Micro Finance

"How it works

Microfinance is lending to poor, often illiterate, people who have no collateral, no business experience and who therefore cannot normally borrow from the banks.

In the developing world the poor often work at home with raw materials bought with borrowed money.

The finished wares have to be sold back to the moneylenders, leaving scarcely enough, after repaying the loan with interest, to feed the family. So to make the next batch of goods poor people have to return to the moneylenders.

A failure to repay a debt ends up with people paying by working. The result is bonded labour, often with the children bearing the burden of unpaid debts.

Microfinance banks break the cycle by lending to the poor to buy raw materials. This means the workers can sell at a fair price on the open market, a price which means enough to service the debt, feed the family and make a profit.

To ensure that debts are paid, money is lent to groups, often women, who appear to respond better to financial terms.

Less than a dozen clients guarantee each other's loans and a default by one could result in the entire group being penalised. The resulting peer pressure means repayment rates exceed 95%."

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