What is microfinance?
In simple terms, microfinance gives those in need a means to lift themselves out of poverty.
For anyone living in the developed 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 gives someone an introduction 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 2 billion people who can't use formal financial services, 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 the world’s poorest to save, borrow, insure, and educate themselves.
Today, the purpose of microfinance is to meet the needs of the 50% of poor households worldwide who are ‘unbanked’. In practical terms, this means providing a community with a safe place to save, the means to take small loans from a communal pot, and access to basic business training.
How does microfinance work?
For more than a decade Five Talents has been developing a model of microfinance in Africa which allows our clients to build a sustainable income and forge a route out of poverty.
As a microfinance charity, we provide services to more than 20,000 people living in Kenya, Tanzania, and Uganda. Our aim is to give our clients the means to save together (in groups we call Trust Groups) and take small business loans to invest in their micro-enterprises. All Trust Groups are unique but most follow a basic model. Visit our blog to find out more.
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 of our 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 microfinance is subtle but very important. Rather than providing external funds (known as capital) for loans, the majority of our programmes provide our clients with the financial infrastructure they need to save together. The cumulated amount of savings (known as the ‘pot’) forms the capital for the microcredit 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 less impactful than the form of savings-led microfinance that Five Talents uses. Since 2007, we have only formed savings-led programmes.