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Frequently Asked Questions
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Microfinance is the provision of financial services to low-income people. It refers to a movement that envisions a world where low-income households have permanent access to high-quality and affordable financial services to finance income-producing activities, build assets, stabilize consumption, and protect against risks. Initially the term was closely associated with microcredit—very small loans to unsalaried borrowers with little or no collateral—but the term has since evolved to include a range of financial products, such as savings, insurance, payments, and remittances.
Microfinance institutions and other financial service providers have worked over the past decades to develop products and delivery methods to meet the diverse financial needs of low-income people. For example, unlike other forms of lending, microcredit loans use methodologies such as group lending and liability, pre-loan savings requirements, and the gradually increase in loan sizes to evaluate clients’ credit worthiness. Microfinance providers today continue to improve their understanding of the financial needs of their target clients and tailor their products and methodologies accordingly.
The goal of financial inclusion is to develop financial markets that responsibly serve more people with more products at lower cost. Financially inclusive markets comprise a broad, interconnected ecosystem of market actors and infrastructure delivering financial products safely and efficiently to low-income customers. These market actors may include banks, financial cooperatives, e-money issuers, payment networks, agent networks, insurance providers, microfinance institutions, and more.
Typical microfinance clients have low incomes and are often self-employed in the informal economy, conditions that together typically deny them access to banks and other formal financial institutions. They commonly run small stores or street stalls, create and sell items they make in their homes, and in rural areas, microfinance clients may be small-scale farmers and those who process or trade crops and goods.
Microfinance clients are often just below or above the poverty line, commonly defined as earnings of 100/= a day, and women constitute a majority of borrowers. Over the past decades, financial institutions have been developing a range of products to meet the diverse needs of this broad and underserved market.
Poor people need many kinds of financial products and services and there is a growing range of organizations working to reach them with savings, insurance, transfers, and credit services.
In addition to traditional operators, such as microfinance institutions, credit unions, cooperatives, and banks, other entities, including mobile network operators, are using technology to develop new delivery methods to bring these services to the poor, sometimes in partnership with existing financial institutions.
One of the realities of living in poverty is that income can be irregular and undependable. People living in poverty need to access a wide range of financial products and services that are tailored to their circumstances. Financial services can help people build assets through savings or financing income-generating activities, and can make it easier for them to manage shocks, such as medical emergencies, death, theft, or natural disasters
Mobile banking refers to financial transactions conducted over a mobile device. Mobile banking has the potential to reach more people, at a lower cost, and with increased convenience than traditional “brick and mortar” banking services that rely on fixed branches.
With the rapid global expansion of mobile technology, mobile banking is helping vast numbers of previously excluded people access financial services. Mobile network operators, governments, and financial institutions, ranging from large commercial banks to microfinance institutions, recognize and have begun to exploit the potential of mobile banking. A number of governments and their central banks have also embarked on “cash-lite” policies to reduce the use and, therefore cost, of cash in their economies.