Financial Services for the Poor
At the outset, financial services for poor households consisted of small loans to individuals organized as peer groups with cross-guarantees. The theory being that social pressure prevented an individual from defaulting on the loan because other members of the group would be liable for the interest and loan repayments. Microcredit to poor individuals enabled them to start small businesses, particularly in countries where jobs were scarce or non-existent. Nonprofit organizations introduced loans as an alternative to local money lenders or pawnbrokers who charged exorbitant interest rates.
Over the past 10 years, as microfinance has grown and matured, access to financial services has broadened its mandate to include savings, microinsurance and other financial products. While loans still constitute the primary offering, savings and other asset accumulation mechanisms are gaining a solid foothold. “Access to financial services” and “innovative financial inclusion” are garnering support from governments, donor agencies and philanthropic organizations. The Gates Foundation, for example, is supporting savings and deposit-taking initiatives. Studies indicate that savings have a greater impact on growing microbusinesses than loans. Whereas loans provide cash flow for microbusinesses, savings enable growth through capital investments.
Portfolios of the Poor.