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Sometimes called “banking for the poor,” classic microfinance is an amazingly simple approach that has been proven to empower very poor people around the world to pull themselves out of poverty. People living in poverty, need a diverse range of financial services to run their businesses. Microfinance offers them access to basic financial services such as loans, savings, money transfer services and microinsurance.
Relying on their traditional skills and entrepreneurial instincts, very poor people, amongst them many women, use small loans, other “micro” financial services and support from local organizations called microfinance institutions (MFIs) to start, sustain, or expand very small, self-supporting businesses. An MFI can be broadly defined as any organization—credit union, down-scaled commercial bank, financial NGO, or credit cooperative—that provides financial services for the poor.
Some of the defining criteria of the microfinance used in third world countries include: size - loans are very small in size; target users - microentrepreneurs and low-income households; small groups - borrower groups of 5 to 8 members (who guarantee for each other’s loan) guarantees that everyone pays on time; short terms - the repayment deadline for new borrowers in informal economies ranges between 4 to 6 months; frequent payments - weekly payments to the microcredit agents; the use of funds - for income generation, and enterprise development, but also for community use. Most terms and conditions for microcredit loans are flexible and easy to understand, and suited to the local conditions of the community.
The core idea of the Romanian microfinance coincides with the classic concept: micro entrepreneurs are offered small loans and other financial services to reduce their material needs, to support their business ideas and to be empowered to use their opportunities. Microcredit is highly demanded on the Romanian financial market, but in addition to the core idea, it has aspects that differ from the typical microfinance applied in poor third world countries.
Due to higher living standards in Romania, credit amounts are much higher than in developing countries and loan characteristics differ as well: disbursement periods are longer, there are individual material guarantees involved (rather than group members guaranteeing for each other) and client supervision is less frequent. There are two essential differences, firstly that Romanian MFIs offer more loan products than the basic group based microloan, and secondly, in Romania only around 43% of clients are women, while MFIs in poorer countries have over 80% female clients.