Monday, January 22, 2007

How Micro Finance Works

In my previous post I introduced the concept of Micro Credit or lending. I'd like to expand on that here.

There are many models for Micro Lending around the world. However, probably the most common is group lending. Poor entrepreneurs in developing countries don’t have collateral to put against a loan. So, instead Micro Finance Institutions organize their borrowers into small groups of 5 or ten borrowers. The borrowers in the group help to guarantee each others loans. If one of the borrowers does not pay back their part of the loan, the entire group will not be able to get another loan even if the rest pay theirs back. This puts peer pressure on the entire group to be responsible for paying back their loan.

Typically Micro Finance organizations do not set up an office where people come and talk to the loan officer about getting loans. The loan officers go out into the field and meet the borrowers in group meetings in their homes. They may have weekly or biweekly meetings with each group where they discuss business plans and collect payments or savings deposits. As this would indicate, payments are made regularly and often. Not monthly as is typical in the US.

Many Micro Finance Institutions offer business training, savings as indicated above, as well as money transfer products, and some offer insurance products.

All these products are great but the product that fuels the development opportunity is access to credit for the poor. These loans give small entrepreneurs the opportunity to buy a cow or goat to provide milk which they can sell in the market. Or to provide materials for making a product like belts or furniture. Or to purchase inventory for their small shops.


MJ said...

I learned about micro financing a few years ago in a class I took on women's studies. The really great thing is that it reshapes the society by empowering women in environments where they are typically opressed. I think it is a far more human way of lending money and that further,it will have a greater impact. We can lend them money to do really great things, like lending India the money build power plants to generate electricity when few people have access to electricity and many don't even have a home. Microlending allows a poor society to evolve at its own pace. from waht I have seen it has been very sucessful.

John said...

I agree mj. I think it is one of the most powerful tools for real positive change. There is now a web site that you can loan as little as $25 to an entrepreneur in a developing country. Check it out if you are interested.