When the Nobel Peace Prize was awarded to Prof. Mohamed Yunus and the Grameen Bank in 2006 it thrust the field of micro finance into the limelight. In the past few years, major financial institutions, like ICICI Bank in India, have lined up to lend funds to Micro Finance Institutions (MFIs). Last year Sequoia Capital, one of the storied Silicon Valley venture capital firms, invested $11.5 million in SKS Microfinance in India further validating MFIs as a mainstream area for investing.

Yet it has taken over three decades of hard work and risk taking by a group of pioneers to establish micro finance as a means for providing financial loans to the neediest people around the world. While Grameen Bank in Bangaldesh has been the most visible, micro finance institutions began to spring up in diverse locations around the world about thirty years ago. In the Americas, ACCION helped pioneer the micro finance model in Brazil when it began lending to small businesses. Ela Bhatt who founded SEWA (Self Employed Women’s Association) later helped found the Women’s World Bank in 1976. WWB supports a network of MFIs that has lent to millions of low-income women entrepreneurs worldwide.

Micro finance is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans and is generally based on a philosophy of group based lending. The roots of micro finance can be traced to even earlier informal pooled lending systems like Chinese biaohu or tontin in West Africa. In those systems a group of people met regularly, say monthly, and contributed a fixed amount to a pot. Each of the group members had an opportunity to borrow the month’s pot to meet their capital needs. MFIs took these basic principles and provided capital, structure and organization to formalize them into a scalable lending mechanism.

Most MFIs are based on certain common principles consisting of:

•    Creating a self help group: The basic building block of most MFIs is a self help group (SHG). Self help groups are groups of 10 to 15 borrowers who are from the same locale and are obliged to support each other. MFIs place a lot of emphasis on the creation of SHGs. The peer support and pressure among the SHG members is one of the main reasons why loan defaults for MFIs are lower than conventional loans.
•    Focusing on women entrepreneurs: The majority of MFIs focus on women entrepreneurs in rural villages. Women who run rural businesses augment the family income and, by allowing them control over their finances, helps raise their socio-economic status.
•    Setting weekly meetings for incremental loan payments: MFIs simplify borrowing by breaking repayment into small regular transactions. In most cases, a MFI official visits the village once a week and meets with each SHG to collect the fixed repayment amount. Loan requests are reviewed and sanctioned during this visit.
•    Setting market rates of interest: Rates of interest for MFI loans can range from 15 to 24% or higher. These rates seem relatively high compared to conventional loans in the west. However, in most cases, rural borrowers are faced with the alternative of borrowing at usurious rates from local loan sharks or not having access to any capital whatsoever.
As MFIs have grown in size, some of them have also added to their portfolio by providing life insurance and, when authorized by the local bank regulators, savings mechanisms.

Lately, websites like www.kiva.org and www.microplace.org have allowed individual lenders to help entrepreneurs in developing countries with micro-loans. Kiva works with MFIs worldwide to identify potential borrowers and profiles their needs on the site. Individuals can make loans directly to borrowers via the site and get paid back on a regular schedule. On the other hand, Microplace allows you to purchase an investment from a security issuer who in turn uses the funds raised to make loans to qualified borrowers and institutions in developing countries. The security issuer is responsible for making regular interest and principal payments to you. Microplace is part of eBay’s network.

For more information on some of the organizations in this article:
Grameen Bank: http://www.grameen-info.org
SKS Microfinance: http://www.sksindia.com
Accion: http://www.accion.org
Women’s World Bank: http://www.swwb.org/
Kiva: http://www.kiva.org
Microplace: http://www.microplace.org

You can contact me with ideas, suggestions or for more information at: SELokvani@gmail.com

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