About Microfinance Banks
Microfinance banks and lenders focus on giving small loans to entrepreneurs in the most impoverished areas of the world. Microfinance loans give people access to business financing they may not have been able to obtain through traditional banks and lending institutions. The goal of microfinance lending is to give people in these areas the opportunity to earn a living wage and lift themselves out of poverty.
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History
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Founded in 1720 by Jonathan Swift, the Irish Loan Funds is one of the earliest known microfinance banks. Swift's focus was on giving small, noncollateralized loans to the poor who were living in rural areas. By the 1800s, Swift's idea spread to other parts of the world, including Asia and Latin America. As the microfinance and overall banking industry grew, it soon became apparent that microfinance banks were becoming inefficient and not properly serving the needs of the rural poor. Problems in the microfinance industry continued to grow until the 1990s.
In the 1990s, the microfinance industry discovered that microfinance loans had a low default rate. Microfinance banks also discovered that people obtaining these loans were willing to pay an interest rate high enough to cover the banks' costs.
Services
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Since its early days, the microfinance industry has grown to include other financial services other than small-business loans. Microfinance banks often offer savings and other deposit accounts, as well as home mortgage loans and credit cards. Certain microfinance banks also offer their members affordable insurance products, including life, medical, disability and property insurance. Microfinance banks may also give emergency loans for unexpected expenses such as major illnesses or hospitalizations. Other types of emergency loans include loans to help pay fort the cost of pregnancy and prenatal care, as well as expenses such as funeral costs.
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Interest Rates
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One of the biggest criticisms of the microfinance industry is the high interest rates certain banks charge to their microfinance loan customers. Banks often charge interest within the range of around 12 percent; certain microfinance institutions charge as much as 20 to 80 percent interest on their loans. Advocates have called upon policymakers in countries operating a large number of microfinance banks to institute interest rate caps. Microfinance lenders charging these high interest rates say they charge high interest to cover their operating expenses.
Limitations
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The limitations for each microfinance bank are different depending on the bank's lending policies. In general, people can't use microfinance business loans for purchasing a nonbusiness property or for the production of tobacco or alcohol. Banks don't generally give microfinance loans to individuals looking to open a gambling or entertainment establishment. Microfinance loans are very small, ranging from $25 to a few thousand dollars. People who aren't currently earning any sort of income don't qualify for microfinance loans.
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