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How does microfinance help the poor?
Microfinance can help poor people in a number of ways.
- Firstly, it can provide microentrepreneurs with the capital needed to operate and expand their businesses. Indeed, having a reliable source of credit allows microentrepreneurs 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 half of the world’s population who survive on less than $2 a day; this is still a significant sum.
- Secondly, through the increased income generated by their businesses as well as the 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.
- Thirdly, it can reduce poor people’s vulnerability. Access to credit, savings and insurance can help them to smooth cash flows and avoid periods when access to food, clothing, shelter, or education is lost. Microfinance can make it easier to manage shocks such as sickness to the family breadwinner or theft.
How do savings services help poor people?
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.
In fact, all poor people already save but tend to use informal methods because they lack access to good formal banking deposit services. They may hide cash under the mattress or buy animals or other assets that can be sold when the need arises. However, these savings methods are fraught with risk - for example cash can be stolen and animals can become ill and even die. What poor people want is secure, convenient deposit services that allow them to frequently withdraw and deposit relatively small amounts of money. The difficulty with the savings facilities already offered by banks is that they may require savers to open an account with a large initial deposit or maintain a high minimum balance thereby excluding small savers or it may simply be that their nearest branch is located too far away.
