Microfinance: FAQs

FAQs

Where does World Vision provide microfinance programmes?

Of the almost 100 countries that World Vision International is working in, 40 countries have VisionFund programmes operating, including Tanzania, Cambodia, Myanmar, Vietnam, India and Indonesia, amongst others. This allows us to integrate microfinance into community development programmes to achieve maximum development impact, and ensures the work can continue when World Vision leaves the area.

Why is World Vision supporting microfinance in Tanzania?

Seventy five per cent of Tanzanians live in rural areas and rely largely on agriculture to eke out a living. They live in some of the poorest communities in the world with no or very limited access to formal financial services. Because Tanzania is 80% agriculturally focused and 75% of the population live in rural areas, positive change can only come about through agricultural economic development.

World Vision New Zealand is currently partnering with VisionFund Tanzania (VFT) to provide microloans to isolated rural communities in Budekwa and Bukene in northern and central Tanzania, giving rural farmers stuck in the poverty trap the opportunity to improve their lives, the lives of their families, and the lives of their communities. This work will complement the community development programmes that World Vision New Zealand currently operates in these two parts of Tanzania with funding from Kiwi child sponsors. Read more about the VisionFund Tanzania partnership.

How does microfinance reduce poverty?

1. Breaks dependency on local loan sharks
   The formal financial sector doesn't give credit to poor entrepreneurs due to the small loan amounts required, the absence of any credit history and the lack of collateral assets.
   A money lender in the community often loans money at high rates of interest to enable the villagers to buy seed, fertiliser and basic tools for cropping, or for purchasing other materials for producing handicrafts. Nearly all the entrepreneurs' profits go towards paying interest to the "loan shark", which leaves the entrepreneurs in a position of grinding poverty.
   This is the cycle that needs to be broken.
2. Empowers the poor to solve their own problems
   Microfinance enables clients to increase their household incomes, build assets and reduce their vulnerability to the crises that are so much a part of their daily lives. They are able to plan for their future and that of their families. They can manage their cash flows and apply them to whatever household priorities they judge most important for their welfare.
   Microfinance empowers and equips the poor to make their own choices and work their way out of poverty in a sustained and self-determined way.
3. Empowers women - the face of world poverty
   Access to financial services empowers women to become more confident and more likely to participate in family and community decisions. Sixty four per cent of VisionFund Tanzania clients are women.
4. Promotes children's education, health and nutrition
   One of the first things poor families do with new income from microfinance is invest in their children's education. Studies show children of microfinance clients are more likely to go to school and stay in school longer. Student dropout rates are much lower in microfinance client households. Parents are also able to provide medicine and more nutritious meals for their children.
5. Critical for overall development
   Testimonies and studies show households of microfinance clients have better nutrition, health practices, health outcomes and living conditions. Children are more likely to go to school and finish their studies and more children go on to further studies.
   
   Access to financial services forms a fundamental basis on which many of the other essential community development interventions depend. Improvements in healthcare, nutrition and education can be sustained only when households have more income and greater control over financial resources.
   
   Increasing household incomes means that families can save money, making them less vulnerable when a business slows, a child gets sick or a family crisis hits.
   
   Microfinance gives families options for the future and enables them to give their children the best start in life.

Can women get small business loans, as well as men?

Yes, most definitely. Women are the face of world poverty.

In fact, women make up 64% of all World Vision's loan clients in Tanzania. Women have proven to be better at repaying their loans. Women also spend more of their business profits on their family and domestic needs, which means the children benefit from more nutritious food, better healthcare and schooling.

Do the loan clients have to pay interest?

Yes, they do. Interest is charged to cover the cost of running a VisionFund microfinance programme and to ensure we can keep offering loans to more clients.

VisionFund Tanzania charges an interest rate of between 2.5% and 5% per month. This may sound high to those who have access to credit in developed market economies like New Zealand. The only other option for many of the rural poor who borrow from VisionFund Tanzania, however, is to borrow from local informal moneylenders who charge between 9% and 13% per month.

Providing loans to the rural poor is expensive in relation to the size of the loan, and is one of the reasons the rural poor have not been an attractive market to the formal financial sector. A $300 dollar loan from a community bank, for example, requires the same management resources as a $2500 individual loan, thus increasing the transaction cost per dollar loaned.

Credit officers often travel to remote areas to visit the client's home or place of work to evaluate creditworthiness and work through the community bank to provide the loan. They then make follow up visits to track and reinforce the repayment culture.

Ensuring ongoing sustainability requires VisionFund to charge a 'high' rate of interest compared to what is expected in a developed country. It can cost NZ$80 to train clients and provide a microloan, which can represent 30% or more of the loan amount. However, on the demand side, clients willingly pay the rates to ensure long-term access to fair credit and business support. And the return received on additional investments funded by the loan can be many times greater than the interest rate charged.

VisionFund Tanzania charges little more than the commercial bank's collateralised loans and remains the lender of choice in all the districts it works. It is committed to improving efficiency levels and increasing scale in rural Tanzania. This will bring down the cost of providing loans, improve access to loans and lower borrowing costs.

I love the idea, but I can't afford to give $4200 for a community bank at the moment. Can I still contribute?

Yes you can!

$4200 will establish a community bank. $480 will support one entrepreneur through a First Steps initial business loan. You could consider making regular monthly donations (e.g. $350 a month to fund a community bank for one year or $40 a month to fund a hard-working entrepreneur), or if you prefer, you can form a group with some friends or colleagues and together raise the $4200.
Fill in the Contact Us form if this is an option for you and we can put you in contact with a World Vision manager who is already experienced in forming VisionGroups.

I am very interested in this product, but before I invest I would like some more detailed financial information, do you have any?

Yes, we can provide you with a more detailed description of the microenterprise process, project information and financials from World Vision International and information from VisionFund Tanzania.

To be part of World Vision's microfinance work with VisionFund Tanzania, call us on 0800 800 776.

It's not easy to start up your own business. Here in New Zealand we have a great infrastructure, accessible capital and business development loans, years of business tradition and a wide knowledge base. All these Tanzanian entrepreneurs want is a chance to work their way out of poverty, and you can help them.