How It Works

Microfinance institutions service the financial needs of the working poor. They provide micro loans, savings products, micro insurance,and other financial services in lower denominations than those offered by commercial banks. Interest rates are also far less than those charged by moneylenders and other mercenary creditors. Loans extended are for shorter periods than traditional commercial loans. A typical term of a microfinance loan is six months to one year with payments of principal, plus interest due weekly.

Unlike traditional banking systems, microfinance institutions use personal integrity and a peer-group approach to ensure loan repayment. Borrowers typically start out by taking out loans in groups. If a borrower defaults on a payment, the group is penalized and may be prohibited from further loans. The peer-group approach has been successful in motivating borrowers to pay back loans in full and on time. Shorter loan cycles also help borrowers to stay current, and repayment rates on microfinance loans are typically 95 percent and higher.

As borrowers establish a track record of performance, they are able to graduate from the group programs and gain access to a greater range of financial services based on their own individual creditworthiness.