Microfinance is a type of banking service offered to people who normally have no access to finance. People excluded from regular banking services are farmers, the poor, and often women. Microfinance has sometimes been called ‚financial inclusion.‘ However, this is a contentious term because there is still much debate about how accessible microfinance is for people.
Microfinance is mainly associated with micro lending. However, microfinance institutions (MFIs) also provide other services like financial and business education, and micro insurance.
According to the World Bank’s latest statistics, only 34% of adults in sub-Saharan Africa have bank accounts, in contrast to the Euro area, where 95% of adults have bank accounts. This makes sub-Saharan Africa the second worst region at providing financial services after the Middle East.
The problem of limited financial services is especially acute in the countryside. Banks rarely operate in the countryside because they get higher profits in big cities. First, there is greater demand for financial services in cities. This is because cities are densely populated, which means lots of people live in a relatively small area. Secondly, operating costs are lower in cities because of the superior communications and transport infrastructure. It is cheaper to provide financial services in cities because they have better roads, internet access etc. Compare this to the countryside where banks have to spend a lot more money sending their employees from village to village, often travelling on limited or non-existent roads.
Microfinance is seen as part of the solution to the above problem of financial exclusion. This is because microfinance is targeted at groups like farmers and the poor, who in sub-Saharan Africa, as elsewhere, often have no access to finance.
WHY MICROFINANCE AIDS THE FINANCIALLY EXCLUDED
People such as farmers and the poor need access to finance as much as everyone else. Farmers wish to save money for the future in case of a bad harvest. The poor likewise, even if living off very little, attempt to save or acquire insurance to guard themselves against risk. Both groups also desire access to finance so they can invest in their futures and leave a better life for their children.
When people have no access to formal financial services, they realistically have two choices. Either they must suffer with limited resources or they turn to informal lenders. Many financially excluded people become dependent on loan sharks. Loan sharks are lenders who charge an illegally high amount of interest and who often back their loans with the threat of violence to ensure it is repaid on time. Their presence makes lives miserable for people who feel they have no alternative but to seek their help.
Microfinance helps financially excluded people because it gives them the formal access to financial services they so desperately require. Also, it should drive out loan sharks, at least in theory, by offering a more attractive, legal service. As sub-Saharan Africa has a particularly high percentage of adults who are financially excluded, especially in the countryside, microfinance is especially important for the region.