What is microfinance?

If a budding entrepreneur in Africa contacted the local bank for a loan of $100 then this loan is likely not be given as the loan amount is too small and there is no profit in this for the bank. There is also no lending history if it is a first time loan.

The result is that millions of potential business people around the world cannot gain access to the funds that they need to build or develop an existing business. Sometimes all it takes is $100 to buy more stock at a discounted price and this profit can then be used to build the business in the future.

A pioneer was needed and Mohammed Yunus from Bangladesh stepped forward as he thought about giving small loans sometimes as small as $50 to help people to help themselves. $50 can buy phone cards for re-sale in rural Africa, chickens for breeding and re-sale, open a small retail outlet or even a bicycle taxi. The options are endless and it helps people to reduce costs and make a profit. Traditionally these people have contacted local money lenders that charge extortionate interest rates and can threaten you and take possessions if the money is not repaid.

Microfinance often involves self help groups and peer pressure to ensure that loans are repaid. It works like this, a loan officer from a microfinance charity or bank will contact a village to explain what microfinance is and how it works. They are then encouraged to form groups of say 7 people and they all have the understanding that of one person fails to make a repayment of the loan then the others in the group need to contribute towards this amount. Loans are then requested and disbursed and repaid over a period of no more than about 18 months. Once the loan is repaid then members can often take out a bigger loan to fund more purchases. The repayment rate worldwide is around 98 percent which beats the banks hands down and has provided profitable businesses for those responsible for administrating the loans. These companies are called microfinance institutions and the biggest Indian institutions now loan millions of dollars per month to hundreds of thousands of borrowers.

A few years ago two genius people thought of KIVA which means that anyone in the world can make a loan of $25 dollars to a budding entrepreneur via the site and when and if the money is repaid they can then use this money to relend to another needy person or withdraw it and keep it for themselves.

Our website guidemegreen has started a lending group on KIVA and made $2000 of loans around the world and all of this has been repaid. May the good luck continue and none of the businesses I invest in fail as I will lose money. KIVA is hoping to lend 1 billion dollars via the internet site in the next 10 years. An enormous transfer of wealth from developed to developing countries.

Many countries including China and India are heavily promoting microfinance as one of the many tools to help alleviate poverty in villagers and urban areas around the world. KIVA has started to allow you to make loans to USA business people who need credit themselves as poverty exists everywhere not just in the third world.