What is the purpose of microfinance?

The purpose of microfinance is to provide financial services to people generally excluded from traditional banking channels because of their low, irregular and unpredictable income. It is part of a process envisaging a world where disadvantaged households have consistent access to affordable, high-quality financial services to finance income-generating activities, accumulate assets through savings, provide for family needs, and protect themselves against the risks of daily life (illness, death, theft, natural disasters, etc.).

The banker of the poor 

Microfinance was originally closely associated with microcredit, small loans ranging from tens to hundreds of euros granted to small businesses and tradesmen with limited or no collateral who need to borrow amounts too small to interest traditional banks. The first to develop microcredit was Bangladeshi economist Muhammad Yunus. In 1976, the man long nicknamed “the banker of the poor” established Grameen Bank in Bangladesh, the first bank specialising in microcredit. His success in Bangladesh is such that similar initiatives sprung up more or less all over the world, and Yunus was awarded the Nobel Peace Prize in 2006. Through his bank, Muhammad Yunus demonstrated that not only do poor people repay their loans, but they can pay high interest and the lender can cover its own costs.

Over recent decades, microfinance has developed to now cover a range of financial products such as savings, insurance, payment methods and money transfers. New products and service delivery channels have also been set up to meet the highly diverse needs of low-income populations, such as group loans and group guarantees, preconditions for savings, and a gradual increase in loan amounts to assess their clients’ creditworthiness. Microfinance is primarily aimed at households living just below or just above the poverty threshold ($1.25 per day), and the majority of borrowers are women. It is mainly developing in southern hemisphere countries where it enables small tradesmen, traders or farmers to carry out micro-projects, but the idea is also gaining ground in Europe and the United States.  

Not a miracle cure, nor a disaster

But while the objectives are laudable, microfinance does nonetheless have limits. Granting loans, even on a small scale, is not enough to reduce poverty. At best it can enable extreme poverty to be escaped, and it can even lead the poorest into more debt if the microfinance institution does not monitor the situation and does not educate borrowers in better money management. The charging of higher interest rates than in traditional banking services is also controversial. This is attributed to the fact that small loans are more costly to manage than larger loans because they take more time to process. In the absence of any guarantee, a representative from the microfinance lending institution must visit the borrower to assess creditworthiness. However, borrowers very often live in remote areas, with low population density. Once the loan is approved, an employee is despatched to dispense the funds and collect repayments in person, which adds more substantial costs when compared with conventional bank operations. That said, these costs are tending to decrease with technological advances and new business models. In addition, mechanisms to protect microfinance clients have been put in place. Microfinance is not a miracle cure that will eradicate poverty with the wave of a magic wand, but neither it is a disaster that will plunge the very poor into an even worse position... 

Luxembourg at the leading edge

For several years now, Luxembourg has aimed to be at the forefront of microfinance in Europe. In 1994 the Luxembourg NGO ADA (Appui au Développement Autonome, meaning “support for independent development”) was formed, co-financed by the Ministry of Foreign Affairs, and run under the patronage of the Grand Duchess Teresa since 2007, and in 2003 a Microfinance Round Table was set up, the Maison de la Microfinance was inaugurated in 2007, and so on. Not forgetting its indisputable areas of expertise, recognised worldwide: more than 60% of microfinance funds’ assets under management  are held in Luxembourg, including 7 of the 10 largest global outfits.

As paradoxical as it might seem, while the country’s image with its European neighbours is not always good, southern countries hold it in high esteem. 

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