What it is
Odds are pretty good that sometime in the last week, you visited your local bank to deposit or withdraw money. Or maybe you made a payment on a mortgage, auto loan, or student loan. There are many millions of people throughout the world who do not have access to any of these services. Microfinance is the attempt to get traditional financial services to the very poor of the world. It is an attempt to replace or work with informal financial services that tend to be riskier, more costly, and at times predatory.
It is important to not confuse microfinance and charity
It also seeks to replace charities that grant loans and grants. Microfinance is something that gives "poor people a 'hand up', not a 'hand out'" by expanding available financial services, increasing the number of financial institutions available to the poor, as well as increasing the capacity and diversity of those institutions. It is important to not confuse microfinance and charity, charity is better suited for situations such as war zones and natural disasters, where it is unlikely for people to be able to generate the cash flow required to repay loans
. This occurs by scaling down traditional systems that we take advantage of every day and getting them to function in places where the currency trades for a fraction of the US dollar. These are places that have until now been left out of the global market because large financial institutions can make more money with fewer Americans or Europeans.
You may not even realize the number of financial institutions you rely on and the role they play in your life, so we've provided as list:
- Stable Currency: The first thing that most people take for granted is a stable currency that is worth about as much as it was a year ago and will be worth about the same in another year. Without this, financial institutions can not persist and currency will be replaced by commodities.
- Banks: Having a safe place to put your money that can not be stolen or destroyed is key to rising out of poverty. Without banks, it is very difficult to accumulate wealth.
- Insurance: Knowing that if something terrible happens tomorrow, you have some backup, allows people to invest in things such as their businesses, rather than hoarding money in case the worst happens.
- Lines of Credit: Having the ability to procure credit at reasonable rates is the only way to expand an economy. How are new businesses to be formed and new expensive products consumed if individuals don't have access to credit?
- Access to Global Market: Being able to trade goods and services with the rest of the world opens up a number of opportunities that we would not have if we were limited to our local economies.
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