Microfinance
Description
Microfinance is the supply of basic financial services to the poor. It was experimented with and developed in 1976 by Bangladeshi economist Mohammad Yunis. In microfinancing, financial services are provided by local organizations called microfinance institutions (MFIs). The Bangladeshi Grameen Bank started by Yunis has served as a model for other microfinance institutions around the world. The most widely recognized service of MFIs is microlending. In microlending, small loans are given to very poor people so they can begin, establish, sustain, or expand very small, self-supporting businesses. Millions have used these loans to work their way into ownership of substantial companies. MFIs also offer other financial services, such as savings accounts, insurance, housing loans, and remittance transfers. Many also provide assistance and education to clients to help them overcome the many difficulties in their lives. Most MFIs are very accessible to their clients; they usually travel to their clients to give loans and receive loan payments. Some MFIs have established support groups where clients can give and receive advice about their businesses and other challenges in their lives.
MFIs are funded in several ways. One source of funding comes through direct loans, grants, and loan guarantees. Individuals, philanthropists, foundations, governments, and international institutions provide additional funding. MFIs also borrow funds from traditional banks. The Grameen Bank has proved that microfinancing and microlending can be self-sufficient, as it operates without grants or donations.
Microfinance has been an integral player in the fight to defeat global poverty. A 1998 World Bank study reported that 1000 clients of the microfinance institution Grameen Bank in Bangladesh were escaping poverty every month. In 2007 alone, more than 100 million of the world’s poorest people received a microloan.
The Institute’s Role/Impact in Sector
While microfinance institutions have been widely successful, many struggle to achieve proper funding. Very few have achieved self-sufficiency. Through Rocky Mountain Peace Institute, these MFIs can enhance their effectiveness. RMPI offers assistance in fundraising to give these institutions greater financial stability. It is critical that MFIs understand the market in which they are operating. RMPI consultants can offer guidance in local market assessments, allowing MFIs to tailor their services to what is most practical and profitable.
Microenterprise
Description
A microenterprise is a type of small business. In the United States, a microenterprise is characterized by five or fewer employees and is small enough to require initial capital of US$35,000 or less. The definition of microenterprise abroad differs. USAID defines a microenterprise as a small enterprise owned and operated by poor people with 10 or less workers. More than 80 percent of the businesses in Latin America and the Caribbean have l 0 employees or less, and microenterprises account for as much as half of all employment in many countries.
It is typically difficult for microenterprises to receive access to financial services through traditional institutions. Microfinance institutions (MFIs) and the microloans they offer have been instrumental in allowing many microenterprises to exist.
Institute’s Role/Impact in Sector
While many microenterprises struggle as a result of finances, lack of business knowledge and experience also prevents many of them from reaching their full potential. the Institute’s consulting services can provide the expertise necessary for microenterprises to succeed in their ventures.
Microlending
Description
Microlending is a part of microfinance. Also known as microcredit, microlending is one of the services provided by microfinance institutions (MFIs). Microlending involves making small loans to nontraditional borrowers, such as entrepreneurs and microbusinesses too poor to qualify for traditional bank loans. Typically the loans are for less than US$200, but can be for much less and much more. The borrowers are not required to provide collateral for their loans that would be required by a traditional lending institution. There is interest on the loans, which is usually between 18 and 60 percent. While this may seem high, the interest rate is necessary to cover the rates MFIs pay for borrowing the money they lend, as well as the costs of running the MFIs. Compared to the 120 to 300 percent interest rates that most local “money lenders” charge, the interest rate on microloans is not extraordinarily high.
The recipients of these loans are enabled to begin, establish, sustain, or expand very small, self-supporting businesses. In microlending, loan dollars are recycled. As each loan is repaid, the principle and interest are used to cover micro-lending program costs and funding for additional loans. With a repayment rate between 95 and 98 percent, micro-lending has become very popular. This rate is higher than the repayment rate of student loans and credit card debts in the United States.
Institute’s Role/Impact in Sector
The majority of the recipients of microloans have little to no business experience. Especially as their businesses expand, these entrepreneurs need guidance to attain longevity. With the help of RMPI, microloans can be utilized to the best capacity.
Microgrants
Description
A microgrant is a small sum of money distributed to a poor person living in extreme poverty. They are given to nontraditional borrowers, such as entrepreneurs and microbusinesses too poor to qualify for traditional bank loans. Microgrants can act as seed capital for businesses and projects to start, improve, and expand. Microgrants are a good option for many of the worlds’ poorest that do not qualify for a microloan or other form of microcredit. In addition, successful projects funded by microgrants have a better chance of receiving later funding through microloans or more traditional means.
Microgrants alleviate the recipients concerns about repayment in the event of business failure. They also allow the receivers to invest in their businesses for the long term, instead of trying to pay off their loans in a timely manner.
Microgrants have been used by the U.S. Army to fund civil reconstruction and humanitarian needs in their battlespaces, such as repairing schools and homes damaged in fighting, fixing broken water pipes and reopening health facilities. Microgrants are also available through organizations solely devoted to giving grants and organizations that provide grants as part of the agency agenda. In addition, individuals can donate to contribute to the funding of various microgrant programs.
Institute’s Role/Impact in Sector
Microgrants fund many worthwhile projects. However, these projects can not be executed properly without a complete understanding of the task at hand. Rocky Mountain Peace Institute can bring a new level of social and environmental understanding to such ventures.