What is Microfinance?

Ever since Kiva was founded in the USA in 2005, word has spread about microloans and their popularity has grown. However, many people are still unaware of how microloans work, therefore a definition is required.

Definition of Microfinance / Microloans

Microloans are a form of person-to-person lending which is offered when banks and financial institutions cannot or will not offer the financial support. They are often very small in size – ranging from around £50 to £500 – and are used to help get businesses in poor areas started, or to expand existing businesses. It is common to see requests for loans from people who are in the livestock trade, perhaps selling the milk from a goat. If you provide enough money to buy another goat, they can breed kids to expand the trade, or they could purchase a cow in order to sell cow milk too. Often it is women running businesses in order to support their children and make sure that they get an education, which means that lending a microloan helps the future community as a whole, not just the individual entrepreneur.

With some associations you can choose to give the loan in one lump sum or to give on a monthly basis. In return the recipient of the loan pays you back and there are often ways to keep in touch with the business owner and see how they are doing.

Business, Charity or Social Enterprise?

Whilst there are businesses out there who loan the money in order to be repaid, it is more and more common for microfinance to be a form of charity. With World Vision Microloans, the recipient of the loans receives the amount they need in full straightaway so that they benefit immediately, even if the donor pays in monthly instalments. And when the recipient pays the money back it does not profit the donor, instead they can send the money to a new business owner in need and so on. It is a kind of mini economy aimed to help people.

Organizations like Kiva have taken this lending to a new level of social enterprise. Not only do you help people on a one to one basis, but you form teams in order to pool your resources. You can proudly set up a group of like minded people – whether from work, family, church or friendship groups – and display the full amount you have donated to date. This goes into a league table competing against other groups. This is a kind of competition where every one wins and which brings people with shared interests around the globe together.

In summary, microfinance charity is a way to offer hand ups instead of handouts. People in need are the same as people who have enough to get by every day – they want to succeed, make something of themselves and provide for their families. Although they might not be able to get loans in the traditional way, others step up to the challenge and provide a simple lifeline. Is money always the root of all evil when it can bring people together like this?

 

Author Bio: Article What is Microfinance? by Liz Strawford on behalf of World Vision Microloans.

 

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