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Microfinance 101
Investing in the World’s Poor: Microfinance 101
In acts of investment that would make traditional bankers cringe, microfinance institutions (MFIs) see the world’s poorest people as a good credit risk. Microfinance fosters small-scale entrepreneurship, providing financial services such as microcredit, microsavings and microinsurance to the very poor. It and acts as a hand-up when a hand-out is no longer beneficial. This process is rooted in 1970s experimental programs which lent small amounts of money to groups of women who, in turn, invested them in small businesses. In the past 30 years, the impact and prevalence of microfinance have grown, pushing the strategy into the frontlines of many worldwide development projects. Understanding microfinance can get complex, but we’ve broken it down for you. Just think of it as… Microfinance 101.Microfinance Framework
Microfinance, also known as microcredit, is the strategy of giving small loans, typically ranging between $50-750, to clients who have minimal collateral to offer for a traditional loan. The process is fairly simple:1. Clients are identified and chosen by a microfinance lender as a good risk and candidate for microfinance lending
2. Clients are coached in simple entrepreneurial practices, and then given a loan to invest in a business.
3. The businesses, typically (99 percent of World Vision supported businesses), thrive and earn a profit.
4. The recipient demonstrates self-sufficiency and the loan is repaid.
5. The loan is recycled for use in another small business and the steps repeat.
Benefits: Fiscal and Humanitarian
Empowers the poor: Rather than acting as a simple hand-out of money, microfinance provides the poor with a means to bring themselves out of poverty. The loan recipients are respected and trusted that they will pay back the loan. This has proved itself to be a successful approach, with more than a 99% repayment rate.Promotes gender equality: By encouraging economic participation, women are esteemed as valuable contributors in the marketplace and gender-equality is promoted. For example, within the work of World Vision MFIs, 68 percent of all recipients are women. Statistically, these women are more apt to spend additional income on their families, thereby extending the reach of the financial benefits.
Supports the local economy: The impact of microfinance stretches beyond the original loan recipient. Since the microfinance approach is more holistic than traditional loans, and clients are trained for success, the established business grows to hire more local employees and expand its influence in the community.
Risks: Appropriate Application
Microfinance is a long-term solution and is not appropriate in all situations, in every condition. It works to build up the surrounding economy, and does not act as a replacement for immediate aid. In the case of a natural disaster or refugee situation, when immediate assistance is needed, microfinance is not the appropriate response.AIDS and Microfinance: Where’s the Intersection?
The economic training required of the loan recipients provides a significant opportunity for AIDS education. Since MFIs are prepping the clients for success, health is a major component. Clients receive HIV and AIDS training in conjunction with their financial orientation and instruction. In addition, many loan recipients receive access to microsavings and microinsurance programs, which impacts both the person living with AIDS and their family.AIDS and poverty are so intertwined, that an approach to dealing with one, nearly automatically touches the other. As the impact of microfinance lifts the economic burden from a household, they are better able to care for their health as they have the means to buy nutritious food and, if needed, antiretroviral treatments for AIDS.
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