What is Microfinance?
Microfinance is a proven, acclaimed method for helping impoverished communities move toward economic self-sufficiency through the provision of small loans and other financial services. It involves lending small sums of money, often just a few hundred dollars, to people who do not have a measurable credit history, assets to secure the loan or access to mainstream financial providers.
Funds are used for a huge variety of purposes. Whether to buy seed crops or animal feed; ingredients to make ice cream or snack food for sale; to set up a hairdressing salon or a bicycle repair shop, microloans enable hardworking people to develop a reliable source of income and a livelihood. This is often the difference between subsistence living and making a small profit to improve food quality, health or to send children to school.
Savings programmes enable those without a reliable and regular income to save funds to be used in the event of disaster or misfortune. Regular savings can help those without other assets to cope when sickness strikes or when income dries up. Microsavings accounts also help ensure safety and security of funds as well as paying a small bonus on the money saved.
We operate savings accounts for clients across our network and continue to develop this vital service to help provide support in difficult times.
The third aspect of microfinance, microinsurance is there in times of trouble. When a failed harvest affects many members of the community it is vital that support can be given to sustain the community during difficult times and help them get back on their feet. Crop insurance enables clients to guard against the failure of their crops through lack of rain or natural disaster. Health insurance helps provide funds when a member of the family is sick or worse still dies.We help by making this insurance available to clients in case the worst happens.
What is our current strategy and plans for growth?
Click here for more details on our three year strategy to annually impact the lives of 3.5 million children by 2014.
How do we help poor communities to live outside of poverty?
• We promote education for children
One of the first things poor families do with new income from microenterprise is to invest in their children´s education. Studies show children of microfinance clients are more likely to go to school and stay in school longer. Student dropout rates are much lower in households who gain income from microfinance, compared to those who have no access to this service.
• We empower women - the face of world poverty
Access to financial services empowers women to become more confident and more likely to participate in family and community decisions. Statistically in Africa, women account for more than *60 per cent of the rural labour force and contribute up to 80 per cent of food production, however they receive less than 10 per cent of credit provided to farmers. *Source: Snapshots on Microfinance - The Virtual Library on Microcredit
• We empower the poor to solve their own problems
Our clients increase their household incomes, build assets and reduce their vulnerability to the crises that are a part of their daily lives. They can manage their cash flow and apply them to whatever household priorities they judge most important for their welfare. We empower and equip the poor to make their own choices and work their way out of poverty in a sustained and self-determined way.
• We break dependency on local loan sharks.
The formal financial sector does not extend credit to poor communities due to the small loan amounts required, the absence of any credit history and the lack of collateral assets. The traditional alternative might be a money lender in the community, who often loans money at high rates of interest. Nearly all of the business profits are applied to the payment of interest to the ’loan shark’ which leaves borrowers in a position of grinding poverty.
• We provide foundations for overall development
Testimonies and studies show households of microfinance clients have better nutrition, health practices and living conditions. Children are more likely to go to school and finish their studies and more children go on to further education. Improved earnings means that families can save money, which reduces their vulnerability when a business slows, a child gets sick or a family crisis hits. Microfinance gives families living in the poorest global communities options for the future and enables them to give their children the best start in life.
Why is interest charged on loans?
Microfinance clients pay interest on loans each month as a part of a strategy to create a mind shift that encourages independence and self-development. This solid business model encourages responsibility, accountability and ownership. People take control of their businesses and their lives.
Microfinance programs become self-sustaining institutions as their capital funds grow, enabling loans to reach more and more impoverished clients. Loan sizes and interest charges are determined by the local economy.
Providing loans to those who live in rural areas is expensive in relation to the size of the loan. For example a $300 loan from a community bank requires the same management resources as a $2500 individual loan, which increases the transaction cost per dollar loaned. This is one of the reasons that the poor in rural areas have not been an attractive market to the formal financial sector.
We charge a reasonable interest rate to:
i Cover the cost of running a microfinance program
ii Help people become financially independent and competitive under normal market conditions
iii Avoid destabilising the local economy and distorting the development of the in-country microfinance industry
Are we a non-profit organisation?
Yes, we are a not-for-profit corporation which is recognised by US tax authorities as a 501(c) (3) tax-exempt charity, which is controlled by and supports the charitable purposes of World Vision International.
Most of our funding is donated through World Vision support offices and supplemented through our own fundraising operations, detailed in our three year strategy.
When loans are repaid, the loan capital is recycled to provide another loan to the next microfinance client. The interest paid is used to fund operating costs of our microfinance institutions so that they become sustainable.