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Glossary of Terms

Glossary of Terms

Bank: A licensed financial intermediary regulated by a state banking supervisory agency. It may provide any of a number of financial services, such as deposit taking, lending, payment services, and money transfers.

Collateral: Asset pledged by a borrower to secure a loan, which can be repossessed in the case of default. In a microfinance context, collateral can vary from fixed assets (a car, a sewing machine) to guarantees from peers.

Commercialization: In a microfinance context, commercialization refers to the move by MFIs to provide services on a financially self-sufficient basis and under prevailing commercial principle and regulations.

Credit Union/Cooperative: A nonprofit, member-based financial intermediary. It may offer a range of financial services, including lending and deposit taking, for the benefit of its members. While not regulated by a state banking supervisory agency, it may come under the supervision of regional or national cooperative council.

Downscaling: Formal financial institutions that offer a microfinance program.

Financial Intermediation: The process of mobilizing deposits and disbursing them as loans to clients or investing them in other types of financial instruments.

Financial Self-Sufficiency: In a microfinance context, an institution is financially self-sufficient when it has enough revenue to pay for all administrative costs, loan losses, potential losses and funds.

Funder: An organization that provides monies to MFIs for operations.

Gross Loan Portfolio: All outstanding principal for all outstanding client loans, including current, delinquent and restructured loans, but not loans that have been written off. It does not include interest receivable. It does not include employee loans.

Group Lending: Lending mechanism which allows a group of individuals - often called a solidarity group - to provide collateral or loan guarantee through a group repayment pledge. The incentive to repay the loan is based on peer pressure - if one group member defaults, the other group members make up the payment amount.

Individual Lending: Single-client lending where repayment relies solely on the individual.

Institutional Type: MFIs can be Bank; Cooperative/Credit Union; Non-Bank Financial Institution; Non-Profit (NGO); Rural Bank.

Microcredit: Another name for a micro-loan. A part of the field of microfinance, microcredit is the provision of credit services to low-income entrepreneurs.

Microentrepreneur: Microentrepreneurs are people who own small-scale businesses that are known as microenterprises.

Microenterprise: A small-scale business in the informal sector. Microenterprises employ fewer than 5 people and can be based out of the home. Microenterprise is often the sole source of family income but can also act as a supplement to other forms of income. Examples of microenterprises include small retail kiosks, sewing workshops, carpentry shops and market stalls.

Microfinance: The practice of providing financial services in very small increments to the working poor.

Microfinance Institution: Also called MFI. An institution that provides financial services to the world’s poor. A financial institution can be a nonprofit organization, regulated financial institution or commercial bank that provides microfinance products and services to low-income clients.

Microinsurance: A system by which people, businesses and other organizations make payments to share risk. Access to insurance enables entrepreneurs to concentrate more on growing their businesses while mitigating other risks affecting property, health or the ability to work.

Microsavings: Savings in very small increments, frequently starting with just 1 USD and followed with very small deposits.

NBFI: Non bank financial institution. An institution that provides similar services to those of a Bank, but is licensed under a separate category. The separate license may be due to lower capital requirements, to limitations on financial service offerings, or to supervision under a different state agency. In some countries this corresponds to a special category created for microfinance institutions.

NGO: Non government organization. One form of MFI. An organization registered as a nonprofit for tax purposes or some other legal charter. Its financial services are usually more restricted, usually not including deposit taking. These institutions are typically not regulated by a banking supervisory agency.

Remittance: Transfers of funds from people in one place to people in another, usually across borders to family and friends. Compared with other sources of money that can fluctuate depending on the political or economic climate, remittances are a relatively steady source of funds.

Rural Bank: Banking institution that targets clients who live and work in non-urban areas and who are generally involved in agricultural-related activities.

Savings Bank: Banks that focus on savings mobilization as their core business. Savings banks often have far greater rural outreach than other bank networks and tend to offer products with terms that are more manageable for the poor than typical commercial banks.

Savings Mobilization: Programs intending to mobilize the capital of the poor and to provide savings accounts, as well as credit services, to microentrepreneurs and low-income households.

Self Help Groups: Also called savings groups. SHG are groups composed of about five to 20 members, with regular meetings in member's homes. At each meeting all members save the same amount. The groups then lend these savings to members, store them in a lockbox, or deposit them in a group bank account in order to leverage a group loan. If an emergency strikes, members often can access a loan quickly from their group’s emergency fund. Savings groups provide limited but highly convenient services to large numbers of small, rural depositors.

Stepped Lending: The process by which borrowers who repay loans on time are eligible for increasingly larger loans. Stepped lending keeps initial risk at a minimum while allowing microentrepreneurs to grow their businesses and increase their incomes.

Sustainability: An organization's ability to cover costs. There are varying degrees of sustainability, ranging from not sustainable to financially sustainable.

Transformation: In a microfinance context, transformation refers to the process by which a nonprofit community organization or an NGO becomes a regulated financial institution.

Transparency: The degree of an MFI's openness as determined by a sequence of financial and social performance information-gathering and testing. A transparent microfinance organization gathers and reports accurate financial information on its own, to be verified and analyzed by external parties. These external authorities ensure that the MFI's performance complies with appropriate industry standards.

Unbanked: A term used to describe the world’s working poor who are not able to participate in the formal banking sectors.

Village Banking: Lending methodology in which clients - typically women - form groups of approximately 10-30 individuals that are autonomously responsible for leadership, bylaws, bookkeeping, fund management and loan supervision. The group pools funds to use for business loans, savings, and mutual support, and members cross-guarantee individual loans.

Voluntary Savings: Deposits from the general public and members that are not maintained as a condition for accessing a current or future loan and are held with the institution.