Loans Through MicroFinance

Microfinance Provides Loans, Hope to Millions Worldwide

Small-scale lending helps people escape poverty, one loan at a time

Fatima Serwoni lives in the village of Namunsi in Uganda's Mbale district, where she owns a small store that sells food and household items. At one time, Serwoni barely had enough capital to keep her store's shelves stocked. But after buying a cell phone with a loan from Foundation for Credit and Community Assistance (FOCCAS), a local microfinance institution (MFI) and partner ofGrameen Foundation USA ( GFUSA), Serwoni could charge fellow villagers to make phone calls, allowing her to raise enough money to keep her inventory high -- and help her community, too.

In Uganda, Rwanda, and Bangladesh, programs like the Village Phone Program provide cell phones to people in rural villages where no telecommunications services previously existed. In Uganda, micro-entrepreneurs receive loans from local MFI partners to purchase phone kits from MTN villagePhone. For many, like Serwoni, this small piece of technology represents a chance to take one step away from poverty and toward economic self-sufficiency.
Yet often, a villagePhone's impact extends far beyond a single person. Serwoni's entire village benefits from her villagePhone because it allows people to perform simple -- yet economically vital -- tasks such as calling a small producer to check on and negotiate the market price of goods. The phone has also made a huge impact on Serwoni's family. Since becoming a "phone lady," Serwoni's income has increased by 80 percent, and she is now able to send her children to school.

Changing Lives through Microfinance:

GFUSA is an international nonprofit that uses microfinance, new technologies, and innovation to empower the world's poorest people to escape poverty. The Grameen Foundation grew out of the Grameen Bank, which was founded in Bangladesh in 1976 by microfinance pioneer Dr. Muhammad Yunus. The two organizations are now global partners, working together to extended small loans to people around the world through partnerships with local MFIs. To date, the GFUSA network has helped more than seven million people worldwide.

Unlike other types of lenders, GFUSA's partners don't ask for collateral like money or property before financing a loan. Instead, MFIs secure loans by leveraging social collateral in the form of peer pressure. Borrowers take out loans in groups of five to eight individuals; if one member defaults on a payment, the entire group is penalized. In some cases, a group will cover for that person, or the loan is rescheduled; in other instances, the entire group typically may be penalized and sometimes barred altogether from taking further loans.

These "solidarity circles" also give borrowers social support beyond the business advice and counseling provided by MFIs: If one borrower falls ill, for instance, her solidarity circle will help with her business until she is well; if she gets discouraged, the support group pulls her through. This system encourages borrowers to repay loans in full and on time, resulting in repayment rates as high as a 95 percent.

Microfinance loan cycles are often shorter than traditional commercial loans, typically spanning six months to a year, with payments (plus interest) due weekly. Shorter loan cycles and frequent payments help borrowers stay current and prevent them from becoming overwhelmed by large installments.

Because this transaction-intense collection schedule -- which often takes place in hard-to-reach rural areas -- is more expensive than providing large loans to economically secure borrowers in cities, MFIs must charge interest rates that may sound high -- often 30 to 70 percent annually -- to cover their costs. Yet these interest rates are still significantly lower than the 300 to 3,000 percent annual rates borrowers once paid to money lenders or credit card companies.
Over the next five years, Grameen expects to reach five million new clients. The organization also seeks to support innovation in three areas: using information and communications technology to reduce poverty; pursuing industry standards for data tracking and reporting; and developing and executing innovative financing models to expand the available capital for microfinance programs.

Other Microfinance Programs:

One way that Grameen has used information and communications technology to reduce poverty is through its now-completed Village Computing Program, which sought to empower and connect the rural poor by giving them access to information technology. During the two-year pilot phase in Tamil Nadu, India, partner MFI Activists for Social Alternatives (ASA) joined forces with information and communications technology provider Drishtee to create 20 Village Computing Centers.

