Microfinance is the provision of a broad range of financial services and products such as credit, savings and insurance designed to assist poor people who lack access to financial services in the formal banking sector. Microfinance is characterised by small loans, typically around USD 1,500, with short maturities of 24-36 months and few write-offs, typically around 1% of the loan portfolio.
Microfinance has been associated with an excessively high nominal interest rate per year. In some cases microfinance institutions do charge excessively high interest rates, but in general the level of interest rates corresponds to costs related to inflation, expensive distribution, costs related to loan capital, write-offs and profit.
Globally about 50% of adults have a bank account while the rest remain unbanked, that is they do not have an account with a formal financial institution. However, there is an increasing demand for financial services to develop small businesses together with savings and insurance. Microfinance institutions offer these services to a fast-growing market which is now estimated to encompass more than 200 million active clients.
The business model is based on a detailed credit policy and standardised products which can be distributed to clients in emerging markets and developing countries. It is important that the microfinance institutions have a sustainable loan policy conforming to recognised international standards which protect the clients from over-indebtedness. This is to protect the clients in general and to ensure the quality of the loan portfolio of the microfinance institutions.
In June 2015 Maj Invest established the Maj Invest Financial Inclusion Fund II K/S and has since 2010 managed the fund Danish Microfinance Partners K/S in cooperation with the Danish pension funds PKA and PBU. The Investment Fund for Developing Countries (IFU) functions as lead consultant besides being an investor.