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How Microfinance and Microcredit works
Microfinance is the provision of financial services to those who are excluded from conventional commerical financial services since most are too poor to offer much - or anything - in the way of collateral. It presents a series of exciting possibilities for extending markets, reducing poverty and fostering social change.
The concept of microfinance originated in the mid-1970s in Bangladesh through a pioneering experiment by Dr Muhammad Yunus, then a Professor of Economics. His aim was to offer poor people:
- financial services
- entrepreneurship opportunities
- an end to mistreatment by money lenders
- a system where they could produce, manage and maintain their own finances
Click here to read more about Dr Yunus.
The most common form of microfinance is microcredit - the extension of small loans to entrepreneurs too poor to qualify for conventional bank loans. This is where the MicroLoan Foundation comes in.
Microfinance and microcredit have two distinct advantages over charitable giving. Firstly, it is sustainable and creates independence from aid, not dependence on it. By giving a small loan to an individual, we hope to give them the ability to work their own way out of poverty. MicroLoan lends to groups of about 10 to 15 women, allowing individuals to support, encourage, and provide assistance to each other if things go wrong.
Secondly, it means that the money goes directly to the people who need it - bypassing the bureaucracy and corruption that can compromise traditional methods of charitable giving.
Moreover, MicroLoan never lends to individuals without first providing them with the expertise and training to build a business plan that is likely to succeed.
For more information on how microfinance and microcredit are shaping economies, read our blog,
Malawi Five O - Adventures in Microfinance
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