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Microfinance, defined
Filed in archive Microfinance by mstandaert on May 4, 2006
Microfinance, defined
(Photo from the World Bank)

I've been slowly gathering links on microfinance and in that process I started to wonder how defined those words 'microfinance' and 'microcredit' and 'microloans' are. How different are these words? Are they all just saying the same thing, just in a different way? Basically, yes, but there are very different stages of microfinance around the world. In the U.S., banks that provide small business loans are pretty well established where even people in very rural areas can access these funds. Internationally that's often a different story. Many times local money lenders or suppliers, such as the rice middle men in places like Sri Lanka, who are basically the 'bank' for subsistence farmers. These lenders (or loan sharks, which you could call the more dubious) provide loans and material for farmers, often at very high interest over the long term. Since there are few other options for this, farmers, or at least the ones I met in Sri Lanka, just go with the situation as a fact of life. When villagers can get off this, and I saw a few that have formed village societies that bank some resources themselves to act sort of like a rudimentary savings and loan, the results can be very substantial and very quick. I also saw a few local microcredit social enterprises that had started giving microloans in villages, much of the time with the money going toward women in the village who are not out in the fields, for them to start enterprises, largely in textiles. From what I found out, their default rates were actually quite low, since the microloan enterprises I saw were also heavily involved in the social integration of the villages as well, mainly strengthening the village societies. But more on this some other time. This is starting to get a little longwinded ...

The World Bank defines microfinance as:

Microfinance refers to the provision of financial services for poor and underserved populations. Traditionally, microfinance has focused on providing very small loans (microcredit) to the poor to help them engage in productive activities. But today microfinance also includes a broader range of financial services: a safe place to save, payment and money transfer services, and insurance. All of these financial services can help poor people to plan for their own futures, invest in productive activities, boost their income and reduce their vulnerability to all types of risks. Unfortunately, only a small proportion of people in developing countries who could make use of these services currently have access.

Far from being simply a business, there are many groups out there starting to use hybrid techniques of business and non-profit to tap in to a variety of resources that can fill microloan needs. Maybe the best way we can define what social microfinance is would be through showing some of the organizations that are out there working in the field on these projects right now:

A good example of microloan non-profit foundation is the Microloan Foundation out of the UK, largely working in Malawi.

To date, over 3700 loans have been made in Malawi. Thanks to our careful nurturing, the vast majority of projects supported are commercially viable and 97% of the loans are repaid in full. This allows the capital to be recycled into new ventures and to go on working for many years to come.

Another nice one is Kiva, which actually lets individual donors choose and decide what enterprises they would like to fund around the world. Often it takes just a few hundred dollars to fund a start up in the developing world as you can see by some of the profiles on this page. (From Ming the Mechanic)

There are also those popping up in the developed world as well, such as Aspire in Northern Ireland, where the economy fell on hard times after the shipbuilding industry collapsed and the political instability scared away investments.

UP, or Microloans Unlimiting People, is another great example. Mainly working in Vietnam, cambodia, Kazakhstan and Pakistan, UP targets their micro-loans to families and single parents.

So there are just a few that are already becoming successful in what they do. I'll be presenting more as I go along, but if you have others to add, please leave that information in the comment section below.

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