What is microfinance? | Village Invest

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What is microfinance?

When an entrepreneur needs cash to set up a business, or buy supplies, they normally seek a bank loan. But banks find it unprofitable to provide small loans to poor communities in remote rural areas. In the past this pushed people into the hands of money-lenders who charged as much as 200% in interest and fees on loans.

The micro-finance institution

Micro-Finance Institutions (MFIs) stepped in to provide cheaper capital to help entrepreneurs escape the clutches of the money-lenders. They were motivated by the belief that access to credit can transform the lives of those living in poverty. These were non-profit organizations in the early days, but as demand for small loans increased some MFIs transformed into for-profit entities charging higher interest rates to maximize profit. 

They stopped providing loans to the poorest people (those living on less than $1.90 a day) and charged those who could afford to pay higher rates than those offered by local commercial banks. Their clients could not access loans at a lower rate because of their lack of collatarel and higher risk profile.

Crowd-funding - a new era in microfinance

Online crowd-lending began to offer a new avenue of financing to MFIs in the early 21st Century as they bid for money via individual projects.

But from the point of view of the borrower the situation remains unchanged - they continue to be charged high rates of interest and the poorest continue to be excluded. As long as MFIs act as intermediaries between lenders and borrowers, this situation is not likely to change.

Microfinance without intermediaries

By building the capacity of communities to administer loans in an accountable way and with minimal credit risk, while including the poorest people, Village Invest can uniquely operate without MFI intermediaries and directly improve the lives of the world's poorest people. We can lend at a more affordable rate, while passing back some of the interest to the lender.