Debunking the myths of microfinance

Debunking the myths of microfinance

MicroLoan offers a long term solution to helping those living in poverty. Here we answer some FAQs regarding how we operate.

You can download our comprehensive microfinance fact sheet and FAQs here.

What is Microfinance?

Microfinance is a type of banking that provides financial services to low income individuals, or people/groups of people who would otherwise have no access to finance.

Microfinance includes the full provision of training and support from microfinance institutions (MFIs,) which is usually why repayment rates are so high. Typically, many commercial microfinance institutions (MFIs) only provide microcredit, the provision of loans (credit) to low income groups of individuals. What sets MicroLoan Foundation apart from commercial MFIs is our commitment to providing training and ongoing support to clients.

Does microfinance actually work?

If microfinance is paired with extensive training, support and responsible lending, the answer is yes.

It is not a quick fix; it’s a long term, sustainable solution that requires ongoing support. A family living on less than £1 a day won’t be lifted out of poverty in the space of one loan cycle. Many women continue working with MicroLoan Foundation for multiple loan cycles, seeing incremental changes as their businesses begin to thrive.

In poor areas, isn’t microfinance used for consumption rather than income generation?

Commercial MFIs which run for profit are often guilty of not providing sufficient training and not vetting their clients before giving out loans. MFIs are often the only people who will lend to the poorest and most rural parts of the world. Dealing with this level of poverty has led to a misuse of spend of microloans.

By “misuse” we mean spending the loans on day to day things like school fees, groceries and medicine. This has led to a public belief that microfinance is now more about unrestrained consumer lending rather than nurturing grass roots entrepreneurship.

 How we operate

Aren’t microloans easy to get but hard to repay?

Over-indebting borrowers is unacceptable under any circumstances, at MicroLoan Foundation we assess all loan applications to ensure that the loan size is right for each individual woman.

We co-operate with other microfinance providers in each area to ensure that to the best of our knowledge, our borrowers are not in danger of becoming over-indebted by seeking additional credit facilities elsewhere. The group dynamics act as checks and balances and provide a level of risk management on loan repayments. The groups are responsible for deciding who can be a part of it. Because of group responsibility of loan repayments, it’s in their own interest to only accept borrowers who will be able to repay their loan.

If you’re a charity, why do you charge interest?

We’re moving away from the conventional aid approach to find a sustainable model to help some of the world’s poorest women. By charging interest on the loans we’re able to cover some of our expenses to deliver the training and support needed to ensure that our clients succeed.

MicroLoan Foundation provides small loans, and small loans are more expensive to process than large ones because they take longer to process. But the loans, by nature, have to be that small to benefit the poorest of the poor.

We work in hard to reach rural areas where most other organisations do not want to go. But it is more expensive to reach often overlooked rural communities.

Without employment history or collateral, microfinance loans require a more hands-on, time-intensive assessment to determine creditworthiness. We send our Loan & Training Officers (LTOs) to visit the client as part of this process, making the process even more challenging and costly in remote areas.

Does microfinance actually reach the poorest of the poor?

MicroLoan Foundation reaches the poorest of the poor, 83% of our clients live below the poverty line ($2.50 per day). Most MFIs are moving more towards urban areas because the cost is lower and the return is higher. Our social mission is to work with the poorest of the poor, to help them work their way out of poverty.

This means our loans and training programmes are designed specifically to reach and benefit some of the poorest women in the world.

We take no collateral and we require no savings or other eligibility requirements. This means that there are no financial barriers to receiving a loan from us, allowing us to reach some of the poorest women in the world.

Why do you only lend to women?

Women are more likely to repay their loans. There is a wealth of research from across the world to prove this.

Additionally, research shows that women are much more altruistic with their incomes. The Havard Review published a report in 2012 stating that women reinvest 90% of every dollar that they earn back into their families’ education, health and nutrition.

How do you have such high repayment rates?

Our long term repayment rate is 97% (In 2016 we reported repayment rates of 99%). We lend to groups of women rather than to individuals, therefore each group accepts joint responsibility for the loan.

We provide extensive training before we make the loans to ensure that we lend responsibly and help our clients succeed. We provide 8 training sessions before the clients receive their loan, and fortnightly training and support throughout the loan period to help clients address challenges and manage their loans and their business.

What happens if someone can’t repay their loan? 

We know that commercial MFIs will put debt onto another family member should something happen. It is commonplace for a lot of commercial MFIs to make their clients take out life insurance as part of their service charge on the loan. The heavy handed approach of commercial MFIs does not help with poverty alleviation. Taking collateral from families who are living on less than £1 a day or shifting debt onto another family member goes against our social mission.

Because we are a charity we have the option to write off loans in extenuating circumstances. For example, when the floods which hit Malawi in 2015 wiped out over 2000 of our client’s businesses, we were able to write off all of these loans. Our structures are set up so that our clients should always be able to pay back their loans, but there is a safety net there if for any given reason they cannot.