"The natural effort of every individual to better his own condition ... is so powerful, that it is alone, and without any assistance ... capable of carrying on the society to wealth and prosperity." - Adam Smith

Maximum opportunity

Microfinance has become increasingly topical in recent years, yet the concept of making small loans to rural communities is not new. The provision of financial services to the poor dates back to late 19th century Germany where Friedrich Raiffiesen's village bank movement had reached 2 million farmers by 1901.

Microfinance levels the economic playing field by giving the poor - particularly women in developing countries - access to capital, a valuable resource that empowers individuals to realise their full potential and provide a better future for their families. Legatum believes that a vibrant microfinance industry has the potential to draw millions more people into the formal economy, transforming lives throughout the world.

Although microfinance institutions now serve an estimated 120 million clients, The World Bank has projected that there are nearly 1.3 billion potential microfinance clients worldwide. To that end, Legatum is assisting the expansion of the microfinance industry overall, and encouraging the active involvement of a greater number of established financial institutions.

Increasing access to capital

Capital is the fuel of entrepreneurial activity and productivity but is frequently unavailable to the world’s poor. Established financial institutions traditionally require collateral and a credit history to underwrite a loan, while informal financiers (“money lenders”) charge extremely high interest rates on unfavourable terms. Consequently, the poor are often deprived of their best opportunity to obtain the capital required to start a small enterprise or supplement household income, further reinforcing the cycle of poverty.

Productive borrowers

There is, however, growing evidence of what the microfinance industry has known for years - that while the poor tend to lack capital, they do not lack ambition, ingenuity or the desire to take ownership of their economic futures. In fact, by providing the working poor with credit in small denominations and at terms they can afford, it has been shown that beneficiaries of microloans are reliable borrowers, with historical repayment rates consistently above 97%. Moreover, microfinance borrowers tend to employ capital productively, whether to finance small businesses or cover household consumer needs. Even when re-financing high interest rate loans from local money lenders, the microfinance borrower frees up excess capital for her family, instantly increasing net household income.