How old were you when you opened your first bank account? Got your first credit card or overdraft? What about your student loan, car loan or mortgage? We in the West take access to banking, insurance and credit as a given. However it is in the absence, or tightening of credit, like in our current 'credit crunch,' where the cracks in the system start to show.

Many people rely on the ability to save money when times are plenty and draw upon savings, or borrow additional money, during times of need. In our current economic crisis many small businesses are struggling because they can't access credit to pay for their goods before they receive the income from selling them to others. Many rely on lines of credit to straddle that gap between buying raw goods and selling finished goods.

The poor are often denied these tools

For the world's poor, the flow of money can be even tighter. Many of them have no access to savings accounts. This means if they need to save for their child's education or the dowry for their daughter they might have to bury jewellery, invest in additional chickens or stash money. All of these are high risk for the capital to be lost.

Many of them also don't have access to insurance policies to protect them against disaster or the ability to borrow funds to cover a medical bill or pay for a new school uniform. Traditionally, many have relied on local 'moneylenders' who often charge crippling rates of interest. But there is another way.

Microfinance

Microfinance is a growing global movement to provide safe and secure basic banking practices to the World's poorest inhabitants. This can take the form of small, unsecured loans to deal with personal emergencies as well as a safe and accessible place to save money. It also has a strong mandate to encourage lending for the starting of small business enterprises whereby, hopefully, the individual can raise his/her family out of poverty (and much of this entrepreneurial activity is led by women).

Grameen Bank

Probably the most well-known of these institutions, especially after its founder Muhammud Yannus won the Nobel peace prize in 2004, 30 years after he started the Grameen Bank with a loan of $27 to a group of villagers in Bangladesh

Village Savings and Loan Associations

Village Savings and Loan Associations, or VSLAs, are a more traditional form of financial grouping. A group of villagers each agree to save a certain amount monthly which is then loaned out in short-term loans at fairly high rates of interest. At the end of the year, the VSLA tallies their books, pays out their investors and folds to be recreated with a new group of investors for another year. While their interest rates are high, they have a very low incident of individual's defaulting on loans as they are personally known to the investors.

Not a panacea

Microfinance does not solve all the problems of the poor - and in some cases can make things worse if loans are not handled properly which can result in people getting in debt over their heads. There is still much need for infrastructure and basic forms of aid, but where used properly it can be a useful financial tool to empower individual's choices.

Written by Knight Hooson