Microfinance institutions (MFIs) have existed since the early 1970s. The best known among them is the “Grameen Bank” in Bangladesh, founded by Muhamad Yunus, and many of the “banks for the poor” created over the last four decades build on existing traditions of saving and lending practiced by poor people around the world and become. The roots of the modern microfinance movement include life insurance funds, which collect the high one-time costs of funerals, rotating savings and credit clubs among neighbors or colleagues (ROSCAS) as well as savings and loan cooperatives.

 The usual responsibility of a group in these systems for building and lending a larger sum of money to which individual members have access according to a rotation principle has been taken over by most modern microfinance organizations. However, they gave this system greater reliability and dissemination and placed a much greater emphasis on lending compared to their informal predecessors.

The landscape of the MFI is wide and confusing. MFIs can look and operate like “ordinary banks” serving a particular client segment, or they can be small rural NGOs that hand out cash to clients, but they can, but can, serve small and medium-sized businesses Even lend small amounts to poor women in the countryside and offer them savings and life insurance.

Effects and mechanisms of action are still unclear, but it is clear that poor people urgently need access to financial service providers, whether they use this for the establishment of a small self-employment, for access to a job or as bridging finance for lean times is not for the evaluation crucial.

For investors in the north, who often invest their money at an unfavorable opportunity risk ratio for a MFF, it is important that they do not harm anyone. In a second step, but providers are also guilty of answering the question of how their money works in developing and emerging countries. With this over-the-top impact often overstated in recent years, MFF should now give their customers a more honest and realistic answer to this question.

Microfinance institutions are represented by non-governmental organizations and specialized financial institutions, whose activities are based on recognition of the creditworthiness of working poor. In transition countries, microfinance institutions are often the only rivals of informal creditors with their excessive interest. For example, in the Philippines, such lenders (so-called loan sharks) often pay 1000% pa on monthly loans, while microfinance institutions – 15-70% per annum. And although such rates may seem excessive for a developed country, they are the result of high administrative costs due to small amounts of loans and high risks. 

Unlike commercial banks, microfinance institutions often do not require collateral in its traditional sense. Yes, they can allow certain groups to monitor the behavior of individual borrowers who are their members and to influence them accordingly. However, such lending within groups is effective, as a rule, in a rural environment where social capital is greater. In addition, it is believed that lending to individuals outside the groups is preferable, since here individuals are considered, not groups. Given the benefits of these two approaches, one can expect their coexistence in the long run.

It is believed that the yield of microfinance does not depend on the situation on the main financial markets and macroeconomic events that will affect traditional banking institutions. After all, the principles of the activities of microfinance institutions differ from the principles of the activities of traditional banks. In particular, clients of microfinance institutions are less integrated into the formal economy, are better able to adapt to changes in economic conditions, are less dependent on exports / imports and fluctuations in exchange rates. 

Micro-loans are provided for much shorter periods, with microfinance institutions having more close links with borrowers than commercial banks, which allows them to effectively monitor and, if necessary, adapt lending practices, reducing borrowers’ default risk. In addition, owners of microfinance institutions are usually guided by long-term interests and are less exposed to market forces, often receiving funding from a variety of international agencies, even against the backdrop of a general decline in the liquidity of the local financial market.

The microfinance sector can be described as an emerging investment opportunity that can improve the diversification of investment portfolios and optimize the risk-return ratio. At the same time, the microfinance sector is moving away from the traditional donor concept towards greater capital market participation, while not abandoning its initial mission – promoting poverty reduction and social development. The higher degree of participation of individual and institutional investors is not only a key prerequisite for improving the access of microfinance institutions to capital and correspondingly increasing the volume of microfinance, but also provides an investment opportunity that combines social and financial benefits (poverty reduction, stable financial returns, low levels of default, by borrowers, etc.).