ABOUT MICROFINANCE

Mainstream banks in the community typically reject applicants who have insufficient collateral. This eliminates most of the working poor from receiving a loan. Discouraged, applicants seek out other means to find a loan to build their business. For most women and men the options are few and far between.

Loan sharks hover around the banks coercing disappointed applicants into signing for high interest loans that are sure to bring disaster. At interest rates of 75-125% per month there is little hope of getting out of poverty. Even though applicants have good ideas and solid work ethics, they have no hope of growing their business without capital.

Microfinance institutions do charge interest on their loans to pay for their services. The interest charged is dependent on the type of loan, length of repayment, efficiency of the institution, and the risk of the client.

A microfinance loan goes far beyond the person receiving the loan and affects the entire community. As entrepreneurs grow their business, their income increases. And as livelihoods increase so does the ability to buy from other stores in the community. Income means women and men can afford new cloths, varied foods, specialty services and entertainment items. The local economy is like an ecosystem where one aspect affects the other. Sustainable and growing incomes in a community means the economy and livelihood of every member grows.

MEDA researched this very concept with an impact study in Bolivia. The study compared communities who had microfinance with those who did not. And not surprisingly, the differences went far beyond economics. The community that had access to microfinance had healthier children, better nutrition and increased education. Civil services were stronger in the community and there was a higher median income. The community with no access to microfinance had less opportunity and increased poverty. A simple loan empowers a whole community and creates a better future for everyone.

An estimated 1.3 billion people around the world live on less than $1 a day. War, disease, famine and drought have left entire communities struggling to survive. Without proper income, families simply do not have sufficient nutrition, healthcare and education.

Our experience at MEDA tells us the best hope for the working poor rests in helping people economically by encouraging small businesses.

While hard work and determination go a long way, a business dream cannot become reality without a loan. For many, a lack of capital is the only thing preventing them from starting their own business. Without money they cannot purchase more cloth to embroider, better kitchen supplies to increase efficiency or newer technology and farming equipment to improve yields.

Microfinance institutions provide these loans. By working through these community institutions entrepreneurs are able to receive training, mentorship and technical guidance for their businesses. The institution becomes a resource they can tap into for years to come as they build their business.

Microfinance allows the working poor to build their business and increase their income. But where does their extra income go and how does it improve their quality of life? Impact studies have been done on this very issue and findings are consistent around the world. Extra family income is spent on several specific areas:

Additional money is first spent on food and shelter for the family and clothes once basic needs are met.

Extra income is then spent on education for children and if possible secondary education – people see education as a way to break out of poverty.

Once basics are taken care of, money goes toward unessential goods and services like TVs and furniture. These items not only improve their quality of life but they also put money into other businesses in the community, helping the local economy grow.

Many people also want to increase their contributions to their Church and other faith communities as their incomes rise. This not only contributes to the faith community, but also increases local accountability in programs, theology, and structural issues.

Finally, rising incomes can lead to paying taxes for the first time. Whereas many think of taxes as a burden, contributing to one’s society through taxation is a strong indication of rising incomes. As people begin to pay taxes, they feel more involved in their community and become more involved in civil society. They have a desire to influence how their taxes are spent.

These impact studies also highlighted the differences between how men and women manage extra income. Men typically spent extra money on themselves while women tended to pour their income back into the family unit. For this reason, most microfinance programs are aimed at helping women build their business and improve their income so the whole family can find a better future.

Microfinance institutions are doomed to fail without the right expertise. It is important to have staff that understand banking, systems that are efficient and transparent, and governance that provides direction.

MEDA is a world leader in microfinance, providing guidance, strategy, procedures and training to institutions around the world.

MEDA has been directly involved in developing rural and urban microfinance credit and training facilities in Haiti, Jamaica, Bolivia, Nicaragua, Tanzania, Russia, Mozambique and Romania. We are developing partnerships with microfinance institutions in many other countries as well.

Several of these programs have become fully sustainable independent financial institutions. MEDA's programs are respected in the field and are used as a template for many institutions seeking a solid foundation for growth.

Microfinance institutions provide the key link to the working poor. These institutions function as banks for the working poor and provide loans to applicants who meet strict requirements. Trustworthy loan applicants who would have been rejected by mainstream banks because of a lack of assets are given loans to help build their business.

In addition to capital, MEDA provides training, organization and expertise to microfinance institutions and helps build their structure. Once the local institutions are set up, MEDA helps them build a client base, creates necessary regulations and makes sure application processes and procedures run smoothly.

The microfinance institution becomes an essential part of the community, allowing the working poor to access loans and build their businesses. The applicants grow their businesses through affordable loans and the institution continues to be a resource for entrepreneurs for generations to come.

In order for Microfinance Institutions to remain strong and continue to offer financial services to underserved communities for many years, they have to become sustainable. In order to pay for their own services to the community, they charge interest on their loans. The more efficient they can become, the less interest they have to charge. The goal is to have create an institution that is can pay for all its own costs and growth through its own work.

Handouts to those living in poverty often provide only temporary relief and a ‘band-aid’ solution. The root challenges of poverty are much deeper and require social and economic solutions. In order to create lasting change, development initiatives need to center around building the economy and the individual livelihood of every woman and man. They need a way to earn a living on a consistent basis.

By setting up strong, sustainable, local institutions business can grow and look to the future with confidence. And once institutions are set up properly, they can remain in communities and provide the fuel for growth allowing people to work their way out of poverty.

Sustainable growth is only possible once the working poor are able to earn a living. And in addition to providing for their families, they also begin to feel the dignity and confidence that comes from making a living and achieving success.

Microfinance is gaining international respect in the field of development. A symbol of the growing recognition is the 2006 Nobel Peace Prize that was awarded to Professor Yunus of Grameen Bank. He is a pioneer in the field of microfinance and his organization has been active in securing loans for nearly 2.2 million families in 22 countries. By giving loans at reasonable interest rates, the Grameen Bank has helped the working poor escape poverty and see a brighter future.

Professor Yunus has inspired thousands of microfinance practitioners and donors and has helped create a movement that has given new hope to poor families around the world. MEDA is proud to share the same passion for microfinance.

We believe the poor are bankable and credit worthy. Hard working people living in poverty deserve an opportunity to earn a living. Our goal is to demonstrate this belief through microfinance.

Microfinance provides capital in manageable loans at reasonable interest rates. These loans help those living in extremely poor areas of the world to begin to grow their business.

With loans they can buy material to embroider, farm equipment to increase yields or the necessary utensils for their restaurant. As a result of these loans, families have food on their table and can look to the future with hope.

To learn more about microfinance, please visit MEDA's website.

Other valuable resources are available from some of MEDA's affiliate organizations in the field of microfinance including Microfinance Gateway, The Seep Network and The Consultative Group to Assist the Poor (CGAP).