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Microfinance Basics

What is microfinance?

Microfinance can be defined simply as financial services geared to the poor and very poor – a group which is traditionally excluded from formal banking institutions. For Oikocredit, it is also a tool in the global fight against poverty. Through microfinance institutions (MFIs), individuals, who are usually women, are able to access financial services such as loans, savings products, insurance, and other means to assist in achieving economic self-sufficiency and financial independence. 

Microfinance Products

Typically, MFIs are focused on providing small loans, or microcredit, as their primary service to clients. Unlike formal bank loans, these microloans are of small dollar amounts that do not require collateral. Repayment terms are usually designed to match a client’s cash-flow, so that she may repay in small and frequent amounts over a long period of time. Interest rates charged to borrowers are designed to cover the administrative costs of MFIs, which are much higher than those of more traditional banks. For example, many MFIs work with clients in rural areas that are geographically cut off from formal banking. To reach these clients, loan officers must spend hours traveling on rough and often dangerous roads. 

But microloans are only one piece of the puzzle. Microfinance more broadly encompasses all types of financial services, such as savings and insurance, and sometimes includes non-financial services such as healthcare and educational programs. By offering more diverse products and services, MFIs are able to expand their poverty outreach. 

Who needs microfinance?

Microfinance is generally geared toward the working poor - people who already have a source of income. These self-employed working poor have a diverse range of microenterprises, including small retail shops and artisanal production. In rural areas these income generating activities include food processing and trade, but by far most rural people are involved in farming. Borrowers are also typically women, who use their loans to reinvest in their businesses and have proven to be the most reliable credit risk for microfinance institutions. They are also more likely to use their business’ profits to invest in the health and education of their families, especially their children. By taking loans to expand these microenterprises, borrowers help both their own families and their communities and in doing so begin to break the cycle of poverty for families and communities worldwide. 

Looking ahead: Client Protection & Social Performance

The microfinance sector has grown exponentially in the past decade, which has in turn exposed new challenges in sustainably and responsibly reaching poor clients. In response, industry leaders, including Oikocredit, are pushing for more responsible microfinance. Responsible microfinance puts the client first – it means that client well-being is considered as important as sustainability within the MFI. This includes promoting transparency of information and pricing, balancing financial and social performance, and designing products and services that meet clients’ needs. The goal is to increase financial inclusion and create benefits for clients, beginning with reducing client vulnerability, and doing so while ensuring that clients are not harmed.

Microfinance programs are funded through loans, grants, and investments made by individuals, organizations, social enterprises, governments, and many others. 

Regional volunteer groups

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Why volunteer groups?

Oikocredit Support Associations are collectives of volunteers whose members are engaged in promoting Oikocredit’s mission. Volunteer associations are part of a long-standing tradition in Oikocredit’s work. In addition to being active volunteers for Oikocredit, Support Associations are members of the Oikocredit International cooperative.

Oikocredit has two Support Associations based in the US – the Western Pennsylvania Support Association and the Oikocredit Northwest Support Association based in Seattle. Click on the regions to learn more about how you can get involved in your local Support Association.
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