A group of Indian women have assembled to make bamboo products that they intend to resell.
Poor people borrow from informal moneylenders and save with informal collectors. They receive loans and grants from charities. They buy insurance from state-owned companies. They receive funds transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from similar activities. It could be claimed that a government that orders state banks to open deposit accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a heifer pool are engaged in microfinance. Ensuring financial services to poor people is best done by expanding the number of financial institutions available to them, as well as by strengthening the capacity of those institutions. In recent years there has also been increasing emphasis on expanding the diversity of institutions, since different institutions serve different needs.
Some principles that summarize a century and a half of development practice were encapsulated in 2004 by CGAP and endorsed by the Group of Eight leaders at the G8 Summit on June 10, 2004
Poor people need not just loans but also savings, insurance and money transfer services.
Microfinance must be useful to poor households: helping them raise income, build up assets and/or cushion themselves against external shocks.
“Microfinance can pay for itself.” Subsidies from donors and government are scarce and uncertain and so, to reach large numbers of poor people, microfinance must pay for itself.
Microfinance means building permanent local institutions.
Microfinance also means integrating the financial needs of poor people into a country’s mainstream financial system.
“The job of government is to enable financial services, not to provide them.”
“Donor funds should complement private capital, not compete with it.”
“The key bottleneck is the shortage of strong institutions and managers.”
Donors should focus on capacity building.
Interest rate ceilings hurt poor people by preventing microfinance institutions from covering their costs, which chokes off the supply of credit.
Microfinance institutions should measure and disclose their performance—both financially and socially.
Microfinance is considered a tool for socio-economic development, and can be clearly distinguished from charity. Families who are destitute, or so poor they are unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity. Others are best served by financial institutions.