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Publish-date-icon August 14, 2012
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What exactly are 'microloans'?

Because the name implies, microloans are 'small' loans, sometimes as low as $100. Microfinance institutions disburse these small loans (as well as other kinds of financial services) towards the entrepreneurial poor who use them to build up and expand informal businesses, which in turn allow borrowers to typically increase profits. While increased profit doesn't directly translate into immediate and finish freedom from poverty, it will allow the poor to better cope with and combat the suffocating realities of extreme poverty. Historically, poor people were written off by commercial banks as not 'creditworthy,' barred from access to important financial tools for example working capital loans, savings and insurance. However, because the first microloan was dispersed in 1973 in Recife, Brazil, by an ACCION-led nonprofit, the significant poor all over the world are actually excellent credit risks and prudent users of "micro" financial services - today, microloan repayment rates for ACCION's partners worldwide average 97 percent.


How can microloans assist the poor?

The majority of the world's poorest people often cannot find steady work, and many that do are not paid a living wage. To give their own families, poor people often turn to self-employment by any means possible - they sell fruit in the local market, weave clothes, open small bakeries. For this vulnerable population of hard-working microentrepreneurs, microloans could be instrumental in smashing the cycle of poverty. A small loan can be used to buy raw goods in bulk or purchase important equipment like a machine. Financing will also help poor people cope with health emergencies or afford larger expenses for example education, funerals or weddings. Generally, these financial tools can help poor people to grow their microenterprises, cut costs and work at a much better quality lifestyle.


How do informal loans compare to microloans?

You should observe that the "...notion that microcredit brings loans to individuals who previously didn't have use of them is widespread but mistaken" (CGAP). Poor people often do have use of informal credit channels - through moneylenders, loan sharks or members of the family; the challenge for microentrepreneurs in developing countries is finding access to reliable and safe credit. Distributed by microfinance institutions, microloans are a much more reliable asset for that poor - and for an organization with irregular and uncertain incomes, this financial constancy can be life-changing. Microloans assist the poor manage irregular incomes, smooth consumption and frequently make them work their in place the economical ladder with dignity and pride.

Are microloans exactly the same?

With larger loans reaching a few thousand dollars, microloans vary in dimensions depending on multiple factors- including regulatory environment, standard of living in the particular country, size of the microfinance institution and individual client evaluations. The evaluation process to find out credit potential is equally as important in microfinance as it is in any other 'formal' financial practice. Like traditional banks, ACCION partner microfinance programs assess potential borrowers using measurements like business assets - that could be no more than a tin stall in the market, amount and cost of goods sold, cost of recycleables and household expenses or collateral.


However, unlike traditional banks, our partner programs do not make loans based purely upon quantitative revenue or collateral. We send loan officers to satisfy potential borrowers within their places of work, to weigh qualitative variables - including interviews with clients and references from customers and neighbors - to evaluate a client's character, understand their business and see the microentrepreneur's willingness and ability to use and repay loans. This character-based lending allows us to go "beyond the numbers" and create a more truth of the potential borrower than the usual traditional credit score. Otherwise as evidence for the success of microloans, then a minimum of as a small testimony to the effectiveness of microloan due diligence, is always that borrowers often repay their first loans and return for increasingly larger loans in a stepped-lending process.

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