The Benefits of Micro-Financing

The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.

Franklin D. Roosevelt [Presidential Inaugural Address, January 20, 1937]

How Does Micro-finance Help the Poor?
Micro-finance can help the poor in a number of ways.

  • It provides small entrepreneurs with the capital needed to operate and expand their businesses: Having a reliable source of credit allows micro entrepreneurs to better plan their business activities and manage their cash flow. Although the size of the loans may seem small, sometimes just $100, it is worth remembering that for many Pakistanis who survive on less than $2 a day; this is still a significant sum.
  • It increases financial stability: Due to the income generated by their business, ability to save and obtain loans, microfinance allows poor people to build their assets, for example by acquiring land, constructing or improving their homes and purchasing livestock and poultry.
  • It reduces the vulnerability of the poor. Access to credit, savings and insurance can help them smooth cash flows and avoid periods when access to food, clothing, shelter, or education is lost. Micro-finance makes it easier to manage financial shocks, such as sickness or theft.

How do Savings Services Help the Poor?
Secure and accessible savings facilities provide a means for poor people to reduce their vulnerability by allowing them to better manage risk and cash flow – poor people do not just have to cope with low incomes, but also with irregular and uncertain incomes. Savings are also used to accumulate money that can be used for investment or to meet the costs associated with expected commitments such as their children’s education and weddings or unexpected events such as ill health and funerals. In fact, very poor people tend to be much more comfortable investing what they already have than increasing their level of liability by taking out a loan. For this reason, for the very poorest people, savings facilities are often more important than access to loans.
It is a misconception that the poor do not save – they desire to save and do save given the opportunity! However, they use informal methods due to lack of access to formal banking deposit services or other saving strategies and knowledge of finance. They tend to keep cash at home or buy animals or other assets that can be sold when the need arises. These savings methods are fraught with risk – for example cash can be stolen and animals can become ill and even die. What these people need is a secure, convenient deposit service that allows them to frequently deposit and/or withdraw relatively small amounts of money. Generally, larger banking institutions require customers to open an account with a large initial deposit or maintain a high minimum balance thereby excluding small savers, additionally in remote areas banks may not even offer branches or services.