Who Provides the Financing?

The original purpose of microfinance was to serve the needs of economically marginalized populations, specifically those living in poverty or near-poverty. Microfinance provides financial services to poor and low-income households, entrepreneurs, and nascent businesses, who would otherwise not have access to such services.

Over time, various institutions have begun to offer microfinance services, including credit unions, commercial banks, non-governmental organizations (NGOs), multilateral development banks, as well as some government agencies and government banks.

The World Bank, has compiled a typology of microfinance service providers. These providers are divided into 5 categories: (1) Formal financial institutions (FFIs) which include: Private commercial banks, State-owned banks, Microfinance banks, and Non-bank financial institutions; (2) Cooperatives (CFIs) which include: Multi-purpose cooperatives and Financial cooperatives such as credit unions; (3) Non-governmental organizations (NGO-MFIs) which include: Multi-purpose NGOs, Multi-purpose NGOs with microfinance services separated from other services, Microfinance NGOs, and Microfinance NGOs transformed into a bank; (4) Community-Based Financial Organizations (CBFOs) which includes a variety of village-based entities with names such as “village bank” and “self-help group”; and (5) Informal village-based providers which include: Rotating Savings and Credit Associations (ROSCA), Accumulating Savings and Credit Associations (ASCA), and Moneylenders.

When a microfinance institution (MFI) ‘transforms’, it essentially changes its legal status from an unregulated nonprofit or non-governmental organization (NGO) into a regulated, for-profit institution. Regulated, transformed organizations differ from nonprofits in that they are held to performance and capital adequacy standards, and are supervised by a financial authority, typically the central bank of the country where they are registered. A transformed MFI attracts equity investors. These equity investors pursue financial and operational strategies so that their investments are maintained or enhanced, and elect Board members who share a common vision for the new for-profit institution. Among transformed MFIs, varying classifications of regulated institutions exist, the strictest being banks — rural banks and thrift banks — followed by non-bank financial institutions. Different countries have varied names for these regulated MFIs.

As mentioned earlier, several types of organizations engage in microfinance. Below are examples of some organizations which support microfinance projects and initiatives.

Multilateral Development Banks

Multilateral development banks (MDBs) are international institutions that provide financial assistance, typically in the form of loans and grants, to developing countries in order to promote economic and social development.

MDBs primarily fund large infrastructure and other development projects and provide loans tied to policy reforms by the government. MDBs provide non-concessional financial assistance to middle-income countries and some creditworthy low-income countries on market-based terms. They also provide concessional assistance, including grants and loans at below-market rate interest rates, to low-income countries.

World Bank Group

The World Bank is the oldest and largest of the MDBs. The World Bank Group comprises three sub-institutions that make loans and grants to developing countries: The International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), and the International Finance Corporation (IFC).

The World Bank Group and IFC have a department which specializes in microfinance and works specifically to support micro-entrepreneurs and small businesses. IFC works to increase access to financial services, by providing funding for equity, loans, and mezzanine finance to financial intermediaries focusing on SME financing. IFC also works to build capacity of financial intermediaries and raise awareness on best SME banking practices. IFC uses both investments and technical assistance to support financial intermediaries’ outreach to the SME sector.

For more information on IFC’s microfinance and small business support department, please click here.

Inter-American Development Bank

The Inter-American Development Bank (IDB) was created in 1959 in response to a strong desire by Latin American countries for a bank that would be attentive to their needs. The IDB has tended to focus more on social projects than large infrastructure projects, although the IDB began lending for infrastructure projects as well in the 1970s. From its founding, the IDB has had both non-concessional and concessional lending windows.

The IDB Group also includes the Inter-American Investment Corporation (IIC) and the Multilateral Investment Fund (MIF), which extend loans to private-sector firms in developing countries, much like the World Bank’s IFC.

IDB began providing small loans to poor women in the early 1970s. Since then, IDB has been a pioneer in promoting microfinance throughout Latin America and the Caribbean. Over the past two decades its Multilateral Investment Fund (MIF) has underwritten the expansion of leading microfinance networks and fostered many of the innovations that enabled the development of the microfinance industry.

For more information on IDB’s microfinance work, please click here

Non-governmental organizations (NGOs)

These organizations are usually non-profit and sometimes have an international scope. They typically work to promote social, economic, and/or political change and play a critical part in developing society and improving communities.

CARE

CARE, an NGO, works around the globe to save lives, defeat poverty and achieve social justice. In 1991, CARE launched the world's first Village Savings and Loan Association in Niger.

CARE’s Village Savings and Loan Associations (VSLAs) are built entirely on member savings and interest from loans; they receive no direct capital investment from CARE. However, their members do receive a year of intensive training from CARE in group dynamics and governance and in money management. This training enables the groups to become self-supporting, to flourish and even to establish and train other groups.

For more information on CARE’s microfinance work, please click here

BRAC

BRAC, an NGO headquartered in Bangladesh, helps deliver access to financial services, supports the investment in small enterprises, and builds financial literacy programs for those living in poverty.

BRAC offers microloans, small enterprise loans, agriculture loans, savings, and jobholder loans. This NGO also offers medical treatment loans and sanitation loans.  

For more information on BRAC’s microfinance work, please click here

International Development Agencies

USAID

The United States Agency for International Development (USAID) is an independent agency of the United States federal government that is primarily responsible for administering civilian foreign aid and development assistance.

USAID provides assistance throughout the world to help developing countries improve their economic and social conditions.

USAID programs enhance poor people’s access to financial services such as savings accounts and credit.  These programs seek to:

• Improve the quality and affordability of financial services.

• Extend access to excluded populations such as women, the disabled, and those living in remote areas.

• Assist smallholder farmers and small business entrepreneurs in selling their products by linking them with buyers and suppliers of good and services.

For more information on USAID’s microfinance work, please click here