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Building financial systems for the poor


KEY PRINCIPLES OF MICROFINANCE


1. The poor need a variety of financial services, not just loans. Just like everyone else, poor people
need a wide range of financial services that are convenient, flexible, and reasonably priced. Depending
on their circumstances, poor people need not only credit, but also savings, cash transfers, and
insurance.
2. Microfinance is a powerful instrument against poverty. Access to sustainable financial
services enables the poor to increase incomes, build assets, and reduce their vulnerability to
external shocks. Microfinance allows poor households to move from everyday survival to planning
for the future, investing in better nutrition, improved living conditions, and children’s health and
education.
3. Microfinance means building financial systems that serve the poor. Poor people constitute the
vast majority of the population in most developing countries. Yet, an overwhelming number of the
poor continue to lack access to basic financial services. In many countries, microfinance continues
to be seen as a marginal sector and primarily a development concern for donors, governments, and
socially-responsible investors. In order to achieve its full potential of reaching a large number of
the poor, microfinance should become an integral part of the financial sector.
4. Financial sustainability is necessary to reach significant numbers of poor people. Most poor
people are not able to access financial services because of the lack of strong retail financial
intermediaries. Building financially sustainable institutions is not an end in itself. It is the only
way to reach significant scale and impact far beyond what donor agencies can fund. Sustainability
is the ability of a microfinance provider to cover all of its costs. It allows the continued operation
of the microfinance provider and the ongoing provision of financial services to the poor. Achieving
financial sustainability means reducing transaction costs, offering better products and services that
meet client needs, and finding new ways to reach the unbanked poor.
5. Microfinance is about building permanent local financial institutions. Building financial
systems for the poor means building sound domestic financial intermediaries that can provide
financial services to poor people on a permanent basis. Such institutions should be able to mobilize
and recycle domestic savings, extend credit, and provide a range of services. Dependence on
funding from donors and governments—including government-financed development banks—will
gradually diminish as local financial institutions and private capital markets mature.
6. Microcredit is not always the answer. Microcredit is not appropriate for everyone or every
situation. The destitute and hungry who have no income or means of repayment need other forms
of support before they can make use of loans. In many cases, small grants, infrastructure
improvements, employment and training programs, and other non-financial services may be more
appropriate tools for poverty alleviation. Wherever possible, such non-financial services should be
coupled with building savings.