Microfinance – The Important Terminologies

The following are the important terminologies of the Microfinance concept, which anyone willing to avail it or learn about it should be aware of!

  • A microfinance institution (MFI) 

It is the institution offering microfinance-related assistance, such as microloans, micro savings scheme, and micro-insurance to the deserving individuals, that is, generally, people belonging to the low-income community, who cannot access the financial assistance offered by the traditional institutions.

  • Active clients 

The total number of clients with the outstanding loan amounts.

  • Group lending

It is a lending mechanism to compensate for the absence of collateral and, as well as to alleviate the risk encountered by the MFI, in where the group of individuals, known as the solidarity group are pooled together to make the loan repayment. That is if, for some reason, one member of the group defaults, the others in the group would compensate for his/her act thus, upholding the repayment rate factor, every time. This lending mechanism was also introduced to create a peer pressure that naturally, encourages everyone in the group to repay their dues on time.

  • Individual lending

Although rare, not impossible, where unlike the group lending, here the repayment solely depends on the individual lender, any day!

Microentrepreneurs 

These are the people owning the small-scale businesses that are referred to as the microenterprises.

  • Microenterprise

The informal business sector, usually, based out of the home with up to 5 associates.

  • Ultra-Poor 

These are the very poor people, whose daily existence is limited to less than $1, unfortunately!

  • Upper Income

 People belonging to the low-income category, whose earnings are in the range of $2- $5 per day!

  • Voluntary Savings

 This referred to the amount of money voluntarily deposited in the MFI by the individuals availing microfinance, which shan’t be used as a condition for accessing any loans now, or in the future.

  • Tier 1 MFI

This refers to the mature and large Microfinance institutions, whose activities are highly transparent to the community o perhaps, the world.

  • Tier 11 MFI

 These refer to the small or medium sized MFIs that are yet to attain the complete maturity.

  • Tier 111 MFI

 Usually the growing or the start-up MFI and the immature NGOs come under this category.

  • Unbanked

This term is used to refer those employed poor individuals of the world who are not eligible to access the conventional financial assistance offered by the formal banking sectors.

  • Non-financial services

The educational services offered to microfinance participants, be it the ones related to financial literacy or the other generic ones that help them tackle the social challenges come under this non-financial services category.