Debunking the myths of microfinance

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

Microfinance includes the full provision of training and support from microfinance institutions (MFIs). This is usually why repayment rates are so high. Typically, commercial MFIs only provide microcredit. This is 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.

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.

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 organisations will lend to the poorest and most rural parts of the world. Dealing with this level of poverty has led to a misuse of the spending 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.

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 cooperate 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.

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. By not solely relying on fundraising income and donations, we are able to reach thousands of more families every year.

MicroLoan Foundation provides very 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.

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 experience in running a business. 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.

In Malawi, Zambia and Zimbabwe, many women are held back from engaging in economic life. They are less likely to get an education, and many women are married at a young age to relieve the financial burden on their parents. Cultural norms and legal structures, such as inheritance and land ownership rights, reinforce inequality and hamper women’s economic empowerment.

Empowering women has positive repercussions for everyone in the community. Research shows that women are much more altruistic with their incomes. According to World Bank, women reinvest 90% of every dollar that they earn back into their families’ education, health and nutrition. This means that by supporting women, we improve access to nutritious food, healthcare and education for children and dependants too.

What’s more, women are more likely to repay their loans. There is a wealth of research to prove this. When loans are repaid to MicroLoan, they can be used again and again to support more women to feed their families. This means that by supporting women, our reach is wider, and our impact is greater.

Our repayment rate is over 96%. MicroLoan lends 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 eight training sessions before the women receive their loan, and fortnightly training and support throughout the loan period to help them address challenges and manage their loans and their business.

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, during the COVID-19 pandemic or in 2019 when a cyclone hit southern Malawi when the floods which hit Malawi wiping out our client’s businesses, we were able to write off  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.