(1) Why Microfinance?
While capital is not the only factor that allows for the growth or creation of enterprises, it is the most vital as without it, creativity, drive, and innovation cannot be transformed into material actions.
Every morning 500 million people around the world rise and go to work... for themselves. Potters, weavers, blacksmiths, carpenters, mechanics, milliners, woodworkers, seamstresses, street vendors, along with a vast array of other skilled based enterprises, often comprise a majority of the workforce in developing countries.
An overwhelming percentage of these workers are women. For them, self-employment is the mainstay of their economic life. They harvest rise, bring fruit to market, craft pottery and tools, weave cloth, and perform thousands of other tasks to support their families. Most operate without financial resources- business loans or a safe place to hold savings- and so cannot expand their work beyond the barest means of survival. Usually, only a small amount of capital can produce growth. A modest loan of perhaps $50, buys a box of merchandise, fertilizer for an acre of land, a few tools-investments which can yield enough to sustain an entire family.
But who will lend to these people? They have no collateral to pledge, no records to demonstrate a steady cash flow and they may not be sufficiently literate to complete loan paperwork. They operate on the margins of the financial mainstream. Until recently, nobody, in fact, would lend to them.
Then, beginning in the late 1970s, some highly inventive non-profit agencies and banks pioneered techniques to issue loans to the self-employed- those who know their trade well, but lack conventional means to secure a loan. Microfinance institutions, as these innovators are now called, have prospered in some of the poorest countries of Africa, Latin America, and Asia. Despite wide differences in the socio-economic and cultural conditions in which these institutions operate, they continue to demonstrate strikingly similar results. Clients borrow, invest in their activities, repay their loans, and borrow again. The average repayment rate is about 98 percent.
Estimates are that this growing community of microfinance institutions are reaching over 10 million people with credit and savings services. But what of the hundreds of millions who could be benefiting from financial services and are not? There is a wide consensus among microfinance practitioners that the main constraint is not capital but rather the lack of institutional and human capacity to deliver services. Investing in and supporting start-ups is an important and effective way to build this capacity. This guide has been designed to help these new efforts reach their potential.
(2) What is the MicroStart Guide?
The MicroStart Guide offers a concrete methodology and ready-to-use tools for establishing a microfinance project. it offers existing or new economic and social service organizations a proven approach for meeting global demand for small loans to the smallest businesses. The MicroStart Guide can also be used by formal sector finance institutions interested in building outreach to this important sector.
The Guide is divided into four sections and includes a tool kit. It begins with ground rules and best practices, then moves on to design and management of a successful project:
Introduction reviews the lessons of project managers of the past twenty years and many of the myths surrounding lending to the poor. It also discusses what mistakes have led to poor performance in the past and how to avoid them. Finally, this section looks at valuable lessons which can be derived from financial practices long employed in the informal sector and which form the basis for the "laws" of good microfinance.
Chapter One, Planning
outlines general principles of good planning and guides you through the design of a MicroStart project. You will answer questions such as: Whom do you intend to reach? Why do they need your help? Which financial services will you offer? How long will it be before you generate enough interest and fees to pay for your operating costs?
Chapter Two, Starting
suggests how to set up your office and recruit and prepare staff. It shows you how to build a strong team that gets the job done, and how to reward good performance. You'll learn how to train client groups so they stay together, elect good officers and repay their loans.
Chapter Three, Managing
demonstrates how to collect and disburse cash, keep records, track loan payments, take action on overdue loans, and create and analyze reports. It also presents guidelines for evaluating project efficiency and financial performance. It shows how to manage healthy loan portfolio and indicates the early warning signals of poor performance.
Tool Kit
contains copies of all forms discussed in the manual, ranging from planning formats to recommended accounting documentation.
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