Micro-finance for macro-results.

• Author: Al-Sultan, Fawzi Hamad
• Position: Includes related article on Microcredit Summit in Washington, DC

A small loan of US$200 to a poor rural woman in Indonesia, Benin or Paraguay may not seem much, but it can make the difference between continued chronic poverty for herself and her family and a chance of a better life. Whether she invests the money in a handloom and weaving materials, improved seeds and fertilizers, livestock and poultry, or to start up her own small business, this small loan can be the catalyst that enables her to become more productive and self-reliant.

What is micro-finance about?

Micro-finance institutions provide savings and credit facilities to establish or expand income generating activities of the poor. These small loans can also help raise investments by small farmers and catalyse the development of micro-enterprises. By helping poor families, and especially the women, to use their productive skills and resources, micro-finance can contribute to income and asset generation of poor people and increase their household food security.

How does it work?

Providing credit and savings services to the poor poses a number of challenges. Small transactions may entail high administrative costs. Lending terms may be inappropriate for a particular clientele, the result of applying "traditional" practices or an inadequate understanding of the borrowers' cash flow and investment opportunities. The absence of adequately trained micro-finance managers can pose problems, as does reaching people in isolated areas, who often need the services the most. There are also legal or cultural biases against women, barring them from taking advantage of services even when available. Client illiteracy and lack of financial experience are further obstacles.

These obstacles can be overcome, and micro-financing can be both profitable to the serving institutions and to the people they serve. Micro-finance institutions provide small, short-term loans, together with offering savings facilities for the poor. Conventional collateral which the poor cannot provide is replaced through innovative lending techniques; loans are granted on the prospect of expected income generated by the investment, and supplemented by compulsory savings or joint liability schemes as security. Women are either fully integrated in the customer clientele or serviced with specialized financial products.

In remote rural economies, this opens windows of opportunity for poor families left out of the traditional rural financial markets, and the investment capital provided can help...