What is microfinance?

‘Microfinance’ is the provision of banking and related services to those who have traditionally been excluded from them. At its core, it is the principle of financial inclusion. Microfinance ensures that the most disadvantaged in society have access to affordable financial products and services that not only meet their needs but are delivered in a responsible and sustainable way.

Microfinance, in its present form, has been operating across the world for nearly 40 years and has been so successful that its ‘founding father’, Muhammad Yunus, was awarded the Nobel Peace Prize in 2006 for economic and social development.

How and why it works

WildHearts funds loans that enable our predominantly female clients to set up small businesses. Our own microfinance institution MicroLoan Foundation emphasises training and, alongside the loans, our clients are provided with financial literacy and business training that equips them with the skills to run their enterprises sustainably.

“I always help out my other microfinance group members and give them tips on how to manage their business and cash flow.” – Besilia Supervil, Haiti

This support helps our clients to become self-sufficient for their daily needs and to work their way out of poverty over time. The money our clients earn helps to provide food security for their family, better housing, access to health care and education for their children. Typically, each loan will impact 5 lives directly.

Loans and training are normally delivered through Trust Groups that consist of between 10 and 40 individuals. These groups meet regularly and provide an important forum for our clients to receive support and to share advice and experiences.

“My micro-loan enabled me to buy stock in bulk which helped me to increase my profit and grow my business.” – Alice Chisate, Malawi

Members of a Trust Group guarantee each other’s loans, which fosters an environment of accountability and solidarity. This approach to lending has a proven and impressive track record, with microfinance repayment rates averaging around 98%. Time and again, when given fair access to finance, the world’s poorest demonstrate that they are very dependable loan recipients.

Are clients charged interest?

Yes. Interest is necessary to ensure that microfinance can be delivered sustainably.

Our Foundation works with carefully selected partners who share our mission, who are committed to client protection and transparency, and who demonstrate innovation in their approach to financial inclusion. The interest that they charge covers administrative costs, the cost of capital, and any loan write-offs. This ensures that when a loan is repaid, those same funds can be re-lent to help someone else in the community. This cycle then continues in perpetuity.

Interest rates for microfinance vary from country to country but they are nearly always higher than those charged by conventional financial institutions. There are a number of reasons for this:

  • Inflation and bank rates in low-income countries are often very high. Interest is necessary to preserve the purchasing power of a loan fund and ensure it can continue to support the same number of clients over the long term.
  • It costs more to administer small loans. If the costs of administering a smaller loan and a larger loan are similar in absolute terms, they will be greatly different in percentage terms. For example, if it costs £10 to administer a loan, this will equate to 0.2% of a £5,000 loan but 20% of a £50 loan.
  • Microfinance is more than simply a transactional loan arrangement. Loan officers spend many hours a week travelling to meet clients and groups to train them and help them with their businesses. Most of our clients are in geographically remote areas with low population densities. This means that, in practice, there are much higher operational costs involved in delivering training, disbursing loans and collecting repayment. Borrowers are also not required to provide collateral or have any other form of income to receive a microloan. Accordingly, loan officers must spend more time with each client and group to properly understand their circumstances, assess the feasibility of each loan application, and manage risk for both the client and lender.

Microfinance when delivered responsibly will always prioritise social outcomes, but balance these with the need for sustainability. It is important to recognise that the communities that depend on their microfinance provider need the comfort and security that it will be able to exist to serve them over the long term. For our clients with no access to traditional banking services, the alternative is often local moneylenders where annual interest rates can reach several hundred percent. Robust client protection protocols are always a core part of responsible microfinance. These include assessments of affordability and safeguards designed to prevent client over-indebtedness.

Further information

For more information on microfinance and the partners that we work with, please contact us.

Additionally, we recommend the following as excellent background reading:

  • Banker to the Poor by Muhammad Yunus (1998)
  • Small Money, Big Impact by Patrick Scheurle and Peter A. Fanconi (2017)