Logistics of Microfinance: The How

April 8, 2018

In this blog, we often write about the benefits that microfinance is able to offer to communities to fight poverty, balance gender disparities, avoid environmental degradation, etc. However, the logistics of how microfinance itself functions is sometimes lost in the margins.

To understand any story, one must always start at the beginning. Microfinance was first put into production in 1976 by Professor Muhammad Yunus who pioneered the concept by giving small loans to a group of female furniture makers in Jobra, Bangladesh. He believed that, if given micro loans at reasonable interest rates, these small business owners would be able to sustainably expand their operations. The idea spread like wildfire, and within 6 years of running his microfinance program, Yunus had provided loans to over 28,000 people. As the program continued to grow, Yunus created the Grameen Bank, a financial institution devoted to microfinance that would go on to lend over $6.3 billion to 7.4 million borrowers. Needless to say, the success of his model inspired many others to run their own microfinance operations and increase access to capital worldwide.

The term microfinance actually applies to a range of financial services, including financial advice, business education, savings access, and of course, microloans. If structured correctly, this combination results in loans with an extremely high repayment rate (Wisconsin Microfinance’s repayment rate is 96%). Microfinance is so much more than a cash transaction, and as a result, tends to create a much more sustainable future for its recipients.

The Wisconsin Microfinance process begins immediately after a donation is made, where the capital is transferred to a loan pool. The pool acts as a community fund run by a trusted distributor on the ground who dispenses loans to the small business owners in the area. Often, these funds are used to expand inventories, purchase new plots of land, or provide a safety net in times of hardship. As soon as the loan is repaid, the funds flow back into the loan pool, ready to be distributed again. The usage of a recycling loan pool means that one loan turns into two, four, and so on and so forth without the need of infusing any additional funds

So what is it that makes microfinance different from traditional loans? First off, one of microfinance’s primary uses is to build up a financial history that allows recipients to open savings accounts and create the ability and capacity to take out a regular loan. The sole intention of a microloan is to empower a small business owner to help themselves to better their financial situation and break the cycle of poverty for their family. Another distinguishing characteristic is its focus on lending to women, an emphasis in place ever since its genesis. In fact, 94% of the Grameen Bank’s loans have gone to women, who Yunus found to be more likely to devote their earnings to their family than their male counterparts. In short, microfinance is a unique entity in the world of non-profits because it’s not a charity. It’s empowerment.