The Consultative Group to Assist the Poor (CGAP) defines microfinance as “the supply of loans, savings, and other basic financial services to the poor.” CGAP further argues that “people living in poverty, like everyone else, need a diverse range of financial instruments
to run their businesses, build assets, stabilize consumption, and shield themselves against risks.”
CGAP was formed in 1995 by leading donors and microfinance practitioners to develop and share best practices, set standards and develop technical tools for the advancement and development of a common language for the microfinance industry. According to the United Nations Capital Development Fund (UNCDF), microfinance is considered as inclusive
finance, which refers to “loans, savings, insurance, transfer services, micro-credit loans and other financial products targeted at low-income clients.”
A wide range of institutions provide microfinance services; these include non governmental organizations, credit unions, co-operatives, private commercial banks, non-bank financial
institutions and private companies, and parts of state-owned banks. U n d e r s t a n d i n g o f Microfinance in different settings Practitioners from the ‘poverty lending’
camp claim ownership of the term, and define it as mainly micro-credit for
p o v e r t y r e d u c t i o n p u r p o s e s , with a particular emphasis on financial
and non-financial support to microenterprises.
While money lenders who are not really concerned about enterprise financing refer to micro finance as short term, cash loans to formally employed, salaried and banked low-to-moderate income individuals, for whatever purpose. Having said this micro finance should not be regarded as charity nor relief work. The latter is for temporary emergency
situations, financial services must be on going and permanent. Charity is for those who cannot help themselves, micro finance is an opportunity for those who can, it provides access to credit, savings and subsequently other financial services as stated in the international definition above.
Micro enterprises and most of the poor population in Africa and many part of Asia, have very limited access to deposit and credit facilities and other financial services provided by formal financial institutions. For example, in Ghana and Tanzania only about 5–6 percent of the population has access to the banking sector. This lack of access to financial services from the formal financial system is quite striking, when one considers that in many
African countries the poor represent the largest share of the population and that
the informal sector is an important part of the economy.To meet unsatisfied
demand for financial services, a variety of microfinance institutions (MFIs) has
emerged over time in Africa.
Some of these institutions concentrate only on providing credit, others are engaged in
providing both deposit and credit facilities, and some are involved only in deposit collection.
