What is Microfinance?
Microfinance involves making small loans to those in third world countries who would otherwise be unable to receive loans due to their socioeconomic status or other factors. The loans are given to help fund financial opportunities, particularly entrepreneurial initiatives, such as buying tools for a farmer in Cambodia or a bike for an aspiring delivery boy in Indonesia.
To ensure the responsible expenditure of capital, money is generally lent to community leaders, such as the principal of a high school, in an underprivileged region of Indonesia, who recently received an Mi3 loan. Loan recipients are expected to utilize this capital to establish a preliminary source of income. Once the loan and interest are paid, they may receive larger loans to further support their endeavors until they have established a stable source of revenue. Furthermore, repaid loans contribute to a larger pool of capital available for use by other aspiring entrepreneurs. Thus, every loan paid back allows for more seed for the initial recipient, as well as for a broader range of entrepreneurs.
Inability to pay back a loan does not indebt the recipients in anyway. The loan becomes pure charity, but the recipients forfeit their right to further microfinance loans. In recent years, well managed microfinance has achieved a greater rate of return on loans than conventional banks, and has been crucial in giving more and more people around the globe the opportunity to improve their lives each year.