (Robinson, 2001).
Robinson states that the 1980s represented a turning point in the history of microfinance in that MFIs
such as Grameen Bank and BRI
began to show that they could provide small loans and savings
services profitably on a large scale. They received no continuing subsidies, were commercially funded
and fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It was also at this time
that the term “microcredit” came to prominence in development (MIX
, 2005). The difference between
microcredit and the subsidised rural credit programmes of the 1950s and 1960s was that microcredit
insisted on repayment, on charging interest rates that covered the cost of credit delivery and by
focusing on clients who were dependent on the informal sector for credit (ibid.). It was now clear for the
first time that microcredit could provide large-scale outreach profitably.
The 1990s “saw accelerated growth in the number of microfinance institutions created and an increased