What is microfinance?
In simple terms, microfinance supports community growth and enables communities to build their income and small businesses.
For anyone living in the western world, the role of microfinance can sometimes be difficult to understand. It’s tough to imagine what life would be like without access to even the most basic financial services. When the Five Talents team introduces our supporters to microfinance, we ask them to imagine starting a small business without access to a bank, or to imagine trying to plan for your children’s future without a savings account. For the 1.7 billion people who don’t have a bank account, these situations are a reality.
Find out more about the different aspects of microfinance below:
You can also visit our blog where we have written about our experiences with microfinance and the benefits of our model.
History of microfinance
The history of microfinance dates back to the 1970s when it was pioneered by the Nobel Prize winner Muhammad Yunus. Since then, the purpose of microfinance has changed - modern microfinance is much more diverse than many people realise. Whilst most people think simply of credit and loans, there's a whole range of small-scale economic tools which enable people to save, borrow, insure, and educate themselves.
Today, the purpose of microfinance is to meet the needs of communities who have been marginalised and are ‘unbanked’. In practical terms, this means providing a community with a safe place to save, take small loans from a communal pot, and access to business training.
A Five Talents member at her business in Tanzania.
How does microfinance work?
Over the last two decades Five Talents and our partners have developed a model of microfinance which enables Savings Group members to build a sustainable business, increase their income and meet their households’ needs.
Five Talents’ programme partners have supported over 260,000 people around the world. Our aim is to, through local partners, begin Savings Groups with communities who have been marginalised so the members the means to save together and take small loans to invest in their micro-enterprises. All Savings Groups across the programmes are unique but most follow a basic model.
Around the world, women struggle more to access basic financial services.
What is microcredit?
Microcredit and microfinance are separate but related concepts. The history of microcredit in Africa dates back to soon after Muhammad Yunus first began work in Bangladesh. The original microcredit organisations aimed to provide small amounts of credit (as little as £2 or £3) to those in need. Unsurprisingly, this is known as microcredit or microcredit loans.
When Five Talents first started, some programmes were purely ‘credit-led’ but in the years since we have moved towards a broader form of ‘savings-led’ microfinance. The difference between microcredit and ‘savings-led’ microfinance is subtle but very important. Rather than providing external funds (known as capital) for loans, the programmes we support provide members with the financial infrastructure they need to save together. The cumulated amount of savings (known as the ‘communal pot’) forms the capital for the loans.
These days, when someone talks about microfinance rather than microcredit, they are referring to a broader range of financial services than just credit. That could include everything from savings facilities to insurance.
The debate over microcredit vs. microfinance has been going on for decades, but our experience has shown that microcredit loans that depend on external loan capital are less sustainable and have less impact than the form of savings-led microfinance that Five Talents’ partners use. Since 2007, we have only formed savings-led microfinance programmes.
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