Microfinance FAQ’s
1. How does such a small loan help someone in poverty?
In developing countries, a very small loan is enough to start a small business, as the cost of goods is much lower than we are accustomed to in the U.S. The idea is to help people purchase what they need to become self-sustaining, pulling them out of a cycle of poverty.
Here are some examples:
· A recipient might buy supplies to produce a craft—woven goods, knitted items, baskets etc. These items can then be sold, creating income to support a family, with enough surplus to repay the loan.
· The purchase of animals (chickens or a goat) that will create a continuous supply of food, and surplus food that can be sold for additional income.
· The loan could fund a capital purchase such as an oven for a bakery, a kiln for pottery, tools for woodworking etc.
2. How are recipients selected?
Most microfinance organizations have field partners on the ground that are familiar with the local communities, so they are able to evaluate a prospective borrower. In addition to the distribution of funds, many microfinance organizations provide support and financial education to help ensure that recipients are successful. The repayment rate for microfinance loans is well over 90%.
3. Can a recipient receive a microfinance loan more than once?
Yes. When an entrepreneur is successful, and their loan is repaid, they will often re-apply for additional financing to expand their business. Some of the most inspiring microfinance success stories involve recipients who have been through several “loan cycles”.
4. If I contribute to a microfinance organization, can I follow the progress of “my” recipient?
Microfinance organizations vary in the way they are structured. For example, KIVA posts the loan requests on their website for each of the entrepreneurs that they loan money to. Donors to KIVA select specific projects to fund and can follow their progress online.
5. What percentage of donations to microfinance organizations goes to administration, and what percentage goes to help impoverished individuals?
Again, it depends on the specific microfinance organization. FINCA is structured so that 93% of dollars received go directly into the hands of needy clients. Many non-profit microfinance organizations rely heavily on volunteers and are leanly staffed to minimize administrative expenses. For example, KIVA has 50 KIVA Fellows in the field who work with the Field Partners and provide oversight to the entrepreneurs receiving loans.
However, it should be noted that the cost of doing business in many developing countries is very high due to the lack of infrastructure, and the cost of administering so many small loans is also very high.
6. Are microfinance organizations not-for-profit? Are donations to microfinance organizations tax-deductible?
3 of the 4 microfinance organizations that Hope Sings is partnering with are not-for-profit (MicroPlace offers an innovative new investment structure, where your loan earns interest so you can increase your impact when you roll over your loan). Hope Sings is currently not registered as a 501 c3, as it is primarily a music production company whose profits are wholly donated to microfinance organizations.
When you donate to a non-profit microfinance organization, you are making a tax-deductible contribution. When you support Hope Sings, you receive music in exchange for your support, while also helping to raise awareness of microfinance and help emerging musical artists. However, the cost of the music you buy is not currently considered a charitable contribution.
7. Are loans always made to individuals? Or can they be made to groups?
Loans are frequently made to groups, and all of the group members are held accountable for the group’s success. Even when loans are made to individuals, the new businesses they build help to create employment opportunities for others in a community. The ripple effect is profound, and can help raise the standard of living for an entire village.
8. I’ve heard a lot of negative press about microfinance- that financial companies are making huge profits by exploiting poor people in developing countries, and that interest rates charged on microfinance loans are usurious. Are these allegations true?
Microfinance has expanded rapidly in developing countries, and many financial companies have jumped on the bandwagon, and are reaping the benefits. As in all human endeavors, there are scrupulous and unscrupulous participants. Thousands of financial institutions are making loans in the developing world—often in places that are unregulated, and where corruption is rampant. Many use the marketing gloss of microfinance to disguise their profit motive. As a result, abuses do occur.
HOWEVER, all of the microfinance partners that HopeSings is associated with (FINCA, KIVA, Accion,) are transparent, well-respected organizations whose missions are highly focused on helping people pull themselves out of poverty. Microfinance is not the panacea for ending world poverty that it is often held up to be…but it is still a very effective tool for creating self-sufficiency.
9. I’ve also read that microloans don’t really help the poor escape poverty.
In the years after Mohammed Yunnus won the Nobel Prize, microfinance was ballyhooed as the solution for poverty. Then came the backlash. Microfinance is not the cure all everyone thought. Of course, there is no one solution to poverty. What everyone agrees is that microfinance is a start for many people. And the human face of microfinance engages the public much more than irrigation systems or solar-powered cell phones. And getting people inspired to help in some small way is the key – and that’s where Hope Sings comes in.
10. Some critics say microfinance is not scalable, that it’s too expensive to run and doesn’t produce big enough results.
We say, it’s all good. Building economies and markets by supporting SME’s (small and medium enterprises) as well as helping individuals. What’s important is that people find the way that speaks to them.
11. A loan is good for one person. But does it have any greater impact?
It does indeed! Research by Hope Sings partner FINCA suggests that 20-25% of their clients create at least one job for others.
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