Microfinance and SME Lending
Microfinance
Microfinance is a concept in which specific microfinance institutions provide small loans to creditworthy people currently underserved by mainstream financial services providers.
In microfinance, women make up the vast majority of borrowers. Due to stronger social and family ties, women often follow a more conservative investment strategy, which in turn results in lower default rates. In contrast to collateral taken by commercial banks, most micro-lending institutions apply the principle of group lending. This means that a microfinance institution extends a small loan to an individual who belongs to a small group of people. As soon as the individual borrower proves reliable, credit is extended to additional people within the group. This procedure creates an incentive for the group to monitor each other's behavior and stay disciplined, as the group is jointly liable for single members failing to repay their loan.
Small and Medium Enterprise (SME) Lending
Development finance also includes the financing of small and medium enterprises, which are larger than microenterprises. Although definitions for each enterprise type are not standardized, a small or medium enterprise is larger than a microenterprise (in terms of number of employees, sales, and total assets).
SME lending is often more traditional than microlending – because enterprises are bigger, they have some collateral and therefore do not need ‘group lending’. However, they still face obstacles in receiving loans from commercial banks; these obstacles may include a lack of sufficient collateral, lack of adequate financial statements, or a perceived notion by commercial banks that SME lending is inherently riskier and costlier. However, many banks have recently realized the fallacy of this perception, and have accordingly embraced SME lending as a growing and profitable part of their business. ConCap further promotes SME lending through its FinAcc fund.