A microfinance bank is one devoted to extending small loans, referred to as microloans, to individuals, businesses, and organizations in low-income regions, including under-developed countries where small amounts of money can go a long way. Some financial institutions are devoted entirely to microfinance, while others are part of larger companies, such as global investment banks. Ultimately, this type of bank provides credit to those who would otherwise be unable to access this form of capital. These loans foster the development of small businesses and provide tools to entrepreneurs to follow their dreams, all in an attempt to alleviate global poverty in vulnerable regions.
In most cases, a microfinance bank is involved in social investing — that is, fostering the growth and economic development in a vulnerable region by extending loans to families, businesses, and entrepreneurs. These financial institutions still intend on generating profits from a microfinance investment, but also take an interest in the social development of a poverty-stricken place. In the process, the bank lends its financial expertise, business resources, and relationship skills to underprivileged areas in addition to financial support.
The history of microfinance begins with one man and one village. Grameen Bank was the first microfinance bank, and it was established by Muhammad Yunus, a native of Bangladesh. He was motivated by the fact that Bangladeshi business owners were forced to repay much of their profits to loan-issuers. In 1976, Yunus extended his first microfinance loan from his personal account to a group of women in a Bangladeshi village, and the concept grew from there. His intentions were not to gouge the borrowers, but instead to provide them with reasonable funding on terms that would not cripple them financially but instead foster growth.
Microfinance loans are designed for providing financing to the most underprivileged regions in the world, including sub-Saharan Africa and the Democratic Republic of Georgia, where pockets of the population might otherwise have no access to any sort of banking institution. In addition to small loans, individuals gain support, including education and training for personal development, in addition to savings and insurance products. The purpose is to break the cycle of poverty in a region.
Loans for women living in poverty are among the most widely-issued forms of credit in microfinance. This is because 70% of the world's population struggling through extreme-poverty conditions are women, according to Opportunity International, a US-based non-profit organization that works with microfinance lenders. A woman is less likely to receive formal education, business training, or a prominent role in society in an underdeveloped region, and without proper financial support, she may never overcome those obstacles.
