Traditional financial systems have historically been inaccessible to low-income communities, resulting in the perpetuation of generational cycles of poverty. 

 

For example, while loans often prove essential to helping people obtain educations or start businesses, mainstream investors usually require that the loan recipient:

• has access to collateral (valuable assets such as cars or homes that can be given up in case the loan is not repaid in a timely manner)

• has a positive credit history, indicated by a positive credit score

• can handle specific loan amounts and interest rates

 

However, low income people generally:

• don’t have collateral

• haven’t borrowed loans before, so investors don’t have a credit history to base their decisions on

• cannot repay large loan amounts, and cannot handle moderate to high interest rates

 

The field of microfinance solves this issue through microloans—loans that are small, with little to no interest rates and no collateral requirements. 

 

These loans are often provided to groups of individuals in order to decrease the financial risk of the investment, as the social pressure within such groups incentivizes repayment. Rates of default (failing to repay a loan) are oftentimes even lower for microloans than they are for regular loans. When low-income individuals repay their loan, they build credit histories that enable them to access higher loan amounts and thereby increase their wealth in the long-term.

 

However, microfinance encompasses more than microloans. Microfinance is defined as a “banking service provided to low-income individuals…who would otherwise have no other access to financial services.” Other microfinance products include microsavings, micro insurance products, educational programming (that provides low-income people with financial literacy) and more. If you’re interested in making the financial world more equitable through microfinance, then consider joining our organization!