Lending a helping hand

PUBLISHED : Monday, 31 March, 2008, 12:00am
UPDATED : Monday, 31 March, 2008, 12:00am

You have just earned your first salary!

You can feel the banknotes in your pocket as you happily head back home.

You are determined to save part of it to buy a motorbike. That will make it easier to go to town rather than walk.

So is there a safe place to keep your money? In the bank, of course.

But for millions of people around the world, this possibility does not exist. There are no banks around, or at least within a reasonable distance. Imagine! No bank to safeguard or lend money, and no easy and safe way to transfer money to others.

For a long time, banks have believed that offering services to very poor people was not profitable. Why?

Opening and managing an account costs money and banks don't usually directly charge their customers for it.

Banks have to hire people to deal with customer transactions, whether it is depositing, withdrawing or transferring money, rent out a complex in a central location and buy various equipment, including computers.

So how do people manage their money without banks? When they need to borrow, they usually resort to the 'informal' sector: friends, family or money lenders, who tend to charge very high interest. With their savings, they can buy jewellery, especially gold, cattle or land. But this is a risky strategy (cattle can die, land values can go down, jewellery can be lost) and not liquid (hard to sell quickly).

In the 1970s, some non-profit institutions started offering banking services to the poorest. And big banks have started exploring this market as well.

These services are called microfinance.