Microfinance Basics

Professor Muhammad Yunus, founder and managing director of Grameen Bank, said that if an institution could make financial resources available to the poorest people in Bangladesh, then "these millions of small people with their millions of small pursuits can add up to create the biggest development wonder." He and Grameen Bank believe that credit should be a human right. Building on our rich Grameen Bank heritage, Grameen Foundation is a leader in making microfinance work harder to help more people progress out of poverty.

Microfinance is a proven tool for fighting poverty on a large scale. It provides very small loans, or micro-loans, to poor people, mostly women, to start or expand very small, self-sufficient businesses. Through their own ingenuity and drive, and the support of the lending microfinance institution (MFI), poor women are able start their journey out of poverty.

Unlike commercial loans, no collateral is required for a micro-loan and it is usually repaid within six months to a year. Those funds are then recycled as other loans, keeping money working and in the hands of borrowers. For example, a woman could borrow $50 to buy chickens so that she can sell their eggs. As the chickens reproduce, she can sell more eggs and eventually sell the chicks. As a borrower, she receives advice and support from the MFI that issued her loan, and support from other borrowers just like her. Some MFIs also provide social services, such as basic health care for her and her children. As her business grows and diversifies, she begins to earn enough to improve the living conditions for her and her family. Microfinance clients boast very high repayment rates. Averaging between 95 and 98 percent, the repayment rates are better than that of student loan and credit card debts in the United States.

MFIs are very client-focused. Some MFIs go directly to the borrower’s place of business to issue loans and collect payments. Other MFIs host weekly borrowers’ meetings at the local center where the transactions and other social services take place. During these center meetings, borrowers empower each other to stay on the path out of poverty by sharing successes and discussing ideas for solving business and personal problems.

Why women? Studies have shown that women use the profits from their businesses to send their children to school, improve their families’ living conditions and nutrition, and expand their businesses. The fruits of their businesses not only make an impact on themselves and their families, but entire communities.

Microfinance programs are funded by loans, grants, guarantees and investments from individuals, philanthropists, social investors, local banks, foundations, governments, and international institutions.