ASA provided loans to a select group of clients to purchase equipment and set up and maintain the centers, while Drishtee provided content, services, and support. Each center offered a range of services, including access to government sites, agricultural information, and computer education. Centers were also equipped with a computer, scanner, printer, photocopier, and digital camera.

The Village Computing Program was designed to explore microfinance's potential to bring sustainable technology to rural communities. To promote financial tenability and encourage entrepreneurship, the program was structured under a franchise business model, meaning that all computing center operators paid a buy-in fee to join the program, plus monthly franchise fees. These fees covered the costs of the intensive training programs and the business and technical support required to launch and sustain the centers.
GFUSA is reviewing the lessons learned through this program and will be publishing a report on its findings.

Alternative Microfinance Models:

GFUSA describes microfinance as small loans (usually less than $200) to individuals to establish or expand a small, self-sustaining business. Yet other microfinance organizations use the term more loosely. The Al-Thiqa Organization for Microfinance and Small Business Loans provides loans ranging from $100 to $25,000 to small businesses in northern Iraq. Since its 2003 creation by ACDI/VOCA, a nonprofit that promotes economic growth around the world, Al-Thiqa has distributed more than 3,700 small business loans (valuing a total of $7.8 million) and has generated an estimated 7,400 sustainable jobs in the war-torn country.
Al-Thiqa loans are secured by property (lien on house or business premises for loans over $2,500) or by the personal guarantee of a government employee, plus two references. In assessing the loan amounts, Al-Thiqa conducts interviews and site visits, reviews balance sheets, and performs cash-flow analyses.

Yet despite its rigorous application process, Al-Thiqa doesn't turn down any legitimate request completely. The average Al-Thiqa loan is $2,000, although Iraq's weak economy has led to an increased need for small loans well. Ironically, Al-Thiqa's $8 million in funding comes from stashes of cash discovered in Saddam Hussein's palaces following the United States' invasion of Iraq. The money was turned over to help rebuild Iraq's business infrastructure, with $30 million designated for microfinance loans.

One of Al-Thiqa's success stories is an Internet cafe in Daquk on the outskirts of Kirkuk. Cafe owner Zaid Serwan says that he wouldn't have been able to upgrade his one-computer shop without help from Al-Thiqa. The loan took him only a few days to procure, but has made a lifetime of difference to him and his community.
"My dream came true by converting the small bureau to an Internet cafe. Now I have many computer devices, and I [can] serve my neighbors, friends, and natives by improving their computer and Internet skills," said Serwan. "I am thankful to Al-Thiqa for believing in my dream."

Technology in Support of Microfinance:

MFIs are quickly integrating technology into their programs. To assist its partners with automation, accounting, and loan tracking, Grameen is sponsoring Mifos (Microfinance Open Source), a project that uses an Open Source information-management system that can be customized to fit the diverse needs of local microfinance organizations around the world. The software is currently being tested in India with an international release planned over the next three years.

The Mifos project's primary objectives are to:
Develop a flexible information management system that can be modified to meet the changing needs of any microfinance institution.
Build an Open Source community that effectively and efficiently manages the ongoing development of the Mifos system.
Establish a global community of Mifos adopters and Mifos implementation and support specialists.

Yet some financial experts are skeptical about the effectiveness of improving MFIs through technology. At a 2004 World Affairs Council program entitled "Reconstructing Iraq: The Role of Microfinance," Brad Swanson, Former Deputy Director of Private Sector Development in Iraq, spoke out against the use of technology in microfinance. According to Swanson, it is loan officers in the field -- and not technology -- that will encourage the microfinance's continued success.
Microfinance itself also has its drawbacks. It creates debts, albeit small ones with safety nets. But there is no doubt that Fatima Serwoni -- along with the more than 2,000 other participants in the Village Phone Program -- is delighted with the success and significantly improved quality of life microfinance has made possible. For millions of micro-entrepreneurs around the globe, small loans have made a great difference.