Frequently Asked Questions

1. What is microfinance?

Sometimes called “banking for the poor,” microfinance is an amazingly simple approach that has been proven to empower very poor people around the world to pull themselves out of poverty. Relying on their traditional skills and entrepreneurial instincts, very poor people, mostly women, use small loans (usually less than R1000), other financial services, and support from local organizations called microfinance institutions (MFIs) to start, establish, sustain, or expand very small, self-supporting businesses. A key to microfinance is the recycling of loan rands. As each loan is repaid—usually within six months to a year—the money is recycled as another loan, thus multiplying the value of each dollar in defeating global poverty, and changing lives and communities

2. Who Are the Clients of Microfinance?

Microfinance clients are a diverse group of people. For WDB, currently it is rural women of South Africa

3. What Is a Microfinance Institution (MFI)?

Microfinance institutions provide financial services to people who are not served by conventional banking.

4. What Is the Government's Role in Microfinance?

Governments play a complex role in microfinance. (to create a link when someone clicks on the question, it takes them to SAMAF)

5. What do local microfinance institutions (MFIs) do?

These MFIs reach out to the very poor and deliver microfinance services to local clients daily. They firstly educate local communities about the opportunity to improve their lives with microfinance; make microloans to start and or grow their small and medium enterprises collect weekly loan payments; and assist clients in solving some of the life challenges they may face. It is a vision of MFIs in South Africa to also provide other financial services such as savings accounts and insurance. Globally, MFIS are able to provide holistic financial services to their clients and also provide social services, such as basic health care for clients and their children.

MFIs differ in size and reach: some serve a few thousand clients in their immediate area, while others serve hundreds of thousands of very poor people through hundreds of branches covering large regions. Grameen Bank of Bangladesh, which was founded by 2006 Nobel Peace Laureate Dr. Muhammad Yunus, is the world’s largest and most successful MFI. It serves more than seven million clients. We at WDB Micro Finance (WDBMF) continue to grow, and currently we serve more than 45000 clients in four provinces of South Africa

6. Where do MFIs get the money for loans?

WDB Investment Holdings (WDBIH) provides funding for about 50% WDB MF’ operational costs, through WDBIH trickle dividends from the investment portfolio. Loans, grants, loan guarantees and other innovative financing techniques are negotiated and acquired from South African individual corporates, philanthropists, foundations, governments and international institutions. MFIs also borrow funds from traditional banks to loan to their clients. In addition, the interest paid by clients on microfinance loans goes back into the program to cover costs and fund more loans.
One of the most attractive features of microfinance is the goal of self-sufficiency for both micro entrepreneurs and MFIs. Currently SAMAF is spearheading several engagements to give MFIs access to taking deposits options as readily available to traditional banks. By combining access to private market financing with more efficient management and technology, MFIs can begin to move from reliance on philanthropy to self-sufficiency to a self funded institution through its own deposits book build. Grameen Bank in Bangladesh has proven that this can be accomplished. It is totally self-supporting and accepts no grants or donations.

7. Why is this different from other loan programs?

The key factor unique to our program, unlike other loan programs, clients are not required to provide collateral to receive loans. This allows people who would not qualify for loans at traditional financial institutions to receive credit. MFIs are also very client-friendly; most usually go to their clients to provide loans and receive payments, rather than requiring their clients to come to them. A few of them also use focal centers where clients gather to conduct financial transactions and receive other social services. The peer support system practiced by many microfinance programs is another unique feature. When clients gather bi weekly at “center meetings” to make loan payments, or informally in smaller support groups, they share successes and discuss ideas for solving business and personal problems. Maybe most importantly, they empower each other to stay on the path out of poverty. This mutual support strengthens their resolve.

In addition, MFI staff members share vital information and resources to improve their clients’ well being. This might include bringing in local nurses to provide health and nutrition counseling, or providing help with literacy.

8. Are these people really poor?

WDB Micro Finance uses a housing quality index to ascertain levels of poverty in the community and identify communities that will benefit from our programs. Our partners approve funding based on the fact that we serve very poor people, many of whom are in rural areas and live on only a dollar or so a day. While the exact dollar figures for measuring their level of poverty may vary from country to country, one thing is constant: they are literally struggling to live from day to day.

What is a housing quality index?

It is a measure of housing quality in South Africa since 1994. The higher the score on the Housing Quality Index (HQI), the higher the housing quality. We identify and help the communities with the lowest possible score, which represents a low-quality roof; low quality wall i.e. mud wall, no access to piped water, no toilet, and no electricity to start improve their lives.

9. What is the difference between microcredit and microfinance?

Microcredit refers specifically to loans and the credit needs of clients, while microfinance covers a broader range of financial services that create a wider range of opportunities for success. Examples of these additional financial services include savings, insurance, housing loans and remittance transfers. The local MFIs might also offer microfinance plus activities such as entrepreneurial and life skills training, and advice on topics such as health and nutrition, sanitation, improving living conditions, and the importance of educating children.

10. Why do you focus on women?

Women have proven to be the best poverty fighters. Experience and studies have shown that they use the profits from their businesses to send their children to school, improve their families’ living conditions and nutrition, and expand their businesses.

11. Can very poor people actually start and run a successful business?

Absolutely! Many poor people have skills that can quickly become an income producing activity. With small sums of money, they are able to purchase the inventory, supplies and tools needed to start or expand micro businesses that range from weaving, crafts, sewing hats and bags, reselling produce, and growing and selling vegetables, selling pap and meat, raising chickens to sell eggs, and sewing clothes and uniform. We also help the rural poor start technology micro businesses, such as selling cell phone air time to the members of the community, which also provides valuable means of communications and access to vital information.

These small ventures grow into vibrant community businesses. One micro entrepreneur in Mpumalanga, she now has supermarket, she also set electricity recharge vouchers to her community. She employs her husband and 5 community members.

12. Do very poor people repay their loans?

Yes, microfinance clients are excellent credit risks. The repayment rate is between 95 and 98 percent. In fact, it is higher than the repayment rate of student loans and credit card debts currently in the South Africa. They value the opportunity to improve their lives.

13. Do people really get out of poverty?

Microfinance is not a silver bullet. It will not defeat global poverty by itself. But, it is an important part of the solution. Microfinance provides a stable and sustainable source of income that enables clients to climb steadily out of poverty, while providing better living conditions and opportunities for their families. For some, that progress means moving from a house made of mud to one made of wood. For others, it means better nutrition and the money to finally send their children to school. A 1998 World Bank study showed that, in Bangladesh, Grameen Bank’s clients were escaping poverty at a much accelerated rate per month. In South Africa, we could do better, but because we are limited in taking deposit and increase loan funding amounts to ensure MFIs clients really grow and become sustainable for both clients and the MFIs, the rate people escape poverty could be improved.

14. I’ve heard that MFIs charge a high rate of interest for the loans. Is that so?

Like other financial institutions, microfinance institutions (MFIs) charge interest for the loans they make to their clients. The interest covers the high cost of making very small loans and personally servicing each client bi week. It also covers the cost of managing the “center meetings”; the peer support group process; and providing information on social services, personal development, health and other critical information that helps clients improve their lives and the future of their families. WDB MF rates are also largely influenced by the rates WDB MFs themselves pay for borrowing the funds that they in turn lend to their clients. MFI interest rates can range from 18 to 60 percent, depending on the conditions in each MFI’s service area. Without microfinance programs, the most common alternative for very poor people is the local “money lenders,” who regularly charge between 120 and 300 percent.

Source: www.grameenfoundation.org and www.cgap.org
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