Micro-credit or micro-lending is a technique that charitable organizations use to assist the very poor to start or expand a business.  One hundred dollars may not seem like a huge amount of money to you or I, but for the very poor that may be enough to permanently lift them out of poverty.  As the technique and its successes gained attention, the first MFIs (MicroFinancing Institutions) were created.  These unique services bridge the gap between poor but enterprising individuals and caring investors who are willing to give someone a hand up.

Money is not the only form of micro-credit that can be extended; for example wool may be provided to a person so that they could spin the wool into yarn which would then be woven into clothing or other useful items.  NGOs (Non Government Organizations) or other charitable organizations extend micro-credit, but the number and size of the loans is often very limited.  Loans that charge no interest or a very low interest rate are common.  In this scenario the lender is invested in the local community and works hand in hand with the borrower.

MFIs typically utilize partner organizations to work with potential borrowers and to review their loan request.  The MFIs global reach pulls investors together and exposes the various loan requests.  Although most look as this as a chance to help others, investors may actually see a return on their investment in the range of 1 to 3 percent.  Upon further research I learned that some of these organizations charge the borrowers between 18% and 60% interest on their loans.  These rates seem high at first glance (and I wish they were lower) but one factor is often the small size of the loan.  Since the loan amounts are small, the fixed fees associated with the MFI and its partners result in higher interest rates on small loans.  As high as this rate seems it is much better than local moneylenders who can charge between 100 and 300 percent.

Along with the loan, both types of programs offer business and finance advice to borrowers  Micro-credit isn’t going to end poverty, but it does offer the less fortunate a chance to help themselves.  It is amazing to think that the amount of money I spend on a date could help to lift a family out of poverty.  If you don’t want to work with an MFI (and offer loans), consider giving a donation to a charitable organization and ask that it is used to start or fund a micro-lending program.

I am going to create an account with one of the larger MFIs and will extend a loan or two.  I will follow up with future articles as the loan is repaid and I learn more about MFIs.