How microfinance works
A microfinance loan starts a cycle of positive events. Read about these different cycle stages below to find out how a small business loan can impact an individual, their family, and their whole community.
The microfinance cycle
1. Applies for microloan
While many working poor have the ideas and ability to create a small business, few can access the capital they need to get started. Because they are asset-poor and in need of only small loans, banks have been unwilling to take on the risk and will not lend to them. Also, the cost of administering the loans is high (banks can make a lot more money on a large loan than a small loan). With little savings to access, the working poor are trapped in poverty. Often the only credit available to them is from local money lenders who charge exorbitant interest rates.
To successfully apply for a microfinance loan the poor entrepreneur must demonstrate trust worthiness, a good work ethic and a sound business idea.
A community bank is formed through VisionFund from a group of chronically-poor entrepreneurs who mutually guarantee each other's loans. As individuals build up a credit history, they can borrow more money from the community bank. This community bank model is based on the Grameen Bank model developed by Nobel Peace Prize winner Professor Muhammad Yunus.
2. Receives microloan training
Before the client receives their first loan VisionFund gives them training in saving, group formation and handling credit. Clients must prepare a sound business case before receiving a loan.
3. Receives microloan
A loan can be as little as NZ$40. With this money a client can buy some seed or stock, fertiliser to increase crop yields, or basic equipment to operate a small trading enterprise (e.g. a sewing machine for shoe repairs).
4. Creates/expands business
Profits made from the sale of crops or merchandise can then be used to buy more seed or stock, or to start a new business such as tailoring.
5. Receives coaching
VisionFund Tanzania will look at providing coaching in business and agricultural or trading practices in the near future.
6. Business thrives
With a loan, entrepreneurs can improve farming, open a hairdressing salon, sell handmade clothing and handicrafts or run a small convenience stall, to name a few. These businesses create jobs and generate additional goods and services. The whole community benefits from them.
7. Families gain self sufficiency
Families are now able to support themselves and provide food for themselves all year round. The burden of borrowing money from local money lenders at high rates of interest is broken.
8. Children impacted
Parents are able to give their children more nutritious food and the health of their family improves. Parents have enough money to send their children to school.
9. Repays loan and money is recycled
The poor are a good credit risk, repaying their loans 99.5% of the time in Tanzania. Once the client has repaid their loan they can take out a bigger loan to continue to expand their business. Repaid loans are recycled to help other poor entrepreneurs to grow their businesses.
You can also make a one-off donation now to our microfinance programme
You can also make a one-off donation now to our microfinance programme
The microfinance cycle
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