What is Microfinance?
Microfinance is the supply of small loans and other basic financial services to the poor. In most poverty striken areas, the poor do not have access to formal banking systems and are therefore denied opportunities simply because the system they live in.  They usually address their financial needs through a variety of informal financial relationships where “money lenders” take most the returns.

What is a microfinance institution (MFI)?
An MFI is any organisation that provides microfinance services to the poor. An MFI can be anything from a small non-profit organization (NGO) to a large commercial or investment bank.

Why do banks ignore poor people?
Most formal banks do not provide microfinance products as it is seen as an expensive, “risky” enterprise – if you can make a lot more money on large loans, why would you give to the poor who are not credit worthy?

Why are microfinance interest rates so high?
For microfinance to work, interest rates on loans need to be high to return the cost of the loan in the first place: the cost of the money that it lends plus the cost of the loan defaults – they need to be proportional to the amount lent.  Transaction costs must also be factored into the loan, through interest, and when loans are small these costs seem larger.

When does microfinance not work?
Microfinance usually struggles when conditions hinder loan repayment. The clients must have the capacity to repay the loan under the terms by which it is provided.  In war zones or where there is much disease or communities are widely dispersed, for example, microfinance may not be the best tool.