MicroFinance

Half the world’s population – approximately 3 billion people – live on less than $2 a day. In most developing countries, more than 50% of the people survive by operating very small businesses. Microentrepreneurs sell a wide range of goods and services: fruits and vegetables, dairy products, baked goods, household items, school supplies, clothing, and services like hair care, just to name a few.
Like any businessperson, these microentrepreneurs need access to working capital to buy equipment and inventory if their businesses are going to grow. But commercial banks won’t lend to them. They’ve assumed the poor are not credit worthy; they also believe small loans cost more than they’re worth. The poor are often illiterate and wouldn’t be able to complete required paperwork if given the chance. Equally important, they lack collateral, an essential feature of the traditional banking model. As if these barriers weren’t enough, patriarchal cultures often exclude women from formal banking systems in spite of the fact that women lead the lion’s share of micro-enterprises. The result: the entrepreneurial poor must fend for themselves when it comes to credit. This typically means dependence on money changers or loan sharks who charge exorbitant interest (anywhere from 50% to 100% per month).
Microfinance emerged in Bangladesh and Latin America during the late 70s as an alternative to other forms of credit. Instead of worrying about ways that the poor didn’t fit traditional banking models, early microfinance practitioners developed a loan product with their customer in mind.

The Guarantee to pay back is known as: “Group Guaranteed Lending”:
Borrowers form peer groups of five to ten members. They take small loans – beginning around $100 – at a rate of interest designed to cover the lender’s costs, about 2% per month. Group members’ cross-guarantee one another’s loans (that is, if one woman doesn’t make good on her loan, the others help repay it) thereby resolving the need for collateral and adding a healthy dose of peer pressure and mutual support to the system. When the first loans have been repaid, members have access to successive, larger loans. After completing several loan cycles, in effect, clients have developed a credit history and become eligible for individual loans which provide larger credit limits and more flexibility.
Microfinance programs around the world typically target women. Women repay their loans more reliably than men and are more likely to invest increased income in improved nutrition, healthcare, and education for their children. The need among women is also greater. FINCA, a microfinance organization active in 19 countries, estimates that 70% of the world’s poor are women; they have traditionally had limited access to education and productive resources like land and credit. This backdrop of patriarchy highlights another benefit: women who participate in microfinance build their confidence and self-esteem in addition to their economic power, thereby strengthening their position and contributions in their homes and communities. Women are the clients of choice.
Microfinance successfully challenged old assumptions. It turns out that the poor are credit worthy. In well managed programs across the world, repayment rates remain above 98%. By setting interest rates to cover costs, operating efficiently, and utilizing commercial credit to meet the demands of a growing loan portfolio, microfinance institutions are capable of weaning their dependence on donor dollars and reaching full sustainability. The appeal is clear: microfinance is an effective, market oriented, self sustaining approach to world poverty.