MicroDreams.org :: Growing MicroBusiness. Empowering Dreams

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In its quest to Build MicroBusinesses and Empower Dreams, MicroDreams supports small, promising microfinance institutions in the developing world achieve permanency through financial self-sufficiency.

Click on the following link to learn more about microfinance from a World Vision interview with MicroDreams’ President, Greg Casagrande.

Check out the YouTube channel for South Pacific Business Development, MicroDreams’ flagship partner!

What is microfinance?
Microfinance is the extension of financial services to the very poor. The centerpiece of most programs is providing credit to those living in poverty who are not considered bankable. Lacking collateral, steady employment and a verifiable credit history, they do not meet the minimal qualifications for accessing loan funds from traditional banks.

Microfinance originated in developing countries where it has successfully enabled impoverished people to access credit to start and develop their own businesses. Engaging in self-employment projects allow the economically disadvantaged to generate an income and, in many cases, exit poverty.

Professor Muhammad Yunus, the recipient of the Nobel Peace prize in 2006, piloted the first microfinance venture in Bangladesh in the 1970s. He started by lending $27 from his own pocket to impoverished farmers. The rapid growth and successful execution of the project bucked conventional wisdom by demonstrating that the poor could be relied on to pay back their loans and that a sustainable, market-based program, without subsidy, could commit to providing financial services to the poorest people.

Today, microfinance organizations are making significant inroads into reducing global poverty by empowering the poor to start small income generating businesses that enable them to work their way out of poverty. There are about 10,000 organizations across the world that collectively hold over USD 7 billion in outstanding loans to needy entrepreneurs. The UN expects that microfinance will be the key driver in meeting the Millennium Development Goal of halving global poverty by 2015.

What are Microfinance Institutions?
Microfinance institutions (MFI) are the organizations that provide the loan funds and other financial services to economically disadvantaged entrepreneurs in the local communities. Most programs now go beyond basic business loans to provide access to savings deposits, insurance, remittance services and home improvement or educational loans.

MFIs provide credit through a variety of individual and group-based methodologies, but a common feature across these organizations is very high repayment rates (usually 97-99% of the portfolio), reminding us that human integrity, rather than the accumulation of material goods, is the fundamental determinant of creditworthiness.

MFIs operate under a variety of legal structures and supervisory frameworks. MFIs might be government owned, member owned, private banks or non-profit organizations. Additionally, MFIs may be formal, semi-formal or informal providers. Formal providers have more traditional bank structures but focus their services on the poor. They exist within the supervisory and banking regulations of the local economy. Semi-formal providers are registered organizations that abide by local and commercial laws but are not subject to local banking regulation. Informal providers are non-registered community or self-help groups.

MFIs charge non-usurious interest rates to their entrepreneur clientele in order to cover the costs of lending (staff, collections, operations). The broad experience of MFIs demonstrates that charging interest increases the business discipline of the staff and clientele in addition to helping the MFI achieve self-sufficiency.

For an MFI, financial self-sufficiency means generating the revenues necessary to cover its operational, lending and borrowing costs without donor or subsidized funding. The goal of financial self-sufficiency is to achieve permanency – so that these critical organizations can continue to impact their communities and not be subject to often limited and unpredictable donor flows. An MFI that is run as a business with a social objective can reach out to help millions more work their way out of poverty than a charitable organization alone.

How does MicroDreams help?
Non-profit, non-governmental organizations have played a large role in initiating, managing and supporting MFIs. In the first phase of development, MFIs often rely on donor and/or subsidized funds to fund their lending activities. However, as MFIs mature, financial self-sufficiency becomes a tangible goal.

Well-managed MFIs can become less reliant on subsidized funds as their lending portfolios reach the US$ 2-5 million mark. At this point, MFIs have generally achieved the scale necessary to grow quickly and cost-effectively and can fulfill their funding needs through traditional commercial funding relationships.

To reach this point, however, MFIs need significant help to establish quality relationships with commercial financers so that they can grow from being vulnerable, small-scale MFIs into stable mid-scale entities. Despite many boasting healthy portfolios and strong management teams, small MFIs can rarely attract commercial financers willing to take on the risks and costs of managing relationships with these small organizations.

The vast majority of MFI financing (donor and commercial) still goes to the largest entities with portfolios in excess of US $10 million. Commercial funding to MFIs with portfolios less than US $2 million is limited while commercial funding to MFIs with portfolios less than US $1 million is unusual. Hence there is significant need to ramp up the smallest, yet highly capable MFIs into mid-size entities so that they can then tap into a wider range of financing possibilities.

A US $1 million portfolio is likely providing financing to 2,000 to 10,000 people, empowering them to support their families through self-employment projects. Thus, the future of massive poverty eradication depends upon these promising young MFIs growing into sustainable large-scale MFIs. Despite the recent popularity of microfinance, many of these young MFIs are still overlooked by the major funders.

MicroDreams is committed to helping small MFIs flourish in the critical growth stage in order to achieve self-sufficiency as they grow. MicroDreams provides direct investments, bilateral loans and loan guarantees to highly rated small microfinance institutions, ensuring funds continue to reach entrepreneurs in need throughout the developing world.