Microfinance, also referred to as micocredit, is a general term to describe small loans and other financial services made available to the historically and economically underserved. Microfinance is also the idea that people are capable of lifting themselves and their communities out of poverty through access to financial services.
Microfinancing works by providing small loans at reasonable terms, to individuals and groups in third world countries. The money is used to start or improve a small business. Perhaps a woman decides to sell bake goods to support her family, or a man buys farming equipment to increase the productivity of his family's farm; the money is paid back to the original investors, and these investors are free to use their money again to support more people.
Microcredit has been shown to be a valuable tool for combating in poverty. A few small loans are typically all that are needed to start a small business in a developing economy. Credit can also make it easier to manage life shocks such as illness, theft, or natural disasters. The poor use credit to build assets such as buying land, which gives them future security. Women participants in microcredit programs often experience important self-empowerment. Most of all, families have a new source of revenue. If the loan was taken out by a group of individual to start a business, which is often the case, that whole group prospers.
The practice of lending credit use to be local and relationship based. Stores, early credit union, and even wealthy individuals would provide credit to people in the community they knew and trusted. However, with the rise modern financial institutions and worldwide banking, many of the world's poor have been left out of the credit market.
The microfinance model was created to address this issues. Muhammad Yunus, Nobel Peace Prize Winner and author of Baker to the Poor, was perhaps the most vocal advocate of this movement. Through his institution, Grameen Bank, Yunus proved that this form of finance can be sustainable. In fact, he showed that poor tend to be extremely good financial risks; 99% of loans are paid back in full. With the the success of the Grameen Bank (which now serves over 7 million poor Bangladeshi women), other institutions and nonprofit agencies have been inspired to do the same. There are now dozens of Microfinance Institutions providing thousands of small loans to the world's poor.
As students, you can join the Rollins Microfinance Fund, a student-run organization that works through Kiva to give to those needing access to credit. Rollins is committed to expanding its role as a leader in this field and teaching the wider community about microfinace. Rollins also provides an undergraduate course in Impact Investing; this 3 credit hour class teaches the basics of microfinace as well as hands-on-learning of how we can use our investment dollars as tools for impact.